Glaxo Smithkline Mergers and Acquisitions Finance Essay

ABSTRACT

Mergers and acquisitions often referred to as M&A is also a tool for expanding ones business or get around different laws or regulations such as tax laws or monopoly regulations. Merger and acquisition (M &A) has been the most debatable issue in the field of management and finance. There are arguments for and against corporate restructuring and mergers. Martin, (1996) argued that although. M&A activities occur in waves but M&A activities are as a result of the economic environment. The purpose of this assignment is to assess the reasons for the GlaxoSmithKline merger and to what extent the aims of the merger have been achieved.

INTRODUCTION

GlaxoSmithKline is a UK based second largest pharmaceutical & healthcare company in the world. Headquartered in the UK and having listing on both New York stock exchange and London stock exchange. GSK is one of the industry leaders, with an estimated seven per cent of the world's pharmaceutical market; GSK is the only pharmaceutical company researching both medicines and vaccines for the World Health Organization's three priority diseases HIV/AIDS, tuberculosis and malaria.(www2)

GSK employs over 100,000 people, has more than 80 manufacturing sites in 37 countries, and makes almost four billion packs of medicines and healthcare products each year. GSK spends £8 million (US$14 million) on research and development each day - that's around £300,000 (US$562,000) every hour (www3). Moreover in 2007 the turnover decreased from 23.2 % in 2006 to 22.7 % a very challenging year for the company as GSK unexpectedly faced a severe decline in sales of Avandia, the second biggest product (www1).

REASONS FOR GSK MERGER

SMITHKLINE BEECHAM

The creation of SmithKline Beecham resulted from two companies running out of internal options. SmithKline was unable to restore the income from its core drug, Tagamet, but had an aggressive sales force in the US. Beecham, a consumer goods Company, got success in its early research attempt on antibiotics, but had no competencies to become a major pharmaceutical player. Their merger resulted in an organization with an international marketing presence. Glaxo's acquisition of Wellcome produced only short-term savings but no long-term growth.

Through amalgamation both Beecham and SmithKline Beckman were able to keep up with critical mass in R&D, as the combined research budget doubled, but total R&D expenditure still lagged behind the likes of top firms such as Glaxo, which were outspending them two to one. However, the amalgamation resulted in a meticulous power sharing agreement between the two management groups and brought about a new organisation with international marketing and sales presence. (Sudarshan, 2003)

People at SmithKline Beecham knew that the advantage of a friendly merger was allowing for 'equality of chances' for those involved. A perception reinforced by Mr Bauman and his team investing substantial amount of time and effort to create a new culture (under the

Simply Better initiative), which also transformed the way people were measured and rewarded. The amalgamation of Beecham and SmithKline Beckman was lengthy and relied in a combination of benchmarking (i.e. continuous improvement efforts) and process reengineering. (Herd, 2000)

Jan Leschly became chief executive in 1994 and was responsible for the continuing implementation of Bauman's vision. The intent was for the pharmaceutical company to match services already offered by insurance companies, hospitals and doctors, by offering complete healthcare packages for a flat, up-front fee. This move was followed by other major pharmaceutical companies in 1994 when SmithKline Beecham and Eli Lilly purchased DPS and PCS Health Systems, respectively. Through the acquisition of DPS, SmithKline inherited a six year alliance with United Healthcare Corp., which owned several health management organisations (HMOs) with some 1.6 million members. The alliance would assure SmithKline exclusive rights among pharmaceutical and diagnostic companies and to access medical outcome data from members of HMOs owned by United Healthcare. (Herd, 2000)

However, the validity of the managed care model was questioned in 1998 when Ely Lilly sold PCS, at a substantial financial loss. The following year SmithKline divested DPS as well as the clinical laboratory business. For the industry the divestiture of PCS's was more significant than the associated financial losses. The strategic turnaround of Eli Lilly and SmithKline Beecham signalled a failure to control distribution channels through formulary lists and the inability of established pharmaceutical companies to integrate proprietary outcome and patient information into new drug discovery. (Scholes & Johnson 2001)

GLAXO WELLCOME

Glaxo Wellcome resulted from the merger of two leading UK pharmaceuticals in 1995. Glaxo already knows the merger game as before Glaxo wellcome was created in 1995 when Glaxo took over Wellcome for £9bn, in what was then the biggest merger in UK corporate history. Wellcome Foundation was financing medical research and was established in 1936, welcome owned a 40% stake in Zantac, Glaxo struggled to find a replacement for its blockbuster, whose patent has expired in the US, and for Zovirax, Wellcome's antiherpes drug which has already become available without a prescription. However before this wellcome has rejected this $14 billion unsolicited takeover offer. (Lambrecht, 2005)

Top managers thus endeavoured to rationalise the overall organisation and introduce economies of scale in R&D activities. However, executives had great difficulty holding the new company together. Russell Reynolds, a top recruitment consulting firm, was brought in to help re-organise world-wide operations. The aim was to create a levelled playing field so that few key individuals were lured away while, at the same time, the integration of different units was smooth and effective. In spite of this, there was increased middle-management turnover after coming together. (Herd, 2000)

At the time of the merger with Wellcome, the chief executive at Glaxo was Sir Richard Sykes. He had been holding that job since 1994, was a former (very successful) British academic and R&D director, as well as a firm believer in investing in R&D for company growth. One of the biggest setbacks of his career, at the top position in the new Glaxo Wellcome, was the UK government's decision in 1999 not to place Relenza, the company's new flu drug and the first real success of combinatorial chemistry research, on the At the time of the merger with Wellcome, the chief executive at Glaxo was Sir Richard Sykes. He had been holding that job since 1994, was a former (very successful) British academic and R&D director, as well as a firm believer in investing in R&D for company growth. One of the biggest setbacks of his career, at the top position in the new Glaxo Wellcome, was the UK government's decision in 1999 not to place Relenza, the company's new flu drug and the first real success of combinatorial chemistry research, on the National Health Service list of prescription drugs. However, he had been responsible for the diversification into emerging markets, a new organisational structure, as well as joint ventures in India and Japan. (Johnson, et al., 2008)

By the end of the 1990s, some analysts were sceptical on whether the merger of Glaxo with Wellcome had produced any synergies at all. It was true that sales of revitalised Wellcome products through Glaxo's marketing muscle had helped to avoid slipping in the rankings, but it was also true that the drugs 'pipeline' was unimpressive and many new products had failed to live up to expectations. The merger had, indeed, brought Glaxo presence in certain therapeutic areas that it had not exploited before (such as antivirals), while Wellcome benefited from greater financial discipline and focus. But both companies had been used to cash and profit rich years. So analysts wondered whether costs had really been brought under control, whether Glaxo Wellcome had relied too much on disposals to flatter its earnings performance and, on balance, many were disappointed that augmented R&D facilities had done little to replenish the 'pipeline' by producing new potential 'blockbusters'. GSK merger was part of the pharmaceutical merger wave, but keeping in view (Economic environment) future prospects and growing market potential pharmaceutical firms started looking for partners, because the growing trend in the industry could affect their future cost. The companies giving birth to GlaxoSmithkline themselves resulted from mergers. (Scholes & Johnson 2001)

SUCESS OF GSK MERGER

As one of the key points of the merger, managers considered building operational headquarters in the US while corporate headquarters would remain in the UK. The new company's increasing leanings to the US in style and markets puzzled many, as Britain was home for both originating companies and the UK one of the world's leading centres for the research, development, and manufacture of prescription medicines. Britain's pharmaceutical output doubled between 1980 and 2000 in real terms while exports boomed and research and development of prescription drugs increasingly became a high-technology business and one of the most successful bits of the knowledge economy. (Myers, et al., 2006)

Another key point to the merger was expected savings of £250 million pounds from combined R&D operations. Those savings were to be reinvested in R&D to produce an annual research budget of £2.4 billion pounds, the largest in the world after the new Pfizer. Top executives also expected the combined company to save an annualised £1 billion pounds after three years. These savings would come on top of previously announced restructuring at both companies, expected to cut a combined £570 million a year. But analysts of pharmaceutical companies at investment banks were puzzled by these figures. (Copeland & Weston 2003)

On the one hand, analysts were disappointed by the planned savings. Most estimated the figure to be between £1.1 billion and £1.5 billion, as well as some sort of immediate disposal of factories, reduction of intermediate capacity or outsourcing plan. On the other hand, analysts were encouraged by potential pay-offs that could come from the complementary research skills of the two companies. (Heracleous & Murray 2001)

As part of the merger process, plans were drafted for the amalgamation of corporate and support operations of the new pharmaceutical colossus in most countries. This made labour unions unhappy because of the lack of consultation. Corporate executives claimed that there was nothing to consult about until the legal merger had taken place and thus, the newly introduced European regulation on consultation would not be broken. Nevertheless, unions feared at least 15,000 job losses, no less than 14% of the 105,000 strong combined global workforces would be lost. As for the 300 or so senior managers likely to be made redundant, Spencer Stuart, an international recruitment consultancy, was brought in to look into areas of potential overlap between business units rather than the universe of managers at the new corporation, and would leave the vital R&D and marketing teams intact. By bringing in recruitment consultancy to carry out a management audit, top executives once again expected to develop a level playing field so that few key individuals were lured away. At the time, Jean Pierre Garnier considered that organising 15,000 scientists across several time zones, with an annual budget in the billions of pounds, would require a radical new structure. This "facilities master plan" would allow assessing which, if any, of the 24 global R&D sites should be closed. (Scholes & Johnson 2001) However, rivals such as Pfizer, Novartis or Aventis, which had already restructured their core operations, questioned how radical Garnier's plan really was. Greater scale in marketing was attractive to managers because, while regulatory approval proceeded in the US, SmithKline Beecham became the world's second-biggest toothpaste manufacturer following the completion of its acquisition of Block Drug of the US for $1.24 billion dollars with a cash bid worth $53 per share. The deal added Block's Sensodyne toothpaste to Smithkline's range of dental care brands, which included Aquafresh, Macleans and Odol. Consumer goods sales, including toothpaste and drinks such as Lucozade, Ribena and Horlicks, would then make £2.5 billion pounds or a third of SmithKline Beecham's sales and 15% of the combined 1999 sales of Glaxo and SmithKline. (Myers, et al., 2006)

Even at the time of merger many analyst citizen the future prospects of GlaxoSmithKline merger as (Barron, 2000) called this merger as a marriage of convenience with lots of tough issues to be worked out SmithKline is wedding itself to a slow-moving company with a lacklustre pipeline of new drugs coming to market. After two and half years cost savings had in fact amounted to £1.8 billion by 2003, cost reductions had taken GSK trading profit margin to 35 per cent. GSK has under-performed the FTSE All-Share Index, S&P by any measure, relative or absolute, this company is not doing well. Compare to pre acquisition stock. Jean-Pierre Garnier was said to be committed to the consumer health business because he saw this area as being key for GlaxoSmithKline extending the life of certain prescription pharmaceutical brands, such as "blockbuster" Tagamet, by switching them to over-the-counter sales. (Myers, et al., 2006) However, analysts at investment banks speculated that the lower-margin consumer unit could be sold and the money reinvested in pharmaceuticals assets. SmithKline Beecham had been willing to sell individual brands in the past. Opinion was thus divided as to whether the Block Drug acquisition represented greater commitment to consumer health or a strengthening of the business in preparation for a sale. Yet for others growth into consumer health meant to signal another significant acquisition for GlaxoSmithKline in the not too distant future, while questioning which were the core competencies that would deliver the much needed advantage in prescription pharmaceuticals markets. (Scholes & Johnson 2001)

CONCLUSION

This assignment on mega pharmaceutical GSK merger shows that they haven't delivered value. The stock prices underperform both in absolute and relative terms against the share index. Besides this previously executive remunerations were based on stock performance, which was supporting short term on the part of management. Contrast to that company has substantially reduced the cost $1.8 a year, to be comprised of combining their R&D operations, manufacturing consolidation and substantial headcount reduction. Any how the debate of value creation in future is still questionable.

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