Consumer products giant Procter & Gamble(NYSE: PG) moved up today as the company let the world know that it is no longer interested in a double merger with drug developers Warner-Lambert(NYSE: WLA) and American Home Products (NYSE: AHP).
Warner-Lambert and American Home Products both lost ground on the news, reversing gains made last week when the media first got hold of the story and speculated that P&G might end up being the white knight that would save Warner-Lambert from the clutches of hostile suitor Pfizer(NYSE: PFE). Alas, ours is not a fairy tale world. Faced with today's kiss-off by P&G, the journalists will have to go back to reporting more mundane fantasies, such as why anyone should care about the Golden Globe awards.
In fact, P&G blamed the media in part for the end of the talks between the three companies, concluding that "leaks and resulting speculation on a possible transaction have created an environment in which we cannot continue meaningful discussions.'' The fact that P&G's shares lost a quick 12% of their value since the "leaks" started showing up late last week didn't exactly help, either.
The timely reaction to the share price movement has some observers speculating that P&G itself may have had a hand in floating the story to the press, just to see if the Street would react favorably or not to a potential transaction. Then again, it's probably just as likely that a source from inside Warner-Lambert's advisory ranks was in the end responsible for spilling the beans in order to prod the long-courted company into a transaction with someone before Y3K rolls around.
Regardless of who is directly to blame for the scuttling of the talks, P&G's decision to stay out of the Warner-Lambert dating game was likely a smart move. The market certainly seemed to think so, at least. After an early morning drop into the $95 per share area, P&G's stock sprinted higher after the end of the talks was formally announced around noon, allowing the company to actually close up slightly for the day at $103.
President and CEO Dirk Jager's goal is to grow P&G's annual revenues in the 6% to 8% range while boosting earnings at a 13% to 15% clip. Given that drug development is not a Procter & Gamble forte, acquiring two companies with an estimated $17.5 billion in combined annual drug-related revenues was arguably not the safest way to meet those goals.
From an investor's perspective, it's probably a better bet for P&G to buy a segment leader such as pampered pet food provider Iams Co. for 3 times revenues than pay a much higher multiple for a leading firm in an intensely competitive industry such as pharmaceuticals. Selling pet chow may not be as sexy or profitable as selling drugs. But for a company that has built its name on selling low-tech laundry detergent and toothpaste, it offers more synergies and a safer potential return than changing gears completely and hawking high-tech drugs.
With P&G out of the picture, the general consensus is that Pfizer will eventually reel in Warner-Lambert, leaving American Home Products without a dancing partner yet again. But just because a Pfizer/Warner-Lambert deal promises to offer more synergies than a P&G/Warner-Lambert/American Home Products hook-up, that does not mean that the expected deal will be any safer for Pfizer's shareholders.
Whenever a company sticks its neck out and offers to make a large-scale, business-changing deal -- whether with an industry peer or with a seemingly unrelated company -- the price paid will end up determining the eventual payoff. For drug investors considering what a combined Pfizer/Warner-Lambert would look like, the analysis should start with a close examination of whether the hostile offer price is fair to not only Warner-Lambert's shareholders but to Pfizer's shareholders as well.
