White knights, black knights, gray knights, greenmail, and poison pills. No, it's not a tale from the Brothers Grimm. It's the language of mergers and acquisitions.
Early last week, in the far away world of European pharmaceutical manufacturers, black knight Sanofi-Synthelabo (NYSE: SNY) launched a takeover attempt of larger rival Aventis (NYSE: AVE). After weeks of reflection, Sanofi bypassed negotiations with the management of Aventis and made a direct, public bid -- the classic definition of a hostile takeover.
Along with some disparaging remarks concerning the state of Aventis' business, Sanofi tendered a low-ball offer of shares and cash amounting to 47.8 billion euro (U.S. $59.92 billion) -- which values Aventis at only a 5% premium. Aventis returned fire with its own less-than-complimentary comments about the rival, and a firm "no." Hostilities began.
Each company has its own Achilles' heel to contend with. Sanofi is in a bitter patent battle with Dr. Reddy's Laboratories (NYSE: RDY) over its novel blood thinner, Plavix. A loss of Plavix would take away Sanofi's second-biggest revenue producer.
Aventis' antihistamine, Allegra, is losing market share to over-the-counter Claritin, and to boot, the company has a weak drug pipeline. Both would benefit from the merger, with the upshot being the creation of the third-biggest drug company worldwide. Only Pfizer (NYSE: PFE) and GlaxoSmithKline (NYSE: GSK) would be larger.
What's the hang-up, then? Money, of course. Aventis is looking for a sweeter deal, and Sanofi wants a bargain basement steal.
An alternative to a hostile bid for Aventis is a white knight with friendly takeover plans. In this story, that might be solid Swiss giant Novartis (NYSE: NOV). Last week, Novartis hired a team of investment bankers to assess a merger with Aventis. It stands to add a complementary stable of products to its medicine chest and become a much larger presence in the world of big pharma. The merger makes sense.
The outcome will depend on Aventis inviting Novartis to join the fray. As of yet, it has not definitely said it would be responsive to an offer from Novartis, but it has expressed interest in a white knight riding to its rescue.
Will Novartis win Aventis' heart? Will Sanofi take Aventis against its will? Stay tuned to this big pharmaceutical cliffhanger to find out.
J Graham owns shares of Novartis and Pfizer and can be reached by email.
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