BREAKFAST WITH THE FOOL
Monday, December 20, 1999
"Error of opinion may be tolerated where reason is left free to combat it."
-- Thomas Jefferson
Monsanto and Pharmacia Tie the Knot
Richard McCaffery (TMF Gibson)
It's a big day for Monsanto (NYSE: MTC) and Pharmacia & Upjohn (NYSE: PNU) shareholders.
The pharmaceutical companies announced plans to merge last night in a deal that will create a company with a market value topping $50 billion.
They also plan to break out Monsanto's controversial agriculture business into a separately operated entity and spin off about 20% of the concern in an initial public offering.
Under the agreement, being called a merger of equals, Pharmacia shareholders will receive 1.19 shares of the new company, and each Monsanto shareholder will get one share. The combined company should have 1999 sales of $17 billion and a research and development budget of more than $2 billion. Management expects to save $600 million annually in costs.
Peapack, New Jersey-based Pharmacia makes the hair loss drug Rogaine, diarrhea medication Kaopectate, and motion sickness pill Dramamine. St. Louis-based Monsanto makes NutraSweet, Equal, and the fast-selling arthritis drug Celebrex, which has had sales of $1.4 billion this year.
Both companies have a wide array of products in the market and in the development pipeline. Next year, the combined company expects to start selling Zyvox, a new antibiotic.
Investors in pharmaceutical companies understand that size is critical because of the cost of developing and marketing drugs. The Pharmaceutical Manufacturers Association estimates that it costs more than $280 million to bring a new drug to market. Size gives companies the research and development budgets they need to compete, and this is what's driving consolidation in the industry.
With a $50 billion market value and $17 billion in sales, Monsanto and Pharmacia should find it easier to compete with powerhouse pharmaceutical companies like Pfizer (NYSE: PFE), which has a market value around $129 billion, and Johnson & Johnson (NYSE: JNJ), with a market cap of about $132 billion.
Merging with Pharmacia also should provide Monsanto with a nice burst of cash for operations. As of the end of September, Monsanto had just $84 million in cash and equivalents on its balance sheet, while Pharmacia had over $1.3 billion in cash, equivalents, and short-term investments at its disposal.
The agricultural business is still an issue for investors. Pharmacia shares fell on Friday after The Wall Street Journal reported the merger talks, apparently on fears about Monsanto's struggling agricultural business. The company makes genetically altered seeds, a process that's raised strong concerns from consumers, public interest groups, and government regulators, especially in Europe and Brazil. The European Union has not given its approval to use seeds that have been altered.
News to Go
Data networking giant Cisco Systems (Nasdaq: CSCO) is acquiring the optical systems business of Pirelli S.P.A. of Milan, Italy for up to $2.15 billion. It's Cisco's largest acquisition in Europe and its first in the dense wavelength division multiplexing market. Cisco expects to take a charge in the $0.03 to $0.09 range in the third quarter of fiscal 2000 because of the acquisition. Pirelli's technology is expected to tie in nicely with Cisco's recent acquisitions of Cerent, Monterey Networks, and Pipelinks, giving the company a complete optical networking package to sell customers.
Diversified technology and manufacturing company Honeywell (NYSE: HON) has agreed to acquire security and fire system company Pittway (NYSE: PRY) for about $2.2 billion in cash and debt to bolster Honeywell's Home & Building Control business. The deal, expected to close in the first quarter of 2000, will be neutral to earnings in 2000.
Long distance communications carrier World Access (Nasdaq: WAXS) and voice and data services company Star Telecommunications (Nasdaq: STRX) have agreed to merge in a deal worth $650 million. Star shareholders will get a minimum of $10.50 per share, and each share of Star will be converted to 0.525 shares of World Access. World Access officials said the deal will expand its retail telecom services in Europe.
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