Renewed City Power Play Could Force Glaxo-SmithKline into a Merger

Shares in Glaxo-SmithKline and Glaxo Wellcome have remained buoyant despite the collapse of merger talks last March, with the combined value of the companies rising to $20bn thanks to speculation of an imminent deal. However, the deal ultimately fell through, leaving shareholders, including Carol Galley from Mercury Asset Management, holding overvalued stock. The 'Ice Maiden' of the City, Galley, has been trying to rekindle talks between Glaxo and SmithKline, but relations between CEOs Jan Leschly and Sir Richard Sykes have broken down to the point where only hostile action can bring her the return she seeks.

Key Takeaways:

• SmithKline has announced the disposal of two subsidiaries, including its American clinical laboratories and the US-based Diversified Pharmaceutical Services, for $1.2bn, as part of its cost-cutting exercise aimed at increasing profits growth from 10% last year to 13% this year and 15% the year after.
• The company expects to eliminate around 3,000 jobs as it streamlines its manufacturing operations, but this could be good news for its Irvine plant, which the company hints will have a bright future.
• Shareholders, including Mercury Asset Management, Prudential Portfolio Managers, and Legal & General, are pressing for a merger between Glaxo and SmithKline, but CEO Jan Leschly is resisting the deal, citing disagreements over who would run the merged drugs giant.
• The City believes that the streamlining of SmithKline's operations may make a hostile bid more likely, with some speculating that Glaxo may approach the major SmithKline shareholders directly, bypassing Leschly.
• Glaxo is due to report 1998 profits of about $2.5bn, down from $2.7bn the year before, and investors will be watching the company's plans for future profit growth closely.
• If Glaxo receives a favourable nod from investors, insiders believe that an approach to SmithKline could be made in the following weeks, leading to a potential merger that would create the world's second-largest company after General Electric.

Statistics:

• Combined value of Glaxo and SmithKline: $20bn
• Stake of Carol Galley in Glaxo: 3.3%
• Stake of Carol Galley in SmithKline: 4.6%
• Estimated savings of merger: $15bn
• Market capitalization of merged company: $110bn
• Planned cost-cutting exercise of SmithKline: 13% increase in profits growth this year and 15% next year
• Number of jobs expected to be eliminated: 3,000

Sources:

• The Independent
• Mercury Asset Management
• Prudential Portfolio Managers
• Legal & General
• Glaxo
• SmithKline Beecham