New York Times
October 14, 1998

American Home Products' Deal With Monsanto Collapses


By DAVID MORROW and BARNABY FEDER

NEW YORK -- American Home Products Corp. and Monsanto
Co. scrapped their $34.4 billion merger Tuesday, the
third big combination in the pharmaceutical industry to
fail this year.

In a joint statement, the companies said the deal had
been abandoned because it was not in the best interests
of their shareholders. Yet, people close to the deal
said Tuesday that the merger was terminated because of
an insurmountable power struggle between the two
companies' chairmen, John Stafford at American Home
Products and Robert Shapiro at Monsanto.

While a clash between the chief executives of merging
companies is common, analysts said Tuesday that they
were becoming increasingly concerned that these disputes
were upending deals that could have benefited
shareholders.

All three of the drug industry's giant mergers this year
have failed -- first between American Home Products and
SmithKline Beecham in January and one month later
between SmithKline Beecham and Glaxo Wellcome -- largely
because one of the chief executives refused to yield
power or compensation to a former rival.

"There have been mergers that have been scuttled because
of people issues," said Viren Mehta, a partner at Mehta
Partners, a biopharmaceutical investment firm. "This
appears to be one of them. The boards have a fiduciary
duty to make sure that any individual needs don't get in
the way of the needs that drive companies."

The botched deal was also painful to Wall Street, which
has been hit by sharp downturns in the financial markets
in the past two months. With investment banks slicing
their payrolls -- Merrill Lynch & Co. announced a huge
cutback Tuesday -- the industry cannot afford to lose
the fees a deal of this size would have generated.
Analysts estimated Tuesday that Goldman, Sachs & Co.,
which advised Monsanto, and Bear Stearns & Co., which
advised American Home Products, forfeited $50 million in
fees between them.

Investors also fled. American Home Products' stock
drooped only slightly in midmorning trading, but then
fell $5, or 10 percent, to close at $45. Shares of
Monsanto, the smaller company, plunged $13.375, or 26.6
percent, to $37.

The issues that sank the merger appeared to have been
simmering since the deal was announced in June. At that
time, the headlines could not have been brighter. The
merger, the largest ever in the pharmaceutical industry
and the sixth largest among U.S. corporations, would
have created the nation's largest seller of prescription
drugs and the world's largest agricultural company.

Aside from such name brands as Advil painkiller, Centrum
vitamins and Nutrasweet sugar substitute, American Home
Products and Monsanto would have been one of the world's
leading life sciences companies. Using biotechnology, it
could not only develop new agricultural products but
drugs and foods with specially engineered ingredients
known as nutraceuticals.

While the merger appeared promising on paper, none of
the bankers calculated the effect the structure of the
deal would have on its outcome, or adequately gauged the
disparate personalities of the combined company's
chairmen.

Both companies described the deal as a merger of equals,
but American Home Products was, in effect, purchasing
Monsanto. Under the terms, American Home Products was to
swap 1.15 of its shares for each Monsanto share, giving
it 65 percent control of the new company's stock.

Shapiro and Stafford said they would run the company
jointly, an arrangement that raised skepticism in Europe
and in the United States. Six months earlier, Stafford
had refused to yield power to Jan Leschly, SmithKline
Beecham's chief executive, a point that ultimately sank
that merger.

Though both are lawyers, Stafford had little in common
with Shapiro. Shapiro, 60, worked his way through Searle
before Monsanto bought it in 1985 but refused to move to
Monsanto's headquarters city of St. Louis from his home
in Chicago when he became chairman of the company.
Instead, he has kept in touch with Monsanto executives
largely through e-mail.

Not only is Stafford, who is also 60, a constant
presence at American Home Products headquarters in
Madison, N.J., he sometimes goes to the company gym at
his lunch hour to play pickup basketball games. There,
some colleagues say, he is not above using his elbows to
get a better position.

The trouble between the two chiefs began in the summer.
Analysts said Stafford became concerned about Shapiro's
role in the proposed company and his anticipated level
of compensation. Even though Stafford drew a higher
salary at American Home Products than Shapiro at
Monsanto, he made considerably less after stock options
were included.

Stafford was also said to become increasingly annoyed
when Shapiro made decisions without consulting him.
According to one source familiar with Monsanto, Stafford
was angry that Shapiro had named Gary Crittenden as
Monsanto's chief financial officer in August. Stafford
was so irritated that he circulated an internal memo
that assured his staff Crittenden would not hold an
important role in the merged company.

An American Home Products spokesman declined to comment
about the memo.

The dispute between the two intensified in recent weeks,
analysts said, when Shapiro insisted he serve as
co-chairman as originally planned. But Stafford refused,
noting American Home Products had controlling interest
of the combined company, not the other way around.

A spokesman for American Home Products denied that the
struggle between the two chief executives had anything
to do with the merger falling apart.

Shapiro repeatedly declined to discuss why the merger
had collapsed, but said finally, "It had a 'Rashomon'
quality," referring to the classic movie by Akira
Kurosawa in which viewers see four accounts of a rape
and murder with no hint of which is correct. "Everyone
will have different views of what happened."

With this merger out of the way, other companies may
attempt a deal, probably with Monsanto. Novartis, the
Swiss-based company formed by the merger two years ago
of Ciba-Geigy and Sandoz, has long been rumored to be
interested in Monsanto. Daniel Vasella, the president of
Novartis, said Tuesday through a company spokesman that
it would be inappropriate to comment.

American Home Products and Monsanto are both likely to
try other mergers, analysts said, though not before next
year. American Home has recently released a bevy of new
products, which could significantly lift the company's
sales.

Monsanto appears to have the brighter future, at least
in the short term. The company said Tuesday that it had
arranged to add $2 billion to its revolving credit
agreement with Citibank and that it would issue new
equity as soon as conditions in the stock market
improve. Monsanto did not say how much equity it would
like to issue but it will ask the Securities and
Exchange Commission for pre-approval covering the sale
of as much as $6 billion in shares and debt.

Monsanto will not be able to raise enough cash from
investors, though, to sustain growth at G.D. Searle, its
drug subsidiary. "We will be back in the partnering
business," said Shapiro, who long ago conceded that
Searle was too small to adequately finance research and
the introduction of new products on its own. Searle is
marketing its most promising new product, an
anti-arthritic drug called Celebra, in a venture with
Pfizer Inc. that was announced before the deal with
American Home Products.

The nutraceutical business is also expected to rely more
on partnerships to take advantage of Monsanto's
technology. It is not yet clear whether the end products
will be mostly consumer goods like vitamins, in which
case the distribution skills of American Home Products
would have been invaluable, or food ingredients, an area
where Monsanto has more experience.

Monsanto's agricultural business is likely to be the
least affected by the collapse of the merger. Though
American Home Products, with more than $2 billion in
annual pesticide sales, is one of the largest crop
protection companies, its major products are among those
that have been losing ground to Monsanto's Roundup, the
world's best-selling herbicide. And it is American Home
that needed Monsanto, not vice versa, to gain expertise
in applying biotechnology to crops and livestock.

Shapiro also stressed that Monsanto remains committed to
its goal of building a life sciences company.

The vision is the same even though the opportunity to
move years ahead in one fell swoop has been lost,
Shapiro said. "We just have to get the capabilities
another way."


Copyright 1998 The New York Times Company

The Wall Street Journal Interactive Edition -- October
14, 1998

A Big Gamble on Seeds, Drugs
Gets Riskier for Monsanto

By SCOTT KILMAN and THOMAS M. BURTON
Staff Reporters of THE WALL STREET JOURNAL

Monsanto Co. was depending on its merger with American
Home Products Corp. to help finance an expensive crop of
biotechnology plans. Now the deal's breakup leaves
Monsanto holding an $8 billion tab for a buying binge of
seed companies and genetic-engineering technology. Could the collapse
of the merger force Monsanto into another suitor's arms? Robert B. Shapiro,
the St. Louis
company's chief executive, says no. Still, Monsanto is
heading into an economic climate far less friendly than
it was months ago when the biotechnology and
pharmaceutical concern agreed to combine with American
Home Products.

The farm sector is sinking into
recession. The U.S. economy is
weakening, along with overseas
markets. And stock prices have
fallen, devaluing the currency Monsanto has
used in its recent
acquisition spree.
Tuesday, Monsanto moved to allay concerns that it
wouldn't be able to finance its expansion plans on its
own. It said it has arranged to increase its credit
line
at Citibank by $2 billion.

Nonetheless, Monsanto faces the real prospect of having
to raise billions of dollars by selling stock into Wall
Street's worst bear market in years. And it expects
operating expenses to swell by hundreds of millions of
dollars next year, as it brings new agricultural
products and drugs to market.

Depending on Celebra
Monsanto's near-term fortunes are largely riding on the
arthritis drug Celebra, the forerunner of a new
class of
pain drugs known as Cox-2 inhibitors. Analysts believe
Celebra could eventually generate as much as $4 billion
in annual revenues.

"Everything is riding on Celebra," said Hemant K. Shah,
an independent drug-industry analyst in Warren, N.J.

Monsanto's Mr. Shapiro said in an interview that
the company isn't seeking another merger partner
and is confident that it won't have to scale back plans
for biotechnology and drugs. "Our strategy is still in
place," said Mr. Shapiro. "We still have the financial
ability."

Executives of at least two of Monsanto's bigger rivals,
DuPont Co. and Novartis AG, have privately expressed
interest in the past in acquiring Monsanto or entering
into joint ventures. Neither company, though, has ever
made formal overtures.

For Monsanto, the all-stock combination with American
Home Products had the virtue of being a so-called
merger
of equals, although Monsanto's revenue is only about
half that of American Home's. Under the proposed
transaction, Monsanto's Mr. Shapiro would have been a
co-chief executive officer, sharing power with American
Home's chief, John R. Stafford. It is unlikely
DuPont or
Novartis would agree to share power in that way.

The plunge in Monsanto shares Tuesday could make the
company vulnerable as a takeover target. But any
acquirer must now worry about Monsanto's considerable
debt load and need for cash. Standard & Poor's said it
is considering whether to lower ratings on Monsanto
debt
because of the breakup.

In the high-stakes race among corporate giants to lock
up crop biotechnology, Monsanto is a relatively small
player. To get ahead, it paid huge premiums in
technology acquisitions and then agreed to pay billions
of dollars more to buy the seed companies that are the
distribution channel for new genes to reach farmers.

Mr. Shapiro's idea was to keep other buyers out of the
market and be the first to cash in on patents for crops
that do things like make drugs and repel bugs. If
farmers and consumers embrace these products, the
payoff
could be huge. If they don't, Monsanto could own some
very expensive seed companies.

Reassuring Investors

Mr. Shapiro said Tuesday that Monsanto intends to go
through with all of its planned acquisitions. The
company sought to reassure investors by projecting that
third-quarter earnings will be in line with Wall Street
estimates.

But the merger's collapse will slow Monsanto expansion
plans. "The advantage of the deal is we would have
accomplished a lot in one swoop. It would have given us
scope and financial backing," said Mr. Shapiro. "Our
strategy is the same, just that now we have to do
things
differently."

The proposed American Home-Monsanto combination rocked
several industries because it would have in essence
created a first-of-its-kind business, one capable of
growing, processing and marketing genetically
engineered
crops that could be used to make everything from new
types of food to plastic.

American Home Products brought to the deal a
sales force that could move Monsanto's crop
creations into drugstores and supermarkets. Now, Mr.
Shapiro said, Monsanto's plan is to develop market
niches incrementally.

Now that the deal is off, the depth of Monsanto's
financing needs is evident in the filing it made with
the U.S. Securities and Exchange Commission to increase
its so-called shelf financing to $6 billion from $2
billion. The filing covers new issues of both debt and
equity.

The breakdown of the deal reverberated beyond Monsanto.
The big drop in Monsanto's stock Tuesday slashed the
value of its proposed acquisition of Delta & Pine Land
Co. by roughly $600 million to $1.3 billion. Monsanto
said it doesn't plan to change terms of its offer for
the cotton-seed breeding concern. Delta & Pine's
president, Murray Robinson, said the company still
wants
to go through with the pact. "It's still a good deal in
the long term," Mr. Robinson said.

Delta & Pine Land shares dropped 26% in composite
trading on the New York Stock Exchange to close at
$28.75, down $10.125.

On Monsanto's pharmaceutical side, the Searle division
isn't a one-drug wonder. But for a relatively small
pharmaceutical company, it does have a remarkable
panoply of promising drugs. These include two
anticlotting agents for cardiovascular disease,
xemilofiban and orbofiban, that are already in advanced
stages of testing on human patients.

This is potentially a far bigger market than the
one for
arthritis pain, which Celebra is aimed at. But Celebra
faces far greater competition.

Searle also has some promising cancer agents, called
myelopoietin and daniplestim, in medium-to-late-range
human clinical testing. In addition, Celebra itself
holds promise in cancer and Alzheimer's because the
COX-2 enzyme that it acts against also apparently plays
a role in these seemingly unrelated illnesses.

Still, Searle remains small for a pharmaceutical
company. With a $600 million annual research budget, it
is trying to compete with giants such as Pfizer Inc.,
which boasts an annual research budget of about $2
billion.
Copyright © 1998 Dow Jones & Company, Inc.
All Rights
Reserved.


The Wall Street Journal Interactive Edition --
October
14, 1998

Monsanto, AHP Deal Collapses;
Firms Unable to Blend Cultures

By THOMAS M. BURTON and ROBERT LANGRETH
Staff Reporters of THE WALL STREET JOURNAL

The planned $35.08 billion merger of American Home
Products Corp. and Monsanto Co. collapsed under the
strain of trying to blend two dramatically different
corporate cultures and chief executives.

In a terse two-paragraph release, the two companies
said
they had canceled the agreement to merge "by mutual
consent." The announcement sent Monsanto's stock
plunging. American Home shares also fell.

Senior executives at the two
companies had clashed in recent
weeks over virtually every issue
under discussion, one executive
familiar with the talks said. In
particular, this person said, senior
executives at American Home and
Monsanto had butted heads over which
and how many employees would be laid
off to produce a more-efficient
combined entity.
Another person familiar with the two
sides' disagreements said they
ranged from who should be assigned
to corporate headquarters to
compensation for top executives. In
the end, trying to merge a
tight-fisted, rigidly run company like American
Home with
a big-spending, risk-taking outfit like Monsanto was too
tall an order.

Moreover, while American Home was to have been the
acquiring company, its chief executive, John R. Stafford,
and Monsanto's chief executive, Robert B. Shapiro, had
vowed to serve as co-chairmen and co-chief executives.
Always an awkward arrangement, it was especially so in
this case.

Different Habits

Mr. Stafford, 60 years old, is a tough, sports-loving
lawyer partial to basketball and golf who scrutinizes
even small expenditures intensely. Mr. Shapiro, also a
lawyer, works in a cubicle rather than an executive
suite, wears sweaters at work and relaxes by playing
cards and perusing thick volumes of nonfiction. He
routinely throws billions of dollars at ventures
ranging
from agricultural genomics to seed companies to
drugs for
arthritis, cancer and Alzheimer's.


----------------------------------------------------------
Monsanto's Full Plate
The end of Monsanto's merger plans with American Home
Products leaves it facing some big projects on its own.
Pending acquisitions include:
Company Price
Sixty percent of DeKalb Genetics
Corp. $2.3 billion
Delta & Pine Land Co. $1.3 billion in
stock*
Cargill Inc.'s international seed
business $1.4 billion
New drugs in development:
Drug Status

Celebra, to treat arthritis Expected to launch
soon
Celebra, to treat cancer and
Alzheimer's In development
Xemilofiban, to treat
cardiovascular disease In development
*Approximate amount; adjusted to reflect Monsanto's
current stock price

----------------------------------------------------------

American Home, intent on moving up to the top tier
of the
pharmaceutical industry, is still regarded as a likely
merger partner for some other drug-industry player even
though it has now been involved in two collapsed
deals. A
planned merger with SmithKline Beecham PLC collapsed
earlier this year.

In composite trading on the New York Stock Exchange
Tuesday, Monsanto closed at $37 a share, down
$13.375, or
27%. American Home, based in Madison, N.J., fell $5 a
share, or 10%, in Big Board composite trading,
closing at
$45.

Among the big losers Tuesday were takeover traders, who
have been pummeled in recent months by the collapse
of a
number of high-profile deals, including one between
Ciena
Corp. and Tellabs Inc. The decline in Monsanto's stock
has left huge losses on Wall Street, traders say.

In an interview, Mr. Shapiro scotched suggestions that
Monsanto and its G.D. Searle pharmaceutical unit
would be
acquired anytime soon by any other major player in the
agriculture-biotech or pharmaceutical business. Searle,
he says, can survive as a prominent pharmaceutical
business under Monsanto by "investing in research and
partnering with other companies to get the cash" to
fund
future research.

'Some Different Perspectives'

Asked about how he and Mr. Stafford got along, he said,
"On a personal level, we got along fine." He added:
"It's
no secret that we have some different perspectives." He
and American Home declined to elaborate on why the
talks
collapsed.

This was the third attempted drug-industry
megamerger to
be derailed this year. In addition to the deal with
American Home, SmithKline Beecham had been involved in
talks with Glaxo Wellcome PLC that were later dropped.

Each of the proposed mergers promised important
benefits
to the businesses and the companies' shareholders. Both
the drug and agricultural industries are under great
pressure to vastly expand their development budgets.
Automated chemistry and screening, along with new
insights in gene science, are revolutionizing drug
research. They are also creating more potential product
opportunities than the traditional stand-alone company
can afford to fully develop. Combining companies
creates
research efficiencies by allowing companies to
eliminate
duplicate efforts and costs. It also creates a bigger
pool of scientific talent.

American Home has an improving new-drug pipeline,
but it
has struggled recently with product recalls. Last
winter
the company withdrew its application to market a new
blood pressure medication after regulators raised
worries
about the medication's side effects. Then in June the
company's highly touted new painkiller, Duract, was
withdrawn from the market because of safety problems.

The company does have several promising drugs in late
testing or awaiting regulatory approval, including
a new
sleeping pill called Sonata, a novel drug for treating
organ-transplant rejection and a promising new vaccine
for preventing meningitis and other childhood
infections.

American Home also owns a majority stake in Immunex
Corp,
which is expected to receive Food and Drug
Administration
approval soon for Enbrel, one of a powerful new
class of
injectable drugs for rheumatoid arthritis.

Another looming worry for American Home is its
potential
liability over the obesity drugs Pondimin and
Redux. The
company is facing numerous lawsuits over the drugs,
which
were withdrawn in September 1997 after they were linked
to heart-valve problems. The extent of the liability is
unknown, but it could run into the billions.

The intensely ambitious Mr. Stafford has told
associates
he wants to make one more big deal before he retires as
chief executive in order to make American Home the
largest drug company. "Mr. Stafford has decided he
wants
American Home to be top tier, and to be a top
pharmaceutical company he has to acquire another
company," says Hemant K. Shah, an independent analyst.
"He doesn't have a megablockbuster in his pipeline."

-- Elyse Tanouye and Steven Lipin contributed to this
article.

Copyright © 1998 Dow Jones & Company, Inc. All Rights
Reserved.

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