In an era when many corporate mergers seem to feature the bride being dragged kicking and screaming to the altar by a ”raider” or hastily recruited ”white knight,” two Chicago area health-care giants lost their independence last week in a manner that almost seemed chaste.
On Monday, Evanston-based American Hospital Supply Corp. agreed to combine with Deerfield-based Baxter Travenol Laboratories Inc. in a deal valued at $3.8 billion in cash and securities. On Thursday, Skokie-based G.D. Searle & Co. smiled upon a $2.7 billion cash merger proposal from Monsanto Co., the St. Louis-based chemical giant.
Though American resisted Baxter for almost a month in favor of a previously arranged match with Hospital Corp. of America, both its merger agreement and that of Searle, wooed once before by Monsanto, eventually were concluded on amicable terms.
Alas for romance, this was love inspired by money.
Companies in the health-care field, like in other deregulated industries, are experiencing tremendous pressure to hold down their costs. In human relationships, that pressure sometimes translates into the phrase, ”two can live as cheaply as one.” In the corporate world, the in-vogue phrase talks of reaching a ”critical mass” in order to prosper in a highly competitive environment.
In the airline industry, the critical mass argument explains carriers with strong domestic systems gobbling up those, like Trans World Airlines, with strength overseas. In financial services, Sears, Roebuck and Co. and other giants talk of critical mass as they race to set up diversified, nationwide networks.
Paul Starr, author of ”The Transformation of American Medicine,” calls the consolidations part of the ”challenge-response” pattern.
”When an industry is facing severe challenges, it`s natural to see a combination,” said the Harvard University sociologist.
In health care, the challenge part of the pattern was set in motion by a 1983 federal law that took away the almost-unlimited cost reimbursement given hospitals for Medicare patients and substituted set fees for each procedure. Private health insurers promptly instituted their own measures to limit costs. That shock to hospitals quickly translated itself to the health-care supply industry. It was followed by legislation last year that fundamentally changed the pharmaceutical industry. The new law extended patent protection to some important brand-name drugs, but it made it easier for less-expensive, generic substitutes for other drugs to be approved.
In their own ways, the Baxter-American and Monsanto-Searle mergers are both responses to the reverberations of those changes.
Vernon R. Loucks Jr., president and chief executive officer of Baxter, said he hopes to achieve $400 million in cost savings by merging his firm with American.
Baxter, he said, had the manufacturing expertise to make high-quality products. But the $1.8 billion maker of intravenous and blood-related products didn`t have the breadth of products that would allow low-cost, piggyback marketing at a time when customers were paying more attention to price than technology.
American, on the other hand, with its $3.4 billion in 1984 sales, had the crack distribution system that could keep marketing costs down by simultaneously offering more than 130,000 different items to hospital customers nationwide.
”Scale becomes very important. You start getting squeezed from every angle,” Loucks said.
At Monsanto, meanwhile, Richard J. Mahoney, president and chief executive officer, was determined to give his $6.7 billion company another high-growth, high-profit niche to complement its agricultural chemicals unit. Two pesticides in that division, Lasso and Roundup, account for more than half Monsanto`s profits, analysts say.
”We had no intention of trying to develop a pharmaceutical company from scratch,” Mahoney said. ”It`s just physically impossible in this day and age.”
In Searle, which earned $162 million last year on sales of $1.25 billion, Mahoney saw a company that had a sales force, distribution network and regulatory-approval organization that could efficiently commercialize the drugs being researched by Monsanto.
In particular, Mahoney said, Searle ”is very capable” in drugs dealing with cardiovascular problems, the immune system and the central nervous system, all areas where Monsanto has funded a great deal of biotechnology-related research.
”It was a bull`s-eye,” Mahoney said.
Combining Searle`s $120 million in research and development expenses last year to Monsanto`s own $150 million effort in the gene-splicing area, the Monsanto exec added, ”is big-league R&D. Searle is already critical mass. We are adding a major amount of discovery R&D to it.”
The ability of a drug company to make new discoveries that can command patent protection from generics, and thus a premium price, ”will influence heavily the companies` profitability and growth,” said Eugene Melnitchenko, an analyst at Rauscher Pierce Refsnes in Dallas.
Of course, as in any match, personality will be as important as the legal bonds between the two sides. Both Loucks and Mahoney are eager to praise management of their new partners.
”The reason we wanted (American) in the first place is the way the people manage it,” said Loucks. ”I believe it starts its way at the top and works its way down.”
But Loucks acknowledged that combining the two Chicago area firms will result in some job loss, though he labels as ”rhetoric” the loss of 800 jobs American estimated during the time it was resisting Baxter.
Mahoney, meanwhile, sees few jobs disappearing at Searle, especially at the profitable NutraSweet division, which makes the artificial sweetener aspartame. ”We`re very pleased. The (two firms`) programs are additive, we see very little overlap,” he said.
As with any match, the opinion of outsiders is important. In this case, Wall Street has granted the marriages an unusual degree of approval. As would be expected, the prices of American and Searle stock rose to near the level the acquiring companies said they would be paying.
But at the end of the week, the price of Baxter stock was down only 75 cents, to $15.37 a share, from its level before the deal was announced, despite the assumption by Baxter of about $2 billion in debt to finance the merger.
Monsanto stock, meanwhile, rose $2.37 on Friday to $52.62 a share as investors anticipated Monsanto selling less-profitable businesses to finance its venture into high-margin pharmaceuticals.
Analysts predict further consolidation in the health-care field as it evolves from a cottage industry to a corporate battleground.
”You`re not going to be looking at the same landscape five years from now,” Loucks said. ”There`s going to be consolidation. The question is who ends up with whom.”
