Pfizer Acquires Warner Lambert in a Hostile Takeover
Pfizer and Warner Lambert Develop a Strategic Relationship
In 1996 Pfizer and Warner Lambert (Warner) agreed to
comarket worldwide the cholesterollowering drug Lipitor, which had been
developed by Warner. The combined marketing effort was extremely successful
with combined 1999 sales reaching $3.5 billion, a 60% increase over 1998.
Before entering into the marketing agreement, Pfizer had entered into a
confidentiality agreement with Warner which contained a standstill clause that,
among other things, prohibited Pfizer from making a merger proposal unless
invited to do so by Warner or until a third party made such a proposal.
Rumors about an Impending Warner Merger Circulate
In late 1998, Pfizer became aware of numerous rumors of a
possible merger between Warner and some unknown entity. William C. Steere,
chair and CEO of Pfizer, sent a letter on October 15, 1999, to Lodeijk de Vink,
chair and CEO of Warner, inquiring about the potential for Pfizer to broaden
its current strategic relationship to include a merger. More than 2 weeks
passed before Steere received a written response in which de Vink expressed
concern that Steere’s letter violated the spirit of the standstill agreement by
indicating interest in a merger. Speculation about an impending merger between
Warner and American Home Products (AHP) came to a head on November 19, 1999,
when an article appeared in the Wall Street Journal announcing an impending
merger of equals between Warner and AHP valued at $58.3 billion.
Pfizer Moves Aggressively with a Hostile Bid
The public announcement of the agreement to merge between
Warner and AHP released Pfizer from the standstill agreement. Tinged with
frustration and impatience at what Pfizer saw as stalling tactics, Steere
outlined in the letter the primary reasons why the proposed combination of the
two companies made sense to Warner’s shareholders. In addition to a substantial
premium over Warner’s current share price, Pfizer argued that combining the
companies would result in a veritable global powerhouse in the pharmaceutical
industry. Furthermore, the firm’s product lines are highly complementary,
including Warner’s over-the-counter drug presence and substantial pipeline of
new drugs and Pfizer’s powerful global marketing and sales infrastructure.
Steere also argued that the combined companies could generate annual cost
savings of at least $1.2 billion annually within 1 year following the
completion of the merger. These savings would come from centralizing computer
systems and research and development activities, consolidating more than 100
manufacturing facilities, and combining two headquarters and multiple sales and
administrative offices in 30 countries. Pfizer also believed that the two
companies’ cultures were highly complementary.
Pfizer Takes Legal Action
In addition to the letter from Steere to de Vink, on
November 4, 1999, Pfizer announced that it had commenced a legal action in the
Delaware Court of Chancery against Warner, Warner’s directors, and AHP. The
action sought to enjoin the approximately $2 billion termination fee and the
stock option granted by Warner Lambert to AHP to acquire 14.9% of Warner’s
common stock valued at $83.81 per share as part of their merger agreement. The
lawsuit charged that the termination fee and stock options were excessively
onerous and were not in the best interests of the Warner shareholders because
they would discourage potential takeover attempts. On November 5, 1999, Warner
explicitly rejected Pfizer’s proposal in a press release and reaffirmed its
commitment to its announced business combination with AHP. On November 9, 1999,
de Vink sent a letter to the Pfizer board in which he expressed Warner’s
disappointment at what he perceived to be Pfizer’s efforts to take over Warner
as well as Pfizer’s lawsuit against the firm. In the letter, he stated Warner
Lambert’s belief that the litigation was not in the best interest of either
company’s stockholders, especially in light of their copromotion of Lipitor,
and it was causing uncertainty in the financial markets. Not only did Warner
reject the Pfizer bid, but it also threatened to cancel the companies’
partnership to market Lipitor.
Pfizer Turns Up the Heat
Pfizer responded by exploiting a weakness in the Warner
Lambert takeover defenses by utilizing a consent solicitation process that
allows shareholders to change the board without waiting months for a
shareholders’ meeting. Pfizer also challenged in court two provisions in the
contract with AHP on the grounds that they were not in the best interests of the
Warner Lambert shareholders because they would discourage other bidders.
Pfizer’s offers for Warner Lambert were contingent on the removal of these
provisions. On November 12, 1999, Steere sent a letter to de Vink and the
Warner board indicating his deep disappointment as a result of their refusal to
consider what Pfizer believed was a superior offer to Warner. He also
reiterated his firm’s resolve in completing a merger with Warner. Not hearing
anything from Warner management, Pfizer decided to go straight to the Warner
shareholders on November 15, 1999, in an attempt to change the composition of
the board and to get the board to remove the poison pill and breakup fee. In
the mid-November proxy statement sent to Warner shareholders, Pfizer argued
that the current Warner Lambert board had approved a merger agreement with
American Home, which provided 30% less current value to the Warner Lambert
stockholders than the Pfizer merger proposal. Moreover, Warner shareholders
would benefit more in the long run in a merger with Pfizer, because the
resulting firm would be operationally and financially stronger than a merger
created with AHP. Pfizer also argued that its international marketing strength
was superior in the view of most industry analysts to that of American Home and
would greatly enhance Warner Lambert’s foreign sales efforts. Pfizer stated
that Warner Lambert was not acting in the best interests of its shareholders by
refusing to even grant Pfizer permission to make a proposal. Pfizer also
alleged that Warner Lambert was violating its fiduciary responsibilities by
approving the merger agreement with American Home in which AHP was entitled to
a termination fee of approximately $2 billion.
Warner Relents Under Increasing Pressure
Pressure intensified from all quarters including such major
shareholders as the California Public Employees Retirement System and the New
York City Retirement Fund. After 3 stormy months, Warner Lambert agreed on
February 8, 2000, to be acquired by Pfizer for $92.5 billion, forming the
world’s second largest pharmaceutical firm. Although Pfizer was able to have
the Warner poison pill overturned in court as being an unreasonable defense, it
was unsuccessful in eliminating the breakup fee and had to pay AHP the largest
such fee in history. The announced acquisition of Warner Lambert by Pfizer
ended one of the most contentious corporate takeover battles in recent memory.
Case Study Discussion Questions
1. What takeover defenses did Warner use to ward off the
Pfizer merger proposal? What tactics did Pfizer use to overcome these defenses?
Comment on the effectiveness of these defenses.
2. What other defenses do you think Warner could or should
have used? Comment on the effectiveness of each alternative defense you suggest
Warner could have used.
3. What factors may have contributed to Warner Lambert’s
rejection of the Pfizer proposal?
4. What are the implications for the long-term financial
performance of the new firm of only using Pfizer stock to purchase Warner
5. What is a standstill agreement, and why might it have
been included as a condition for the Pfizer–Warner Lambert Lipitor distribution
arrangement? How did the standstill agreement affect Pfizer’s effort to merge
with Warner Lambert?