AHP Offers to Pay Warner Holders If Company Gets Control of Lipitor

Staff Reporters of THE WALL STREET JOURNAL, Dec. 1, 1999

Pfizer co-markets Lipitor with Warner-Lambert and receives a portion of the drug's profits. On Monday, Warner-Lambert sued Pfizer seeking to cancel the agreement and take full control of the drug.

American Home's move Tuesday is an attempt to make its friendly $66.17 billion merger proposal with Warner-Lambert appear more attractive in the face of Pfizer's $77.3 billion hostile takeover attempt.

But American Home offered no specifics about how exactly it would fulfill this promise, and several independent lawyers said it could be difficult to follow through. For one thing, the contract dispute over Lipitor is likely to take much longer to resolve than the proposed mergers, they said.

Warner-Lambert's lawsuit on Monday followed Pfizer's suit last week in Delaware Chancery Court, claiming Warner-Lambert violated terms of their Lipitor pact. Each company claims the other side violated a "standstill" provision in the pact, which blocks Pfizer from making an unsolicited bid for Warner-Lambert unless the company is already in play.

Issue of Accounting Treatment

To deliver on its promise, American Home might have to delay indefinitely its proposed merger with Warner-Lambert and then possibly revise its bid, the attorneys said. Or it might have to make the deal conditioned on the outcome of the court case, which could block its ability to get favorable accounting treatment for the merger. But American Home believes that it could figure out a way to compensate shareholders and retain favorable accounting treatment.

Drug-industry analysts said American Home's announcement signaled that the bidding for Warner-Lambert is far from over. Certainly, it is the latest escalation in an increasingly nasty battle for the control of Lipitor, which is expected to generate nearly $4 billion in sales this year.

In a statement, American Home said it is "prepared to work with Warner-Lambert to provide a mechanism, consistent with our merger agreement, for fairly allocating to Warner-Lambert's shareholders additional value ultimately created by the recovery of the marketing rights to Lipitor."

American Home said it had no plans to sweeten its offer now, and it offered no hint of how it might do so in the future.

Pfizer shares closed at $36.25, down $1.25, Tuesday in 4 p.m. New York Stock Exchange trading. American Home closed at $52, down 50 cents, while Warner-Lambert was down $1.375 to close at $90.

A person close to Pfizer said that the American Home statement "is just a smoke screen to cover up the fact that they are trying to delay [Warner-Lambert] shareholders from evaluating a far superior proposal from Pfizer."

Unless the Lipitor suit is resolved quickly, American Home's proposal to compensate Warner-Lambert's shareholders for the increased value of the company would be difficult to implement, said several lawyers who are experts in mergers and acquisitions.

American Home could give a conditioned security that would pay a dividend to Warner-Lambert shareholders in case of a positive ruling. But that could prevent the two partners from using favorable accounting, called poolings of interest, because shareholders of merging companies must be treated equally to get pooling. A merger that has such conditions also requires much more disclosure to the Securities and Exchange Commission, the lawyers said.

Exchange Ratio

Alternatively, the two companies could delay their merger until the case is resolved, at which point they could adjust the exchange ratio of the two companies' shares. Such a delay would likely appeal to no one.

"It's all possible, but it's one hell of a securities problem," said John Coffee, a professor at Columbia Law School.

Several experts said that American Home's announcement was intended as a signal to Pfizer that it is in for a bidding war -- which could put downward pressure on Pfizer's stock and make its takeover attempt more difficult.

"The stakes are getting higher, the language is getting hotter and the legal battles are getting more complicated," said Steven Gerber, an analyst with CIBC World Markets.