LONDON -- Glaxo Wellcome Plc and SmithKline Beecham Plc said on Friday they had reopened merger talks to create what would be the world's biggest pharmaceutical company worth more than $180 billion.
In a brief statement, the two British drug companies -- which failed to agree on merger terms two years ago -- said they were "in discussions which may or may not lead to a merger of equals."
Industry analysts said the deal was likely to be structured as a no-premium bid by Glaxo for its smaller rival, valuing the transaction at close to 50 billion pounds ($82 billion).
Shares in SmithKline rose 9.5 percent and Glaxo 6.0 percent by 1510 GMT as investors relished the prospect of a deal that would strip out costs and boost the combined group's research and development and sales clout in a consolidating industry.
Glaxo's market capitalization was 63.3 billion pounds at the close of trade on Thursday while SmithKline was valued at 44.4 billion, suggesting the combined group will vie with BP Amoco Plc, currently worth around 110 billion pounds, for the position as the largest company in Britain.
Paul Diggle, pharmaceutical industry analyst at SG Securities, said cost savings meant a combined group could deliver earnings growth of around 20 percent, against the mid-teens expected from the two firms independently.
Other analysts applauded the industrial logic of the proposed tie-up.
"If this is consummated it will send a chill down the spine of every other industry executive because this creates a very different beast, a super company with true competitive advantage," added Steve Plag at Credit Suisse First Boston.
"These super companies -- of which Pfizer-Warner-Lambert will be another if it goes through, which looks likely -- will have market share well in excess of five percent and R&D expenditure approaching $4 billion."
In February 1998, a planned merger between Glaxo and SmithKline foundered because of a clash between Glaxo Executive Chairman Richard Sykes and SmithKline Chief Executive Jan Leschly over who should run the group.
Since then, Leschly has announced plans to retire in April 2000, while Sykes is contemplating a role in academia after he reaches 60 in 2002.
"The message to the two companies this time must be 'don't screw up' -- it's as simple as that," Peter Cartwright of stockbroker Williams de Broe told Reuters Television.
John Hatherley, head of research at fund manager M&G Asset Management, said there was a chance a third party might attempt a spoiling bid but the logic of this deal was compelling.
"Everyone recognized when the original proposals were made that there was a natural marriage between the two and any other deal for either one would be inferior," he said.
Global drugs firms, facing rising costs as the search for new medicines becomes ever more complex, are under mounting pressure to merge.
Pharmacia & Upjohn Inc. and Monsanto Co. recently announced merger plans while Pfizer Inc. is attempting to take over Warner-Lambert Co..
The link-up of Glaxo and SmithKline would leapfrog those deals, creating the world's biggest producer of prescription drugs with a market share of around 7.5 percent.
This would put it ahead of a combined Pfizer-Warner-Lambert, with a market share of 6.0 percent, according to Commerzbank.
Others would trail behind significantly with Aventis, AstraZeneca Plc, Merck & Co Inc. and Novartis AG all on 4.3-4.5 percent.
The split between Glaxo and SmithKline is expected to be roughly 60-40 in favour of Glaxo, similar to the figures discussed two years ago, although Commerzbank analysts think SmithKline might nudge its share up to 42 percent.
That would classify the deal as a merger rather than a takeover under UK accounting rules, avoiding the need to write off goodwill.
Analysts expect Sykes to retain the position of executive chairman of the merged company but he is likely to hand day-to-day running of the company to Jean-Pierre Garnier, SmithKline's No. 2, who is expected to become chief executive.
John Coombe and James Niedel, both of Glaxo, are seen keeping the key positions as heads of finance and research respectively.
SG Securities's Diggle said the combined group would be able to cut its costs by around 8 percent, or 1.2 billion pounds, as duplications in management, manufacturing, and R&D are stripped out.
The price of achieving those savings is likely to be heavy job losses in Britain and the United States -- British unions fear 15,000 jobs could go -- and a rationalization charge of about 1.5 billion pounds over the next three years.
"At the earnings level, that would mean for the period between now and 2004, instead of Glaxo growing by 12-13 percent and SmithKline by 15, the two together would grow by around 20 percent," Diggle said.
No major regulatory hurdles are expected from the planned merger, given a limited product overlap. Glaxo is strong in asthma and anti-virals, while SmithKline is focused on antibiotics, vaccines, central nervous system products, and diabetes.
However, there are some areas where regulators may fret that the new group is too powerful. These include herpes treatments, where SmithKline's Famvir competes with Glaxo's Valtrex, and cancer care, where SmithKline's Kytril clashes with Zofran.
There is also some overlap in anti-depressants -- SmithKline has Paxil and Glaxo Welbutrin -- while drugs in development at Glaxo may compete with SmithKline's Avandia diabetes treatment.
"In the pharma sector, market shares are very low. But it's a very different story on a product-by-product basis," said Alexander Mencik of US law practice Squire, Sanders & Dempsey.
The two groups also have complementary technologies -- Glaxo being strong in combinatorial chemistry and SmithKline in genomics.
Lazard Brothers and Goldman Sachs are advising Glaxo while Morgan Stanley is advising SmithKline.
