News: Analysis & Commentary: MERGERS
UPJOHN FINALLY MAKES IT TO THE BIG LEAGUES
It was a stunning bit of serendipity. John L. Zabriskie, chairman of perennial takeover candidate Upjohn Co., was quietly searching for a merger partner last March. At the top of his list was Sweden's Pharmacia. But before he made a move, Zabriskie received a surprise phone call at his Kalamazoo (Mich.), office. On the line was Pharmacia Chief Executive Jan Ekberg.
Ekberg was calling to propose a U.S. distribution deal, but Zabriskie had grander plans. The courtship culminated on Aug. 20, when the companies' boards voted for a "merger of equals" financed by a tax-free stock swap. If shareholders approve, the merger would transform two second-tier drug companies into Pharmacia & Upjohn Inc., a global player analysts say is destined to double its earnings by 1997.
A NEW ERA. The deal is a coup for Zabriskie, who would become CEO of the new company. He enticed Ekberg into an agreement that had eluded several European drug companies. He also persuaded the Upjohn family, which owns 20% of Upjohn's shares, to loosen their grip on the 108-year-old company. "We recognize we're being distanced from our heritage, and that tugs at you," said William U. Parfet, great-grandson of founder W.E. Upjohn and a company director. "But this is absolutely the right thing for Upjohn to do in today's environment, and John Zabriskie is really the key."
Only the second nonfamily member to run Upjohn, Zabriskie landed there in January, 1994, having left industry leader Merck & Co. when he learned he wouldn't win its top job. The 56-year-old organic chemist arrived eager to push Upjohn into the pharmaceutical big leagues. But the situation was bleak. Upjohn Chairman Theodore Cooper had died unexpectedly, and the company was facing the expiration of patents on four drugs worth $400 million in revenue.
Zabriskie slashed costs, eliminated 1,400 jobs, and sold off noncore assets such as Asgrow Seed Co. Says Walter Trosin, a former Merck vice-president who worked closely with Zabriskie. "Upjohn needed an outsider to come in and tear down some of their fiefdoms." Upjohn got just that: Earnings jumped 25% last year, to $491 million, despite flat sales of $3.3 billion.
Zabriskie understood, though, that cost-cutting wasn't enough. In the spring and summer of 1994, he huddled with Upjohn's top 20 executives at Brooke Lodge, the summer home of the company's founder located just outside Kalamazoo. They sketched out a plan to catapult Upjohn into the ranks of the top 10 drugmakers by 2000--in large part by finding a merger partner. The tricky part: convincing the board. In September, 1994, Zabriskie began methodically laying out his plan to directors. "John orchestrated the discussion so that...it wasn't just his views, take it or leave it," says Parfet, who relayed details to other family members. Zabriskie warned that inaction left Upjohn vulnerable to raiders. By November, the board gave him the green light.
OF LIKE MINDS. So when Ekberg made his call out of the blue four months later, Zabriskie was ready. Although Ekberg wasn't phoning to talk merger, he, too, was gunning for the top 10. He, too, had slashed expenses to keep the maker of cancer drugs profitable. When Ekberg arrived in 1986 at Pharmacia's predecessor company, KabiVitrum, finances were so bad he had to borrow $12.5 million to make payroll. By last year, operating profits were $726 million on sales of $3.6 billion.
Zabriskie proposed a meeting at the Willard Inter-Continental Hotel in Washington, D.C., which led quickly to a string of private meetings at hotels in London, Paris, and New York. "As Jan and I talked, we realized we shared a common view of what it takes to succeed," Zabriskie recalls. Adds Ekberg: "It was an excellent fit.
The deal still could be upended by a hostile bid--a possibility that pushed both companies' shares up after news of the merger. But Pharmacia has a built-in takeover defense: the Swedish government's 14% stake and Volvo's 28% holding. The two big investors scotched previously proposed acquisitions by Rhone-Poulenc Rorer Inc. and Zeneca Group PLC. Upjohn's family holding, with employees' 10%, poses another formidable barrier.
So Zabriskie, who just finished restoring a historic home in Kalamazoo, expects to move to Pharmacia & Upjohn's new London headquarters early next year. And he relishes the thought of closing in on his old employer, Merck. "I can't wait until they're chasing me. I would love it." He'll have to find two or three more Pharmacia mergers to realize that scenario. But a man can dream.
JOHN L. ZABRISKIE
EDUCATION BS chemistry, Dartmouth College; PhD organic chemistry, University of Rochester.
FIRST JOB Joined Merck & Co. as a chemist, then took jobs in quality control, manufacturing, and marketing.
FAST TRACK Named a Merck senior vice-president in 1991, heading manufacturing. Elected executive vice-president in 1993; considered a candidate to replace P. Roy Vagelos as CEO.
NEW TRACK Joined Upjohn as chairman and CEO in January, 1994, succeeding Theodore Cooper.
TRACK RECORD Cost-cutting lifted Upjohn's 1994 profits by 25%, but revenue remains flat.
CLAUDIO EDINGER/GAMMA-LIAISONBy Keith Naughton in Detroit and Heidi Dawley in London