Commentary: This Bid Looks Like Bad Medicine

Sanofi's lowball offer for giant drugmaker Aventis is unwise for both companies

When he fired the opening shot in France's largest-ever takeover battle on Jan. 26, Sanofi-Synthélabo (SYN ) Chief Exec-utive Jean François Dehecq was nothing if not eloquent. Announcing his audacious, $60 billion bid for Aventis (AVE ), 64-year-old Dehecq waxed poetic about his "beautiful project to create a new European leader in the pharmaceuticals sector." The new company would be the world's No. 3 drugmaker, with sales of $32 billion, a $5 billion research and development budget, and a stronger presence in the lucrative U.S. market. Dehecq also reckons he can cut $2 billion in annual costs by 2006. "Everyone will say this is a hostile bid," he said at a news conference in Paris, where Sanofi is headquartered. "But this offer is directed against no one; it is a bid for the future."

Tell that to Aventis. With $21 billion in sales last year, the Strasbourg-based company is twice the size of Sanofi. And it is now astonished to find itself prey instead of predator. As well it might be: Dehecq's bid looks distinctly ill-considered for both acquirer and target.

SANOFI'S HURDLES. Sanofi's bid puts a low 3.7% premium on the previous closing price of Aventis stock, though it is a 15.2% premium on the monthly average. The average premium for industry mergers is 25% to 30%. "The offer is not attractive to our shareholders," says Igor Landau, management board chairman at Aventis. "We can deliver more value as a stand-alone company."

A tie-up with Sanofi simply doesn't offer Aventis much. Aventis has a U.S. sales force of 5,000 -- more than double Sanofi's. At just over $1 billion, Sanofi's R&D budget is a third of Aventis'. Some analysts expect Sanofi to launch one drug a year from 2003 through 2006, compared with eight for Aventis during that period. "They need us but we don't need them," says Landau.

Nor does Dehecq's talk of a European champion reflect Sanofi's challenges. A U.S. court will decide this year whether Plavix, a blood thinner that contributes an estimated 26% to Sanofi's sales and profits, faces generic competition. Analysts say the urgency of Dehecq's bid suggests Sanofi is uncertain the patent will be upheld. Sanofi's best-selling sleeping pill, Ambien, will compete with generics in 2006. Moreover, Sanofi's two largest shareholders, oil giant Total (TOT ) and cosmetics firm L'Oréal (LORLY ), say they will not renew a standstill agreement at yearend, leaving both free to sell. Total, which owns 24.5% of the stock and controls 35% of voting rights, has said it will bail -- increasing the chance that Sanofi itself could become a target. "If we didn't do this, we'd be the ones on the receiving end," Dehecq conceded.

Dehecq's plan could backfire even if he tempts Aventis' shareholders. Hostile deals in the drug business are rare for a reason. Pharmaceutical companies rely on their scientists -- who could quit if a merger is too disruptive. And while Sanofi and Aventis are both French, they are culturally very different -- Aventis being by far more global.

Nor is it certain that Dehecq will make his cost-cutting target. Analysts say the only way he can achieve it is through layoffs. And those will be politically difficult in France and Germany, the only two countries where Sanofi and Aventis have overlapping operations. What is more, a hostile takeover won't give Sanofi inside access to Aventis' books. That will make it tough for shareholders to assess the deal.

Although Aventis says it will go it alone, bankers say it may be looking at options. Some speculate that Aventis may turn to Berlin-based Schering (SHR ) as a white knight; others think Swiss-based Novartis (NVS ) could enter the fray -- perhaps proposing a three-way merger with Roche (RHHVF ), which is also Swiss-based. "A transaction like this changes the rules," one investment banker notes. "Now, all the large pharmaceutical companies are running their slide rules over both Aventis and Sanofi." The only certainty in Dehecq's battle for Aventis is that it will be longer and tougher than he thinks.

By Kerry Cappell

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