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On Nov. 4, 1999, pharmaceutical industry giant Pfizer, Inc. made an unsolicited bid to buy Warner-Lambert Co. (which had earlier that same day announced a merger with American Home Products Corp.). This triggered a series of events that over the next eight months resulted in the biggest transaction in the history of the industry -- creating a company whose scale is unknown in most industries. The $100 billion-plus deal had to be communicated and its merits "sold" to the investment community, regulators and more than 90,000 employees in over 100 locations worldwide.

Pfizer executive vice president and chief financial officer David L. Shedlarz played the biggest role of his 25-year career in this real-life corporate drama. With June 2001 marking one year from the close of the deal, Shedlarz, an FEI member, reminisces about his part in the deal with Phil Livingston, FEI's CEO and president, and Ellen M. Heffes, Fes managing editor.

What was Pfizer thinking? What key strategic drivers made acquiring Warner-Lambert so important?

Shedlarz: Before the merger, Pfizer was among the top pharmaceutical companies in the world, with total revenues in the prior year slightly in excess of $16 billion. We were also one of the fastest-growing companies in terms of revenue and income performance; in 1999 we had earnings per share growth of 30 percent (excluding the impact of the 3Q99 charge relating to Trovan inventories and certain 1998 significant charges and discontinued operations), second to Warner-Lambert, with 35 percent growth in EPS. That in itself points to some of the clear advantages for combining the two companies -- at least over the short term.

Other strategic drivers: Pfizer was very dedicated and committed to its investment in research and development -- 1999 R&D investment was approximately $2.8 billion -- and with its preeminent marketing and sales organization, the company showed very strong top-line and bottom-line performance.

In certain circles that could raise the question, "Why merge with anybody?" The response is multifaceted. It really points back to one significant factor: This was a unique strategic opportunity for Pfizer, and this [merger] had a very powerful strategic and financial rationale.

Here were the two fastest-growing major companies within our industry; organizations with similar cultures, each with its own strong commitment to the pharmaceutical business; a great deal of success, on both the marketing and research fronts; common values in terms of respect for people and a strong community focus; and also having a fair amount of experience with each other, since we were co-promoting one of the largest pharmaceutical products in the history of the industry [cholesterol-lowering drug Lipitor].

Will you describe Pfizer's very successful strategic alliances? Then, in the case of Warner-Lambert, was Lipitor the "magnet?"

Shedlarz: One of Pfizer's strategic imperatives is to be the partner of choice with a number of outside alliances. That involves opportunities to take very promising candidates through the final development stages and then co-promote them. We have had very successful alliances with Pharmacia involving Celebrex and the Eiasi Company involving Aricept. We have hundreds of outstanding alliances on the research front, which we leverage quite strongly across every major functional area of the company, particularly in marketing and research. In addition, we now have numerous outstanding alliances on the research front. Pfizer's strengths in development and commercialization of product lines -- well-recognized in the industry -- has led to some very strong and successful collaborations.

The cooperation in commercializing Lipitor was a clear example of the commonly held values and similar cultures of both companies. I believe strongly this was one of the key elements that made this acquisition attractive and made much easier what is by nature a very difficult process, although it didn't make it an "easy" exercise by any means!

In light of the magnitude of this merging of industry giants, will you expand more on the internal dimensions of the deal?

Shedlarz: There are several dimensions here. Clearly, one is the powerful strategic and financial rationale for the combination, in sharp contrast to other mergers within our own and other industries, which focus on short-term cost savings opportunities. Reinforcing the strategic rationale is the portfolio of products that we have the opportunity to commercialize over the long term.

Another key factor was the leadership of William C. "Bill" Steere Jr., then chairman of the board and chief executive officer, and Henry A. "Hank" McKinnell, then president and chief operating officer. They quickly recognized the unique opportunity and were very dedicated to the transaction, and the success to date is due in no small way to their instrumental focus and leadership.

We also have learned that timing is critically important to the overall merger process, facilitated by clarity, focus and commitment across the entire company.

Another factor involves close attention to both the people and organizational issues. As you can imagine, in a transaction of this size and level of complexity, "the devil is in the details." What proved to be of great importance was our ability to establish a plan of action very quick ly, then implement the plan and communicate what we were looking to achieve and what we expected people to do.

From the "big picture" strategically, what else was considered? For example, what is the value of depth and scale?

Shedlarz: Pfizer has eight products achieving annual sales of over $1 billion-plus each, representing a depth and breadth of product offerings in our core pharmaceutical operation that is unprecedented in our industry. The merger further enhances the globalization of the company, by allowing us to leverage the significant presence that we each had internationally, whether it be with Japan, Europe and elsewhere.

We believe that "scale" is critically important, and this merger clearly gives us scale in research, as well as in the marketing and sales functions. This is important now as we're in the midst of a renaissance in the pharmaceutical industry that's come about, in part, by the characterization of the genome, as well as the increasing demand for our products due, in part, to changing demo graphics [aging baby boomers], driving increased needs for pharmaceutical therapy. Also, the explosion in new technology provides new targets for controlling disease.

[This merger] affords Pfizer the opportunity to engage the full therapeutic breadth of research activity. For a brief sense of that: We currently have some 156 projects in our research organization involving close to 100 new chemical entities in 19 therapeutic areas. It's obvious: scale affords the ability to attack emerging opportunities head-on, at a very high level.

As the CFO, what was your role in the transaction?

Shedlarz: This transaction has proven to be a source of deep personal and professional satisfaction. Given the transaction size and its complexities, the merger process has provided quite a growth opportunity.

I am especially proud of the organization. People responded to this significant challenge like the true professionals that they are. My personal role was varied, starting from the preparation of analyses to support the merger decision. [Other roles included] being part of the team developing acquisition strategies; participating in the many negotiations, which went on for several months -- often round-the-clock -- and supporting Steere and McKinnell in selling the transaction to the investment community.

In this transaction, our currency was our stock, and our relative position was defined on the basis of our stock price. So, McKinnell, Steere and I spent a lot of time explaining this deal to the investment community, by going on the equivalent of a road show.

On the financial framework, what elements were considered as you valued the transaction and determined pricing?

Shedlarz: We had to look at the strategic value of the two companies and do the difficult analyses in terms of what could be brought to bear, from financial and strategic points of view, both short- and long-term. As for the complementary nature of the product portfolio and the ability to leverage marketing and sales capabilities across all of those product lines, we had to have a clear sense of what that was worth to the company.

We had to value what it was worth to have the scale that I've described and what that would mean in terms of our ability to pursue these exciting technologies. We had to assess what sat in the pipelines of the respective companies, in light of the competitive environment. We weren't out there alone, so we had to assess our capability relative to others in terms of this transaction. We knew that we were in a competitive position, and we knew we might be in a further competitive [struggle] as this transaction went on.

On the behavior of your stock price: Looking at a chart of that time period, the stock kind of bounced around in the $30 to $40 range. As the deal unfolded, did the changing value of the stock influence or concern you?

Shedlarz: You'll note until we got out there and went through the extensive effort of explaining the deal to the institutional shareholders, the stock did vacillate. Once we explained the near- and longer-term benefits of the combination, the stock stabilized and continued to rise. We had a competitive bidding situation in which the stock price was critical. We really had to do that, and it took time. Steere, McKinnell and I spent a tremendous amount of time with institutional investors.

After we had the opportunity to tell our story, the financial marketplace became very comfortable with the transaction. But our dialogues with institutional shareholders were very different from those in the past, due to the size of this deal, [the magnitude of] which we'd never done, or even come close to.

From the perspective of process, what's different and what's involved in transacting the "big" one?

Shedlarz: It wasn't only the bigness, but rather the complexity. Indeed, the Warner-Lambert transaction was exponentially larger than any we had previously embarked upon.

Our acquisition of the SmithKline Beecham animal health business, in 1995, was [valued at] around $1.5 billion, and we'd been involved in divesting our medical technology group a number of years prior to the Warner-Lambert transaction -in aggregate, amounting to just over $4 billion.

The Warner-Lambert transaction was north of $100 billion, involving approximately 90,000 people between the two companies. So that raised a host of issues, as well as the need to be very clear about what we were doing and why we were doing it -- and selling the transaction to our employees, to our board and to the external community. The complementary nature, the strategic fit, the common culture -- all of that worked for us in selling the opportunity, but we'd never sold something of this size and complexity across the entire breadth of constituencies, as well as to the regulatory authorities.

Then, together we had to develop a plan -- between the initial signing of the contract and the closing (February-June 2000) -- for addressing how to bring the companies together. It detailed how we were going to take the best practices from each, how we were going to communicate with the employees and get them to internalize and act upon the plan and to provide a clear focus on an ongoing basis.

Then, three weeks after we closed on the transaction -- and other CFOs can appreciate this -- we had to create financial statements, "close" the books of both companies, report to the Wall Street community and file all the filings. It was a huge task.

It's been written that Pfizer's approach to corporate governance was what turned the deal in your favor. What about those practices have earned a good reputation with key institutions?

Shedlarz: Pfizer has a long and strong history of being very sensitive to corporate governance issues and we tend to be at the cutting edge in this arena. As a result, I'm certain our access to the institutions was enhanced. I also believe our reputation in the areas of transparency, financial reporting and accounting helped. Given the nature of the transaction, this went through extensive review by regulatory authorities. Without that past investment, this would have been a lot more difficult to accomplish [especially given the time limitations].

What goes into integrating and consolidating two huge already functioning finance organizations -- the people, structures and systems?

Shedlarz: This was especially time-constrained because we had to close the books three weeks after closing on the transaction. We had different systems, processes, charts of accounts and even different definitions. So, that tight time horizon between the contract signing in February and the closing in June was dedicated to Day One activity, knowing we had to bring the two financial systems together. This meant understanding the charts of accounts, both domestically and internationally, and understanding the differences; figuring out what we wanted to standardize around, which means understanding systems, processes and applications. You can't do this on a surface level. You've got to get into the detail.

Financial systems are a perfect example. With a transaction this large and companies with long histories, you can count on dramatic differences that need to be reconciled up front.

We expect we'll get off major different systems within a 12-month horizon, but you've got to live with some of these legacy systems for an extended time frame. And it's not only about putting a new platform in place -- or rationalizing the applications, or the processes, or changing the chart of accounts. It also involves educating and training thousands of financial people in over 100 locations around the world.

With Pfizer now grown from big to biggest, what are the challenges? Will there be more big deals? Or do the technology and scale you've acquired hold the keys for growth and opportunity?

Shedlarz: While size and global presence affords us tremendous opportunities on the research side, it brings with it a number of challenges and responsibilities.

We also have the ongoing challenge of continuing to manage and make scale work. That reinforces the need for managing and communicating with the 90,000 employees worldwide. The environment will surely change as other potential mergers in our industry change the competitive dynamics. And while the scale and competitive position we enjoy today is unique and favorable, we can't stay there, as others are looking to catch up and go beyond us.

This means we have to execute at an unprecedented scale and continue to respond to what happens with competitive activity as well as the general health-care environment.

Stand back and think about this transaction. What did you learn, and what would you do differently?

Shedlarz: Despite the complementary nature of the two companies and the powerful rationale, this just was not simple. I think our attention to the planning, communication and respect for people was critically important. We did indeed give those areas a lot of attention, by planning and communicating and re-planning and recommunicating. But if I could do it over again, I'd do it even more. It's never enough; you always underestimate the difficulty of the undertaking. Even given the strong rationale and similar cultures, this is tough stuff.

For other CFOs managing M&As -- though the numbers might not be as large -- the logistics may be similar. What do you advise your peers?

Here's my list of take-aways. You have to:

* Pursue something with a tremendous amount of strategic merit.

* Have great leadership.

* Dedicate yourself to being very focused and to doing the transaction in a very speedy fashion, which is counterintuitive, given the nature of the challenge.

* Most importantly, you have to spend a lot of time with your colleagues. You've got to get to know them and get to the point where people internalize what the company is trying to accomplish and embrace it as their own. There is no way you're going to do that through a select number of senior folks. You need all 90,000 people to get on board and understand as well as feel the importance of what needs to bed one on behalf of the company.


Bid made: November 4, 1999

Agreement: February 7, 2000

Close Deal: June 19, 2000

Annual revenues 2000

approximately $30 billion

Lipitor revenues 2000

$5 billion

Revenue growth (2000)


Earnings growth through 2002 (*)

25% average annual

Diluted EPS (2000, 2001, 2002) (*)

$1.02, $1.27+, $1.56+

R&D expenses 2001 approximately $5 billion

Cost savings and efficiencies

over $400 million in 2000

$1.2 billion in 2001 at least $1.6 billion in 2002

Restructuring and transaction fees

$1.7 billion to $2.2 billion

This deal was done under the pooling-of interests-accounting method.(*.). excluding certain significant items and merger-related costs
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Article Details
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Author:Livingston, Phil
Publication:Financial Executive
Article Type:Interview
Geographic Code:1USA
Date:Jun 1, 2001
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