Magazine article Management Today

Fortress Zeneca

Magazine article Management Today

Fortress Zeneca

Article excerpt

The fortunes of Zeneca since its demerger from ICI have been attracting interest not only as a test of fashionable theories about focus on core businesses but also from industry rivals on the prowl for vulnerable prey. Matthew Lynn

David Barnes, the chief executive of Zeneca, could have been forgiven for expecting an easy, even pleasurable, day. A Thursday morning in early March and the company was set to announce its annual results. The numbers themselves looked good: pre-tax the company had made 878 million[pounds] in the past 12 months, double the figure of three years ago. Earnings were well ahead, and the pipeline of new products due for launch in the next few years meant that the prospect of continuing strong growth was easy to demonstrate; easier, anyway, than for most of its rivals in either the UK or the rest of the world. For Barnes the day should have been a breeze.

Events intervened, however. That same morning two of Zeneca's giant Swiss rivals, Sandoz and Ciba-Geigy, announced plans to combine. With a total market value of more than 40 billion[pounds], the new company, Novartis, was the result of the largest merger ever in corporate history. Its arrival on the scene marked a new and dramatic twist to the rapid consolidation of the drugs industry that has been gathering pace for the past two years. On the stock market, Zeneca's shares leapt, not so much in response to the results the company released that morning, but in reaction to the more immediately exciting prospect of it being the next player in the consolidation, most probably as prey not predator. Then as analysts gathered to question the Zeneca management about the results, the ceiling promptly fell in on top of Barnes and his team. Though they tried to make a joke of it--`The results were so good, they boughs the roofdown,'quipped John Mayo, the amiable finance director -- the analysts could not help but see it as a portent. `It was very funny,'said one later, `as though the gods had spoken.'

Takeover rumours are something that Barnes and his team have had to learn to live with. For more than a year, Zeneca has been a staple feature of the market report pages. Sometimes the gossip is that Roche of Switzerland is about to pounce, often tomorrow if you listen to some of the more enthusiastic pundits; on other occasions it is Glaxo or Merck or Smith-Kline Beecham which is rumoured to be getting ready to strike; sometimes it is just a whisper about massive sterling borrowings in Basle. Whatever the rumour of the day, Zeneca is punted around as though it had put itself in play. `It is very irritating,' reflects Barnes. `It is obviously unsettling for the staff, particularly when you get totally silly comments in some of the papers. But life is life, and it is a challenge for us to manage that situation.'

Speculation about a bid, though a racy story, in many ways masks a more interesting tale. For Zeneca in the past three years has been one of the great experiments in industrial engineering, a laboratory in which the fashionable management theories about focus and concentration on core businesses are being tested. Zeneca's divorce from ICI was, after all, one of the first really significant demergers, and one of the first to test whether splitting companies in half creates two stronger businesses or simply two smaller companies.

Zeneca was demerged from ICI in the summer of 1993, three years ago. It was not an entirely voluntary move. More than a year earlier, ICI, always regarded as one of the bastions of British industry, had been stalked by Hanson. Their lordships, Hanson and White, had taken a 4% stake in the corporation and made little secret of their desire to take over and split apart a company which then spanned everything from heavy chemicals to high-technology pharmaceuticals. Hanson was seen off, partly by some nimble public relations from which Hanson has never fully recovered. But its move forced a strategic rethink, and Mayo, then a corporate financier at SG Warburg, sold the board the idea of a demerger as the best long-term defence of the independence of both the chemicals and the drugs businesses, a strategy of getting your retaliation in first. …

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