Wednesday, December 9, 1998 Published at 12:49 GMT
Business: The Company File
Europe's giant drug merger explained
The deal could be good for consumers
The merger between drug giants Zeneca and Astra is the latest in a string of high profile deals which are set to transform the pharmaceutical industry.
But what is prompting the sudden rush to do deals, what will it mean for consumers and what are the potential pitfalls?
Why the deal was done
What is means for consumers
They are putting pressure on companies to cut prices, which in turn has helped fuel mergers.
The marriage of Astra and Zeneca could therefore lead to lower pharmaceutical prices, with the combined company passing on some cost savings to consumers.
The two drug companies are also under pressure to produce new products, and a merger should lead to more pharmaceutical breakthroughs and speed up the introduction of new remedies on the market.
Not withstanding the clear advantages of the merger, doubts remain about the deal and the future of the combined group.
Drug mergers have not had a successful history. There is no better example than Pharmacia of Sweden and Upjohn of the US whose own union got off to a terrible start, where the combined management had a major culture clash.
The market has also reacted warily to the creation of the pharmaceutical and life sciences merger between Rhone-Poulenc of France and Germany's Hoechst.
In fact even getting some mergers off the ground has proved difficult.
Management clashes at UK pharmaceutical groups Glaxo Wellcome and SmithKline Beecham prevented their merger and US groups American Home Products and Monsanto recently called off talks.
Shareholders short changed?
Zeneca shares have stormed ahead in recent years as bid speculation has circled the group.
However a merger with Astra will leave some shareholders disappointed that the UK group has not been taken over at a significant premium to the current share price.
When large mergers are announced in a blaze of publicity, share prices usually soar as companies extol the virtues of their new union.
However in the long term, the real benefits of merger are far from clear.
Indeed large mergers could turn out to be bad news for shareholders.
A recent study of 100 large deals taking place between 1994 and 1997, showed that two thirds result in immediate losses for shareholders and, in the long term, the resulting companies underperformed their industry peers.
Mark Sirower, professor of mergers and acquisitions at the New York University's Stern School of Business, who conducted the research, reported a similar trend in the 1980s.
Financial markets have soared over the past few years, putting many stocks on heady ratings.
High valuations mean that companies have to run hard just to stand still, delivering every higher profit growth for their shareholders.
Astra's deal with Zeneca looks like a step in the right direction for both groups.
However it could still prove to be bitter pill to swallow for shareholders.
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