Institutional shareholders of Ciba-Geigy Ltd. and Sandoz Ltd. made big money after a merger of the two companies was announced March 7.
And, they expect to make more money as shareholders of the merged company.
The unexpected announcement of a merger between the two Basle, Switzerland, drug and chemical companies resulted in one-day gains of almost 25% in American depository receipts of Ciba-Geigy, and more than 11% in Sandoz ADRs.
Holders of the Swiss-traded shares made out even better. Ciba-Geigy rose 29% to 1,455 Swiss francs ($1,212), while Sandoz climbed 20% to 1,381 francs ($1,151).
One U.S. investment manager interviewed made almost $60 million in one day on its holdings of Ciba-Geigy ADRs.
Institutional investors like the merger because they expect significant gains from increased efficiency, and because operating cash flow from Novartis - the name of the merged company - will be strong enough to fund future acquisitions.
In addition, Ciba-Geigy and Sandoz executives might be estimating cost savings conservatively, at $1.5 billion annually, said David M. Graham, senior vice president and director of research at Palley-Needelman Asset Management Inc., Newport Beach, Calif.
Adrian Paine, portfolio manager-Europe with IDS International, London, agrees. He said any underestimation of cost savings will drive the price even higher.
"It's a great deal," Mr. Graham said of the merger.
The drug industry is in consolidation, and this merger positions the company to take part in that, Mr. Graham said. Free cash flow from Novartis should be about $2.5 billion per year, which is more than enough to fund purchases of other drug companies, he said.
He said Ciba-Geigy was on Palley-Needelman's buy list before the merger, and he would consider buying more shares of the merged company. The firm owns about 1.58 million Ciba-Geigy ADRs.
Robert Lyon, president and chief investment officer at Institutional Capital Corp., Chicago, likes the company, but has pretty much reached the limits on how much his firm can own. Mr. Lyon said the deal makes sense: There's a lot of untapped potential in Ciba-Geigy that should be realized with the merger and the associated drive to cut costs.
In addition, Institutional Capital executives expect Novartis to purchase additional drug companies to further its growth.
Institutional Capital owned about 3.4 million Ciba-Geigy ADRs, which trades over the counter, and made about $59 million on the day of the merger announcement, he said. As of midday March 14, Ciba-Geigy ADRs were valued at 593/4, compared with a price of 471/4 before the merger announcement. Sandoz ADRs traded at 561/4 midday March 14, compared with its pre-merger price of 481/8.
Mr. Lyon said Ciba-Geigy was its single largest holding even before the merger.
Investors say greater expected earnings growth is key to the merger, with higher growth anticipated from the merged company.
Said IDS International's Mr. Paine: "We view it as a very positive move."
Novartis should be able to generate 17% compounded-annual earnings growth; Sandoz's expected growth was about 14%, and Ciba-Geigy's was a little less than that, he said.
Mr. Paine said IDS is "a very happy holder" of about $123 million worth of Sandoz ordinary shares. He said it is possible IDS would buy more, but that's not definite.
A broadened product mix is also seen as a benefit to the companies' merging.
Rande Muffick, securities analyst for the Montana Board of Investments, Helena, said the merger gives Novartis "a much stronger presence in the global pharmaceuticals market."
He said he'll recommend to the board's portfolio managers that Montana sit tight with the 300,000 Ciba-Geigy ADRs it owns.
John Carey, vice president and portfolio manager for Pioneering Management Corp., Boston, said his tendency is to give firms involved in a merger "the benefit of the doubt" and hold on to shares to see how the merger plays out.
He said the merger is typical of the industry and of industry in general. "Two companies with similar product lines get together" to try to cut some costs. He said pricing pressure in the drug industry has spurred, and will continue to spur, company mergers.
Mr. Carey said he'll hold on to the Pioneer Fund's 870,000 Ciba-Geigy ADRs.
If history is any guide, the merged company should perform well, said John Schroer, portfolio manager for INVESCO Trust Co., Denver. Two mutual funds he manages - INVESCO Strategic Health Sciences and INVESCO Global Health Sciences - own $25 million of Sandoz ordinary shares.
Mr. Schroer noted drug company mergers in the past - such as Upjohn Co./Pharmacia A.B. in 1995 and American Home Products/American Cyanamid Co. in 1994 -have worked out well for shareholders. Likewise, Mr. Schroer said the merged company's value will rise as the market sees the results of the cost cutting.