Block threat to Sankyo merger

A storm is whipping up over the proposed merger of Japanese pharma firms, Sankyo and Daiichi, which looks to be under threat after a shareholder activist fund moved to block the tabled $7.7bn deal.

Investment company M&A Consulting, led by former Japanese government bureaucrat Yoshiaki Murakami, has written to 90 per cent of Sankyo shareholders urging them to ìreconsider seriously the legitimacy of this integrationî at the forthcoming annual general meeting.

Shares in Sankyo, Japan's third largest pharma company, have fallen by about 15 per cent since it agreed to buy out Daiichi (ranked 5^th in Japan) in a stock swap deal in February this year. The move valued Daiichi's shares at a 14 per cent premium.

At the time, several analysts remained sceptical about the potential benefits of the merger, saying that the marriage of two firms with weak growth prospects and little product overlap was a cause for concern.

`We strongly believe that the Sankyo share price will rise again if this integration is voted down at the annual general shareholders' meeting,î the M&A letter read.

ìThe [Sankyo] shares have been falling because investors worry [whether] the deal can win shareholders' approval,î said pharma analyst Maya Mita, at Morgan Stanley.

Sankyo president, Takashi Shoda, has defended the merger.

ìWe do not think we are paying that excessive a premium,î he said, adding that the tie-up would cut mutual costs by •50bn ($465m) and increase sales by •17bn ($158m) in fiscal 2007, outweighing integration costs of •16bn ($148m).

Sankyo and Daiichi have unveiled ambitious profit targets for the merged entity, which is scheduled to commence in September.

The two companies said they would aim for a group operating profit of •255bn ($2.37bn) on revenue of •932bn ($8.66bn) in the year ending March 2010. That equates to more than a quarter of the merged company's sales and represents 15 per cent annual growth in operating profit for the next five years.

ìRather than simply seeking to increase our size, we will become a company capable of sustainable growth and possessing a high operational efficiency,î Shoda noted.

Sankyo specialises in cardiovascular and metabolic disorder treatments while Daiichi's main franchise is in allergy treatments. Both companies need consent from two-thirds of shareholders, at the general shareholders' meetings on June 29, for the merger to go ahead as planned.