Pfizer Can Mold Its Future by Learning from the Past

Pfizer Chairman and CEO Hank McKinnell sees the company's $58 billion blockbuster acquisition of Pharmacia as the key to Pfizer's leadership in pharmaceutical markets around the globe. But philosopher George Santayana's famous aphorism is especially poignant for the successful marriage of the two companies: "Those who cannot remember the past are condemned to repeat it." For the Pharmacia deal to meet his expectations and to escape the failure of most acquisitions, McKinnell must understand the recent history of the company he is buying. Only then can he know how to best integrate the two organizations.

The 1995 merger of Sweden's Pharmacia AB and the USA's Upjohn was touted as a combination that would create a major force in global pharmaceuticals, but, in fact, it led to years of chaos and lost profits. From the start, leaders at the new Pharmacia & Upjohn-later just Pharmacia-battled about where to locate the new corporate headquarters. John Zabriskie (Upjohn) and Jan Ekberg (Pharmacia), both very strong-willed CEOs who didn't want to be seen as "less equal," could not agree on which of three existing business centers-Kalamazoo, Michigan; Stockholm, or Milan-they should choose.

As a result, they turned to the most costly of all solutions: London, which was home turf for no one and, hence, "neutral." Because they couldn't make a decision that was best for the company and its shareholders, they settled for a costly compromise. That decision added a layer of bureaucracy, further complicated the battles between top executives, and set the stage for a lack of cooperation and a fight for national identity among the company's Swedes, Italians, and Americans.

That initial lack of collaboration spread like a wildfire throughout the merged units. Seemingly simple issues such as vacation schedules, smoking policies, and monthly progress reports became grounds for disagreement, debate, and resentment. Internal power struggles and infighting replaced the focus on business. Employees sided with their different leaders, transforming the merger into an internal civil war.

The quick exit of top talent drained the new organization of its ability to meet its challenging financial goals. It also jeopardized the company's plans to reach critical milestones on the merger implementation timeline.

After many key executives jumped ship, including CEO John Zabriskie and chairman Jan Ekberg, the board finally recruited industry veteran Fred Hassan from American Home Products to stop the exodus and restore order. One of his first initiatives was to find the "right" headquarters location.

Hassan quickly announced a major restructuring that called for dismantling the Kalamazoo, Stockholm, and Milan facilities. In the summer of 1998, after wasted months and millions of dollars in unplanned capital expenditures, he relocated the temporary London headquarters to New Jersey.

Pharmacia & Upjohn's results were predictably wretched during their "integration." They issued profit warnings in every quarter of 1997, and the merger's costs quickly ballooned to more than $200 million over budget. By the end of 1997 their stock value was down 4.8 percent vis a vis the industry as a whole, whose stock prices soared over 58 percent. Consolidated net income plunged from $835 million in 1994 to just $323 million in 1997.

By 1998, Hassan had wrestled the feuding company into submission. By the third quarter, Pharmacia finally posted an earnings increase. But the sad fact remains that, while the battles raged, the company lost almost two years of growth and shareholder wealth. Consolidated revenue remained flat from 1994 to 1997, a period during which it should have exploded in growth. What had been a marriage designed to jump-start both companies ended as a textbook case of how not to merge. The foundering ship was saved only when Hassan, a total outsider, was brought in to keep it from sinking.

The bitter taste of the poorly managed integration is still in the mouths of many Pharmacia employees. So Pfizer has bought a company that is fraught with internal baggage. The anxiety and pain of a traumatic integration don't go away in four or five years.

What must McKinnell do to overcome those obstacles? He must address the new integration on four fronts.

• He must clearly understand the mistakes made during the Pharmacia and Upjohn merger and take decisive steps to make sure they are not repeated.

• The integration plan must unmistakably define the operations, business practices and systems, and organization structures that will be integrated into one, as well as those that will remain autonomous.

• He must implement the integration plan with blinding speed. The longer the integration takes, the more nonproductive energy is expended on internal consolidation issues. That robs the company of vital energy that should be focused on the external market, which is currently under immense competitive and political pressures.

• McKinnell must stop the talent drain that has already started.

Within days of the deal's closing, Hassan announced he was leaving to take the top post at Schering-Plough. Dr. G� Andro, Pharmacia's head of research and development, resigned to take the chief executive job at the UK biotech company Celltech. If McKinnell fails to take decisive countermeasures, the exit of those key executives may open the floodgates, with the most talented Pharmacia employees leaving to fall into the outstretched arms of direct competitors. McKinnell and other top Pfizer executives must quickly identify those Pharmacia employees who are critical for the success of the combined company. They must then swiftly develop relationships that build mutual commitment for a future together at Pfizer.

Pfizer is now the largest, and is considered one of the very best, pharma companies in the industry. But to remain on top, it must not allow a mass exodus of top talent. Will Pfizer succeed with the Pharmacia acquisition? Only time will tell. One thing is certain: If McKinnell doesn't clearly understand the mistakes made during the Pharmacia–Upjohn integration, success won't come easily.