O.C.'s Bergen Plans Merger With Big Rival

By BARBARA MARSH

Aug. 26, 1997 12 AM PT

TIMES STAFF WRITER

ORANGE —

In a deal so big that analysts wonder whether the government will stop it, Bergen Brunswig Corp. said Monday that it is merging with Ohio-based rival Cardinal Health Inc. to form the world’s largest pharmaceutical distributor.

The proposed deal, valued at nearly $3 billion, would combine two of the largest companies in the industry into a distribution giant with total annual revenue of $22 billion.

If the transaction proceeds, Orange County will lose the headquarters of its fourth-largest publicly held company, one that traces its roots in Southern California back more than a century.

The new company, to be called Cardinal Bergen Health Inc., would have headquarters in Dublin, Ohio, where Cardinal is based. Cardinal would issue about 40 million shares of stock and assume $386 million in Bergen debt.

Shareholders of Orange-based Bergen Brunswig would receive 0.775 shares of Cardinal Health for each share of Bergen stock.

Shares of both companies ran up to new highs Monday in heavy trading on the New York Stock Exchange. Bergen stock jumped $12.06 a share, or about 40%, to close at a record $42. Cardinal advanced $3.25 to $65.56.

The transaction, expected to be completed by early next year, must be approved by regulators and by shareholders of both companies.

Analysts said the Federal Trade Commission has yet to evaluate a combination of this magnitude in the industry. The combined company would control about a third of the market for drugs and related products sold through U.S. wholesalers and a fourth of overall drug sales.

“The big question is, will regulatory authorities approve it,” said Jeffrey Kraws, an analyst with Everen Securities of Chicago.

The merger would tilt the industry’s playing field in favor of the new company and likely “make it much more difficult for competitors to enter the business,” Kraws said. The next-largest competitor would be San Francisco-based McKesson Corp., which is expected to post about $18 billion in revenue for the fiscal year ending next March.

Bergen Brunswig Chairman Robert E. Martini said he doesn’t believe antitrust questions will present an obstacle to the deal. “Both parties have studied that very diligently, used expert analysts, and have spoken to some of our larger customers,” he said. “We’ve gotten an overall favorable reaction [from customers] and we intend to cooperate with the FTC.”

The combination is expected to result in annual savings of at least $100 million from job reductions and consolidations of distribution outlets, among other things.

A handful of executives from both companies have been promised places in the new company. However, company officials refused to say how many positions might be cut in the combined work force. Bergen Brunswig has about 650 employees in Orange County.

Officials emphasized, however, that their markets are growing and there will be opportunities for job growth in certain areas.

Bergen Brunswig grew out of a wholesale apothecary that was founded in Los Angeles in 1888 and was later named Brunswig Drug Co. In 1969, the former Bergen Drug Co., of Hackensack, N.J., controlled by the Martini family, bought Brunswig Drug Co., forming the current corporation.

Robert Martini’s brother, Emil, was Bergen Brunswig’s first chief executive. Robert succeeded Emil. Last year, Donald R. Roden became the company’s first chief executive from outside the family.

The company’s headquarters has been in Orange since 1985.

Bergen previously had agreed to merge with generic drug maker Ivax Corp., but the companies called off the deal in March. Robert Walter, Cardinal’s chairman and chief executive, said that when the Ivax deal collapsed, he finally “got the guts” to call Bergen to discuss a possible merger.

Walter would become chief executive of the combined company, and Martini would be chairman.

Roden, Bergen’s chief executive, and John C. Kane, Cardinal’s president and chief operating officer, would serve as co-presidents and chief operating officers of the new company. Cardinal’s board of directors would also be expanded to 14 members to include four directors from Bergen, including Martini and Roden.

Bergen executives set to move to Ohio include Roden; Neil F. Dimick, chief financial officer; and Brent R. Martini, president of Bergen’s largest subsidiary.

Both of the extremely similar companies have revenue of about $11 billion a year from distributing pharmaceutical and medical products to pharmacies and health systems across the country.

The two companies have served complementary geographic markets, officials say, with Bergen Brunswig traditionally strong in the West and the South and Cardinal strong in the Northeast. A Cardinal spokeswoman said that, assuming the deal goes through, the new company will focus on pushing more of its business through large distribution centers that can handle revenue of about $1 billion annually.

Most of the existing centers are much smaller, and over the next three years the new company would cut the number of distribution centers from a total of 57 to less than 30, according to the spokeswoman.

The deal leaves Cardinal firmly in the driver’s seat.

Lawrence Marsh, a Salomon Brothers analyst, attributed Cardinal’s negotiating strength to the overall market value of its outstanding stock--roughly $6.8 billion, compared with $1.5 billion for Bergen Brunswig.

Though both companies are growing, Cardinal’s growth prospects appeared stronger to investors and its earnings far outpace Bergen’s, Marsh said. Bergen last year earned $74 million while Cardinal posted net income of $181 million.

Cardinal has taken a step to protect itself if the merger falls through. It received an option to buy up to 19.9% of Bergen’s common shares should things go awry.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Dual Stock Leap

Bergen Brunswig and Cardinal Health shares soared on news that the two firms will merge to form Cardinal Bergen Health Inc., the nation’s largest wholesale drug and medical products distributor.

Bergen Brunswig Corp.

Headquarters: Orange

Chairman: Robert E. Martini (chairman of combined company)

President/CEO: Donald R. Roden (co-president and co-chief operating officer of combined company)

Business: Drug and medical products distributor

Employees: 4,900, including about 650 in Orange County

Exchange: NYSE

Purchase price: $3 billion in stock and assumed debt

1996 net sales: $10 billion

1996 net income: $74 million

Cardinal Health Inc.

Headquarters: Dublin, Ohio