Wellcome Trust's judgement looks sound

COMMENT

Gallows humour is the order of the day at Wellcome, which would dearly love to put up a fight to Glaxo's £9bn takeover bid but admits that, with its largest shareholder, the Wellcome Trust, determined to sell, it would be a futile cause. "That our obituary has already been written is not in question", one director mutters glumly. "The only question is whether it will be Glaxo or someone else that performs the role of undertaker".

John Robb and the rest of the Wellcome board are realists but they find it hard to disguise their bitterness at the way the Trust, without so much as a by your leave, has sold them down the river. Since the company was floated, Wellcome has been the Trust's best performing investment by a long way. The company's prospects are second to none, just the sort of proven British success story that responsible long-term investors should support and encourage. Glaxo's case for the merger is convincingly put, but it is by no means proven. This is an industry at the crossroads of change. Who can say which is the right road?

Wellcome directors have done all they can to accommodate the Trust's needs, pursueing a progressive dividend policy in an industry whose demands would argue against it. What is more, the Trust put its name to a memorandum at the time of the last share offer, saying it would not sell. Is this not treachery on a grand scale?

On the face of it, the case against the Trust looks damning. Even accepting that the £10.25 a share Glaxo is offering is a price Wellcome on its own had no realistic chance of attaining, the decision to allow directors only three weeks to come up with analternative higher offer looks mean and self-defeating. The best policy, surely, would have been to put the 40 per cent stake up for auction, allowing the highest possible price to be attained.

In the Wellcome camp at least, it is believed that the Trust must have been panicked into submission. Who were its advisers, Robert Fleming, working for: the Trust or Glaxo? Fleming's big hitter on the case, Bernard Taylor, makes it look doubly suspicious. He is a good friend of Glaxo's chief executive, Sir Richard Sykes. If he could deliver Glaxo as a long-term client, it would more than justify the reputed golden hello Fleming is said to have lured him from Barings with.

This is all good conspiratorial stuff, but there is a rather more innocent explanation for what occurred. Far from failing to execute its fiduciary duties, the Trust seems to have been meticulous in its attention to them. Glaxo's opening offer to the Trust was a good deal lower. Furthermore, it threatened that, without the Trust's irrevocable and immediate undertaking to accept, it would walk away. On top of a high price, the Trust managed to extract a number of important concessions, including a five-week stay on its irrevocable acceptance. To the Trust's mind it was creating the opportunity for an auction while at the same time guaranteeing itself an exit at a minimum level of £10.25 a share.

The irrevocable undertaking is in any case largely an irrelevance. If a higher offer emerges after it comes into force, other shareholders would reject Glaxo's offer and it would lapse. The key to the whole thing is that, under the terms of the agreement, Glaxo is prevented from buying in the market to shut out the higher bid.

The effect is doubly beneficial to the Trust for it also prevents Glaxo buying the 10 per cent stake it is entitled to under takeover rules merely to fustrate rivals. No rival is going to bid if it cannot surpass the 90 per cent acceptance level which allows it compulsory purchase of the rest. To the Trust's mind it has created a situation that is more conducive to a rival and higher offer than any of the alternatives.

At the same time it guarantees itself a 20 per cent increase in capital value and a 30 per cent increase in annual income, allowing it to overtake the Medical Research Council as the biggest funder of medical research in the country. It may be possible to accuse the Trust of treachery, but bad judgement, no.