Banking & Finance

BEHIND THE NEWS: Lechleiter went toe to toe with Icahn to cut megadeal

October 20, 2008

Eli Lilly and Co. had been salivating over ImClone Systems Inc. for more than two years when, on July 25 of this year, its senior executives received a formal staff recommendation to contact the company and make an overture.

So it must have come as quite a jolt to Lilly brass when, just six days later, Bristol-Myers Squibb announced that it was offering to buy the 83 percent of ImClone it didn't already own for $60 a share, or $4.5 billion.

That announcement lit a fire under Lilly executives, triggering a rapid-fire courtship that culminated with the Oct. 6 announcement that the Indianapolis company was buying New York-based ImClone for $70 a share in cash, or a total of $6.5 billion.

The dramatic, behind-the-scenes machinations are spelled out in a document Lilly and ImClone filed with the Securities and Exchange Commission Oct. 14.

The deal-Lilly's largest ever-came together with breathtaking speed.

Carl Icahn, ImClone's chairman and secondlargest shareholder, gave CEO John Lechleiter only two weeks to complete due diligence. It was a daunting task, given the complex intellectualproperty issues hanging over ImClone's blockbuster cancer drug, Erbitux, and its stable of cancer treatments in the R&D pipeline.

And Icahn told Lechleiter that Lilly had no hope of winning board approval for any bid less than $70 a share, even though that was a whopping 17 percent more than Bristol-Myers was offering.

"I would say John had his hands full with Carl Icahn. That's a very fair statement," said Joe Broecker, a veteran Indianapolis deal-maker who serves as senior managing director of locally based Periculum Capital.

But the filings make clear Lechleiter, who's been CEO only six months, was no pushover himself. Lechleiter, 55, may not have the international reputation of Icahn-a 72-year-old activist Fortune once called "the shrewdest investor on the planet"-but he dug in his heels on key points.

For example, during negotiations, Lilly argued that if ImClone later pulled out of the sale, it should have to pay a "termination fee" equal to 4 percent of the deal's value, or $260 million. Icahn countered that he would agree to that language only if Lilly upped its offer to $72 a share, or $6.7 billion.

No deal, Lilly said. "Dr. Lechleiter indicated that Lilly would only be interested in a transaction at $70 per share," the SEC filing said. The companies ended up settling on a termination fee of $150 million.

It's far too early to assess whether, by sealing the deal, Lechleiter outfoxed Bristol-Myers CEO Jim Cornelius or opened Lilly's checkbook too wide. The verdict will hinge on how much in sales Lilly can ring up from Erbitux and products under development in ImClone labs.

What's already clear, however, is that Cornelius-who for years served as Lilly's chief financial officer-saw the winning offer as overly rich, or at least richer than his company could justify.

Bristol-Myers in late September dangled $62 a share and said "it might be willing to increase its offer significantly above [that] but not up to $70 a share," the SEC filing said.

Lilly and ImClone representatives stayed up all night Oct. 5 to finalize their agreement and prepare for a public announcement the following morning.

Lechleiter and Lilly show no signs of buyer's remorse. The CEO continues to crow about the deal like a man still experiencing an adrenalin rush.

"We really do create an oncology powerhouse," Lechleiter said on CNBC hours after the deal was signed, a position he's repeated in interviews since.

Nat City to get scooped up?

National City Corp. has been one of Indianapolis' top banks since swooping into the market in 1992 with the $641 million acquisition of locally based Merchants National Corp.

Don't be surprised if the name isn't around much longer. The Wall Street Journal recently reported the struggling bank is in sale discussions. It listed potential buyers as Pittsburgh's PNC Financial Services Group Inc. and Canada's Bank of Nova Scotia-both of which would be newcomers to Indianapolis.

During a swing through Indianapolis Oct. 14, National City CEO Peter Raskind declined to discuss "rumors or speculation" about the sale of the bank.

Asked whether he expects consolidation in the banking industry, Raskind said, "I do. I don't know where National City fits. There's some pretty compelling economics to drive consolidation."
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