The merger of the two British pharmaceutical giants, Glaxo and SmithKline Beecham, has excited investors because of the prospect of cost cuts of $1.8 billion. But the merger is really centred on much more than that. It is creating a formidable research and development base.

In 1998 Sir Richard Sykes, chairman of Glaxo Wellcome, had made it clear that he was not interested in a merger that would result only in a run-of-the-mill cost cutting exercise. He was keen on a merger that would see two big successful organisations coming together and doubling their R&D expenditure to get a better portfolio of new medicines. For him it was a matter of consolidation rather than cost cutting.

What has changed since that famous spoilt party in 1998, when Sir Richard and SmithKline’s chief executive Jan Leschely hurriedly drafted the merger proposal in New York and dropped it nearly as quickly, within a month?

The biggest clash seems to be the personality of the two bigwigs. Sir Richard, born in 1942 to a carpenter, is known for his leading Glaxo in a stunning 9 billion-pound raid on compatriot Wellcome in 1995 that shook the complacent pharmaceutical industry. Leschely, a former tennis player, and two years senior to Sir Sykes, is also known for his boardroom heroics. He joined SmithKline Beecham in 1990 as head of global pharmaceuticals and four years later took the top job. He launched initiatives that resulted in acquisition or sale of businesses worth around $10 billion.

Their mismatch began to surface once detailed negotiations got under way. According to the plan Sir Richard would have been executive chairman of the merged entity, and Mr Leschely the chief executive. The disagreements revolved around jobs and how the new company should operate. There was openly speculation that a deal was impossible while both men remained.

Things are different now. Mr Leschely has decided to retire in April 2000, and Sir Sykes is interested in pursuing an academic career. This leaves room for a new man to occupy the top slot. And the convincing choice was Jean-Pierre Garnier, Mr Leschely’s successor who also has a good equation with Sir Richard. Mr Garnier has also convinced Glaxo’s senior management that he has the ability to run the new company -- and that too from the US.

The second factor leading to the resumption of merger talks was performance. Following the announcement of a failed merger, Glaxo warned of lower growth in net profit in 1998, for the first time in its history. Though the share prices of SmithKline too underperformed the global pharmaceutical index, it was in a better position compared to Glaxo, and was improving.

SmithKline announced three-year growth targets in double digits after it sold two peripheral businesses and announced cost-saving measures in manufacturing. In contrast, Glaxo announced single digit growth for 1999. SmithKline also launched a diabetes drug, Avandia, with a big sales potential. As a result, SmithKline was well placed to demand a genuine merger of equals.

The third reason that compelled the two to resume merger talks is the current wave of consolidation in the drug industry. In the last couple of years, more than half the world’s top 25 pharmaceutical companies have announced mergers. Important among these were the merger of Sweden’s Astra with Britain''s Zeneca to form AstraZeneca, and between France’s Rhone-Poulenc and Germany’s Hoechst Marion Roussel, to form Aventis.

But the greatest threat to Glaxo Wellcome comes from Pfizer’s hostile bid for Warner Lambert, which probably indicated that even formidable drug companies are beginning to feel the pressure of squeezed margins, high costs of marketing and the need for short term gains.