NEWS OF THE WEEK BUSINESS
BUSH TAKES AIM AT COMPANY FRAUD Government plans action as drugmakers deal with scandals
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RESIDENT GEORGE W. BUSH
last week laid out his plan to root out corporate corruption, as yet another firm, Merck & Co., came clean about questionable accounting practices and other drug firms dealt with their own federal investigations. "At this moment, America's greatest economic need is higher ethical standards enforced by strict laws and upheld by responsible business leaders," Bush said in New York City last Tuesday. "The lure of heady profits of the late 1990s spawned abuses and excesses. With strict enforcement and higher ethical standards, we must usher in a new era of integrity in corporate America." Bush's speech came just three days after Merck's pharmacy benefits management business, Medco Health Solutions, reported to the Securities & Exchange Commission that it had counted as revenues copayments made by consumers to pharmacies, not to Medco.The copayments were also counted as cost ofproducts and thus had no effect on profits. From 1999 through 2001, $12.4 billion in revenues were in such copayments. Merck's stock price dropped 10%, to $43.57, during the three trading days following its filing. Merck says SEC approved Medco's registration after analyzing the copayments issue. "Merck has strongly maintained that its accounting practices are appropriate and in accordance with generally accepted accounting principles," the company said in a statement. Nevertheless, Merck is delaying—"due solely to market conditions"—pricing HTTP://PUBS.ACS.ORG/CEN
of its initial public offering of Medco, set for last week. The problems don't stop at Merck. Bristol-Myers Squibb admitted last week that it is being investigated by SEC over the reporting of inventories that may have overstated revenues by as much as $ 1 billion. The company says it is cooperating with the investigation. In addition, the chairman and chief executive officer of Irish drugmaker Elan Corp., Donal J. Geaney and the vice chairman, Thomas G. Lynch, stepped down from their positions last week. Elan is facing an SEC investigation and shareholder litigation over accounting practices. In his speech, Bush endorsed private-sector proposals that independent directors comprise a majority on company boards. He
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signed an executive order to create a corporate fraud task force—a "financial crimes SWAT team" that will oversee investigations. He also called on chief executives to describe "in plain English" their compensation packages in company annual reports. Bush endorsed an SEC order that the top executives of the 1,000 largest publicly traded companies personally vouch for the financial information submitted to SEC over the previous year and called on SEC to ensure auditors and analysts aren't compromised by conflicts of interest. Democrats, seeing a political opportunity, questioned Bush's credibility in tackling the corporate accountability issue in light of a stock sale he made in 1990 as a director of Harken Energy Others were critical of the depth of the plan. "Unfortunately, the proposals made by the President today only scratch the surface," said AFL-CIO President John J. Sweeney-ALEX TULL0
N E W E R A Bush wants higher ethical standards enforced by strict laws.
BUY-BACK
Heyman Wants To Own All Of ISP elf-styled shareholder rights champion and International Specialty Products Chairman Samuel J. Heyman wants to take ISP private because he believes public shareholders haven't given the company credit for the earnings in its investment portfolio. Heyman says he'll pay $10 a share for the 20% of ISP he does not already own. In a letter to ISP's board dated July 8, Heyman says the price per share is "an almost 45% premium over the average price for the prior 30
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days." As of July 8, the offer was a 26% premium over the closing price of $7.95. Heyman will fund the approximately $125 million buyout "out of available funds of ISP." The next step: ISP's board will form a committee of independent shareholders to evaluate the offer. Though ISP is profitable on its own, Heyman's investments have netted the company considerable profits. In 1985, he made $250 million in an unsuccessful takeover bid for Union Carbide. In 2001, he realized $128 mil-
lion in an unsuccessful bid for Dexter Corp. and biotechnology supply company Life Technologies. More recently, he has invested in beleaguered specialty chemicals maker Hercules. This is the second time Heyman has attempted to privatize one of his businesses. In 1989, he took the old General Aniline & Film Co. private in a leveraged buyout. In 1991, he raised $285 million in an initial public offering of 20% of ISP, which included the GAF chemical operations.-MARC REISCH
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JULY
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2002
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