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Executive Summary

Kodak's first contact with Sterling about a possible merger occurred immediately following the announcement of Hoffman-LaRoche's first offer for Sterling on Jan. 4, according to documents filed with the Securities & Exchange Commission. The filing notes that on Jan. 4, "a representative of Shearson Lehman Brothers, Inc., financial advisor to [Eastman Kodak] contacted [Sterling] and communicated [Kodak's] interest in entering into some form of business combination." Kodak Chairman Colby Chandler spoke with Sterling Chairman John Pietruski two days later to reiterate Kodak's interest, but Pietruski continued to affirm Sterling's desire to remain independent. Nevertheless, the two companies exchanged information under a confidentiality agreement on Jan. 8 and in the following two weeks representatives of the two companies "held conversations and exchanged data." On Jan. 21, two days after Roche bumped its offer for Sterling to $ 81 a share, the two companies met "to negotiate business terms and draft documentation for the possible acquisition" of Sterling by Kodak, the filing notes. The final agreement was reached on the afternoon of Jan. 22 after "extensive negotiation." The filing indicates that Kodak was one of several "white knight" suitors to appear on Sterling's doorstep once Roche put the company in play. However, Sterling's investment banker Morgan Stanley, explaining its support for the Kodak bid, noted that Kodak topped all other bids for the company. According to the Sterling filing, Morgan Stanley advised the Sterling board that "no alternative transaction to a sale of the entire company [was] likely to yield a per share value in the short term which is equal to or greater than the $ 89.50 per share price contemplated by the Kodak offer." Sterling added that the Kodak offer was "higher than the per share price contemplated by any expressions of interest in acquiring the company received from other parties." Kodak and Sterling announced the $ 5.15 bil. merger on Jan. 22 ("The Pink Sheet" Jan. 25, p. 3). Kodak's price for Sterling, which comes out to approximately 26 times Sterling's 1987 net income, sets a high benchmark for drug business acquisitions, possibly taking some other potential candidates out of affordable takeover price range. For Sterling, the Kodak merger was a way to retain its corporate identity. Because of its very early stage in development, Kodak's nascent drug business will likely be consolidated into Sterling, not vice versa. Monsanto followed that strategy with Searle. In fact, the Kodak merger agreement includes provisions that would maintain Sterling's corporate headquarters in New York City and retain the name "Sterling Drug." A letter from Pietruski to company employees on the merger agreement underscores Sterling's intention to retain its identity, if not its independence. "We are disappointed that it became necessary to give up our independence as a public company," Pietruski wrote, adding: "I know you join with me in continuing our best efforts toward the growth and success of Sterling Drug Inc. as a member of the Eastman Kodak family." For its part in assisting Sterling in its fight against Roche and in putting together the Kodak merger, Morgan Stanley will receive approximately $ 29 mil., including $ 14 mil. for finding a suitor willing to pay $ 9.50 a share above the $ 80 per share threshold. Kodak is paying its investment banker, Shearson Lehman, approximately $ 8 mil. for its help in winning Sterling. The Kodak tender offer is set to expire on Feb. 22 unless extended.

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