Aventis and Sanofi announced on Monday they have agreed to merge, ending months of hostilities and government pressure against a potential third party bidder. The board of Aventis accepted a raised takeover offer from its smaller rival, who had upped its bid by 14 percent.

Sanofi-Synthelabo said that the French-German drug maker had agreed to the terms and that it had now launched a friendly bid of €54.5 billion ($64.31 billion) in place of the previously rejected hostile bid of €47.8 billion.

The French government immediately welcomed the deal between the country's two main pharmaceutical groups, which would lead to the creation of the world's third largest behind U.S. giant Pfizer and Britain's GlaxoSmithKline.

Government pressure

The merger follows a three-month takeover battle in which the French government of Prime Minister Jean-Pierre Raffarin had actively applied pressure to Aventis to accept a local merger solution. Only last week Paris had harshly criticized the French-German company's attempts to negotiate a friendly merger with Switzerland's much larger Novartis AG.

A French government official, who asked not to be named, told the Associated Press that Finance Minister Nicolas Sarkozy had put heavy pressure on Sanofi to raise its bid for Aventis after it became known that Novartis was in the running.

The Swiss company, however, withdrew from the bidding race late Sunday, signaling an unwillingness to be pulled into a battle for Aventis against its government-backed rival. "Following Aventis' decision to engage in discussions with Sanofi, at the strong intervention of the French government, Novartis decided not to proceed," the company said in an official statement.

On Monday Raffarin hailed the Sanofi-Aventis deal, saying it would "maintain decision-making centers and jobs in France and Europe."

German Chancellor Gerhard Schröder and Swiss President Joseph Deiss expressed irritation over Paris' mingling in the business affairs of the pharmaceutical groups, according to French press reports. Politics has no role to play in companies' decision making processes, Schröder was quoted as saying.

Aventis, which itself was created from a merger of France's Rhone-Poulenc and Germany's Hoechst in 1999, employs about 69,000 people, some 9,000 of whom work in Germany.