The Merck deal is driven by politics - and fear

Peter Cohan

It seems like every time we get a Democratic president, Merck (MRK) decides it needs to make a big merger. Last time Merck made a big deal it was 1993 just after Bill Clinton entered the White House. Merck was afraid of politically-driven change in the health care industry -- as well as the possibility that its competitor Bristol Myers Squibb (BMY) would buy Medco Containment Services, then a mail-order drug shipper that was pushing Bristol's drugs over Merck's into Pharmacy Benefit Managers (PBMs), which were dominating corporate drug purchases. So in 1993 Merck bought Medco for $6.6 billion. The deal flopped and Merck ended up spinning off Medco Health Solutions (MHS) in 2003 roughly a year after Merck discovered that $14 billion of Medco's revenue was an accounting fraud.

Now Merck wants to try again -- this time it's buying another drug company, Schering Plough (SGP) in a $41.1 billion cash and stock deal. Schering-Plough shareholders would get 0.5767 shares of Merck and $10.50 in cash for each share. This price is a 34 percent premium to where it closed last Friday and the deal will leave Merck shareholders with 68 percent of the combined company. Forty-four percent of the price will be paid in cash, with $9.8 billion coming from existing cash balances and $8.5 billion from debt. The companies expect to cut $3.5 billion in costs beyond 2011. And Schering-Plough is expected to "modestly" add to Merck's earnings. So does this deal make any more sense than Merck's Medco disaster?