Schering Escapes Merck's Grasp

German pharmaceutical company Schering had been waiting for a white knight to rescue it from the hostile bid by compatriot firm Merck, and one appeared: Bayer.

Bayer has offered to acquire Schering for roughly $108 per share. The all-cash transaction, which has been accepted by Schering's executive board, values Schering at $20.3 billion, a considerable improvement over the $18.2 billion that Merck offered one week earlier.

Given Bayer's increased bid and deeper pockets, Merck's management withdrew its offer, claiming that a higher price was not justified. And in contrast to the Merck bid, which raised eyebrows in the investment community, Bayer's offer has generally been warmly received by industry analysts.

Assuming no other bidder enters the fray, Bayer plans to fold Schering's operations into its own health care business, to be named Bayer-Schering Pharmaceuticals. The business will be headquartered in Berlin, where Schering is currently based.

In 2005, the Bayer-Schering business would have had combined drug sales of $11.2 billion. The pro forma drug sales of the Merck-Schering combination, by contrast, would have been roughly $7 billion.

Bayer-Schering will rank number 11 worldwide in the overall pharmaceuticals sector. However, Bayer Chairman Werner Wenning said at a press conference that the new firm will be seventh worldwide in specialty pharmaceuticals, a segment that includes treatments in areas such as multiple sclerosis, gynecology, and hematology. The combination will also be seventh worldwide in biological proteins.

The new company will have nearly 60,000 employees worldwide, Wenning said, although about 10% of them will eventually lose their jobs. He said it is too early to say where or in what units jobs will be lost, although he hinted at eliminating overlaps in production and R&D.

Wenning said the R&D budget for the combined company will be 15-17% of sales. Some of Bayer's research operations in Wuppertal, Germany, will move to Berlin to be amalgamated with those of Schering, he confirmed.

Bayer will sell two chemical businesses-electronic chemicals firm H. C. Starck and cellulosics producer Wolff Walsrode-to help fund the deal. Bayer will publish its formal offer by mid-April. It expects to receive approvals from antitrust authorities in May and hopes to have the deal wrapped up in the second quarter of this year.

Bayer is aiming for synergy savings of some $870 million per year by 2009, although it also is braced for a nonrecurring restructuring charge of about $1.2 billion, half of which will hit the company next year and the remainder in 2008.

The deal draws a line under Bayer's efforts in recent years to find a joint venture partner for its pharma operations. Some critics have said that Bayer's insistence on having control over any such partnership was one reason the effort did not pan out.