Bayer Trumps Merck's Bid For Schering

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

In an deal announced late Thursday evening, March 22, 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.

Bayer plans to fold Schering's operations into its own health care business, to be named Bayer-Schering Pharmaceuticals. Headquarters of the firm, which would have had combined pharmaceutical sales in 2005 of $11.2 billion, would be Berlin, where Schering is currently based.

The total pro forma pharmaceutical sales of the Merck-Schering combination, by contrast, would have been roughly $7 billion.

Bayer-Schering would rank at number 11 worldwide in the overall pharmaceuticals sector. However, Bayer Chairman Werner Wenning told a press conference held Friday morning that the new firm would be seventh worldwide in the specialty pharmaceutical segment. That segment, he said, includes treatments in areas such as multiple sclerosis, gynecology, and hematology, in particular, as distinct from primary care pharmaceuticals. It would also be seventh worldwide in biological proteins.

The new company would have nearly 60,000 employees worldwide; according to Wenning, the merger would cause about 10% of employees to lose their jobs. He said it is too early to say where or in what units jobs would be lost, although he hinted at cuts from elimination of overlaps in production facilities and R&D. Wenning said the R&D budget for the combined company would be about 15 to 17% of combined sales. Some of Bayer???s research operations in Wuppertal, Germany, would move to Berlin to be amalgamated with those of Schering, he confirmed.

The value of Schering shares rose above the level of Bayer's offer, indicating that industry analysts and observers think there may be a counteroffer from Merck. However, analysts say Bayer???s deeper pockets will enable it to ultimately prevail. Martin Hall, a research analyst at Eden Group, an investment firm in London, notes that ???the stock market thinks Merck will come back. But the point is, whatever Merck comes back with, Bayer will top.??? He says Merck is in a no-win situation.

And Merck???s management seems to have come to that conclusion, as well. A Merck statement announced that it will not increase its original offer: A higher price per Schering share ???is not justified,??? the board decided. So the company "has decided not to pursue the planned takeover of Schering."

Assuming that yet another bidder does not enter the fray, Bayer will sell two units of its MaterialScience company—electronic chemicals producer 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, with half hitting the company next year and the remainder, in 2008.