Surprise Us in a Good Way, Merck

Merck (NYSE: MRK  ) announced today that it plans to close eight manufacturing and eight research sites. No big surprise there; closures were expected given Merck's plan to cut 15% of its workforce after the acquisition of Schering-Plough.

Merck expects to turn the synergies into $3.5 billion in annual savings by 2012. The changes announced so far should account for about $2.7 billion to $3.1 billion of that, so we still have a few more cuts to go.

What's it going to cost Merck? The "initial phases" of the merger restructuring will cost between $3.5 billion and $4.3 billion. Even if the total cost is three times that, it's still a pretty good return on investment, when you extrapolate the $3.5 billion in annual savings out for several years. Of course that calculation doesn't take into account the premium it paid for Schering-Plough.

While that's a lot of money to lay out in a relatively short timeframe -- cash expenses are expected to be two-thirds of the total -- Merck can afford it. The company had nearly $10 billion in the bank at the end of last quarter. Its hefty 4.3% dividend yield seems safe for now.

The bigger issue is what the acquisition and restructuring related costs will do for the long-term growth of the company. Could Merck have gotten a better return if it had followed the paths of Johnson & Johnson (NYSE: JNJ  ) and Abbott Labs (NYSE: ABT  ) and purchased a series of smaller companies and licensed a few drugs along the way? It's not like large acquisitions and their subsequent hit to productivity have worked out well for companies like Pfizer (NYSE: PFE  ) and Boston Scientific (NYSE: BSX  ) .

If Merck can pull off the integration and save all that cash, while not losing a step in the growth department, that really will be a surprise.