If so, you'll already be familiar with two companies that headlined Friday's news: Germany's Bayer
On Thursday, Bayer, the company known best for inventing aspirin (although it makes most of its money off of "specialty materials" these days), announced a $19.5 billion bid to acquire fellow countryman Schering. Schering's claim to fame is its world leadership in manufacturing birth control pills. The business also produces media used in depicting MRI and X-ray results, and medications for the treatment of various cancers and multiple sclerosis.
Bayer's bid trumped an earlier $17.5 billion offer from yet another German powerhouse, Merck KGaA. The bid also raises the valuation on Schering from where I'd pronounced the shares "pricey" last month. In fact, Schering now trades about 45% higher than it was prior to these two competing bids.
Why would Bayer pay so much for Schering? Strategically, Bayer thinks it can use Schering's large U.S. sales force to help move Bayer's new cancer drug, Nexavar. Schering already has a foothold in the cancer-treatment space, which should permit Bayer to piggyback on Schering's contacts. The deal also brings with it Schering's several late-stage drug candidates. Finally, Bayer plans to cut labor costs by laying off as many as 6,000 "overlapping" employees of the two firms -- about 5% of the combined workforce.
But what does the deal mean to investors? First, because Schering's board is recommending that shareholders accept Bayer's offer, and because Merck KGaA has said it will not raise its bid, there's little point in buying Schering now. The merger-related upside is gone, and you probably don't want to be left holding a stock priced at 28 times earnings and projected to grow at only 8% if the merger should fall apart. Even if Bayer sees value in that price, I do not.
Better investing prospects can be found right here at home. If Bayer can find value in slow-growing Schering, it doesn't take a whole lot of imagination to see a buyout wave reaching our shores as well. The precedent Bayer is setting -- paying a PEG (price-to-earnings-to-growth) of 3.5 for Schering -- suggests that low growth prospects are no longer a deal breaker. Bristol-Myers
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