It's striking -- bordering on shocking -- how investors have reacted differently to the megamergers by Pfizer (NYSE:PFE) and Merck (NYSE:MRK). Merck traded down right after the announcement, but investors now seem to have warmed up to the idea of its taking over partner Schering-Plough (NYSE:SGP).


Increase (decrease) in share price from day before announcement

Increase (decrease) in S&P500 since merger announcement







Source: Yahoo! Finance.

Granted, it's only been seven trading days for Merck (including the day of the announcement) and we did have a giant bull run last week, but Merck outpaced the S&P 500. Over the same amount of time immediately following its announcement, Pfizer trailed the broad market by more than 13 points. It sure looks like Pfizer's investors aren't all that excited about what Wyeth (NYSE:WYE) will add.

There are some pipeline and patent expiration differences between Schering and Wyeth, but I think the main culprit in Pfizer's lackluster performance since the announcement is the dividend cut. Pfizer had to make a cut to conserve cash for the acquisition and, so far at least, Merck hasn't. Investors in Pfizer had been sitting on a nice fat 7.3% yield, getting paid to wait for what the company would do to overcome the impending fall in revenue post-Lipitor. With the dividend cut in half, investors had to discount the stock. And the yield still isn't back up to what it was, sitting at just 4.5% going forward. That's better than the yields at Johnson & Johnson (NYSE:JNJ) or Procter & Gamble (NYSE:PG), but these companies don't have steep patent cliffs ahead of them. There's still that problem at Pfizer.

As I wrote after the Merck deal was announced, I like that acquisition better than Pfizer's, but that doesn't make it the best move for Merck. Instead, stocking its pipeline with a bunch of developmental-stage drugmakers might have been a better use of the $41 billion Merck is using to buy Schering. Investors may be happy with the increase in share price they’ve seen over the last week and a half, but I'm not convinced this merger's the best long-term move for Merck.

Johnson & Johnson is a current recommendation of Motley Fool Income Investor, and Pfizer is a former pick of the newsletter. To see how dividend-paying stocks can offer both secure income and the opportunity for growth, take a free look at this newsletter with a 30-day free trial.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of Procter & Gamble. Pfizer is also an Inside Value pick. The Fool has a disclosure policy.