CASE 5.1: MERCK ACQUISITION OF MEDCO
Corporate mergers and acquisitions (M&A) have become popular across the globe
during the last two decades due to globalization, liberalization, technological developments,
and competitive business environment (Fisher & Siburg, 2009). The synergistic gains from
M&A may result from efficient management, economies of scale, profitable use of assets,
exploitation of market power, and the use of complementary resources (Mitchell et al, 2004).
Theoretically it is assumed that mergers improve the performance of the acquiring firm due to
increased market share and synergy impact.
This paper reviews the acquisition of Medco Medco Containment Services, Inc.
(Medco) by Merck & Company (Merck) and cites reasons for acquisition of Medco. Merck's
acquisition of Medco represents a $6.6 billion bet on where the future of the pharmaceutical
industry lies (Nichols, 1994). In today's managed-care environment, Vagelos (CEO of Merck
in 1993) argues, the company that best controls the information flow from doctor to patient to
pharmacist to plan sponsor has the greatest chance of succeeding. Medco has information on
38 million patients, which allows Merck to learn a lot more about how its drugs are
prescribed and used and, ultimately, how effective they are in fighting disease. Owning
Medco can also help Merck increase its market share in an industry in which no company has
more than 5% (Nichols, 1994). Medco pharmacists make about 2 million phone calls a year
to doctors, and when it's appropriate medically, Merck can use these calls to ask physicians to
choose Merck products. Merck stands to benefit from acquisition of Merck.
Table of Contents
Company Profiles 4
Relationship between Merck and Medco 6
Announcement of the Bid 7
Acceptance of the Offer 8
Motivations behind the Merger 8
This report reviews the merger between Merck & Company (Merck), a pharmaceutical researcher and manufacturer and Medco Containment Services, Inc. (Medco), a prescription benefits management company (PBM). On November 18, 1993, Merck purchased Medco for $6.6 billion. Immediately after the merger, Medco operated as a subsidiary of Merck (McGahan, 1993). In 1994, Merck-Medco was formed. According to Grant (2002) corporate strategy involves decisions that define the scope of the firm. In addition, he states that the importance of vertical integration has caused companies to redesign their value chains within their organizational boundaries. The acquisition of Medco by Merck is an example of Merck expanding its organizational boundaries while at the same time adding value. Merck added value to its operations by purchasing Medco (Grant, 2002). Pharmaceutical companies operated in a relatively stable environment that was characterized by solid profits and minimal pressure. While many of its competitors seem to be faring poorly, Merck seems to have managed the Medco integration superbly. The merger created Merck-Medco, a subsidiary of Merck (O’Reilly, 1993).
Merck & Co., Inc., is traded on the New York Stock Exchange (NYSE) with the
ticker: MRK. The founders of Merck & Company are Friedrich Jacob Merck and Emanuel
Merck, who, who took over the store several generations later, in 1816. The company is
known as Merck Sharp & Dohme (MSD) outside the United States and Canada and it is one
of the largest pharmaceutical companies in the world. Merck & Company is headquartered in
Whitehouse Station, New Jersey. It was established in the United States as a subsidiary of
Merck KGaA (German company) in 1891. It became an independent company in 1917.
Currently, it is one of the seven largest pharmaceutical companies in the world in terms of
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