Reaction to Mylan Laboratories’ swoop on the generics unit of Merck KGaA has not been all positive and the firm’s share price has taken a significant tumble.
The US firm’s stockholders would appear to be thinking that the $4.9 billion euro offer to buy the division is on the high side and the shares ended the day 12% down at $19.70. The planned acquisition has taken Wall Street by surprise and while observers are impressed by the audacious nature of Mylan’s bid, there are also fears about the effect paying such a sum will have on the firm.
Cowen & Co analyst Ken Cacciatore issued a research note saying that “although we like the boldness of the move, we also feel Mylan will be under pressure until visible and measurable successes are achieved – and that will take time." The firm has arranged debt financing to fund the transaction with Merrill Lynch, Citigroup and Goldman Sachs but the fact remains that is paying well over its own market value and the price tag, which equates to around $6.7 billion, dwarves the Pennsylvania-based firm’s sales. Last November it noted that half-yearly turnover was $706.6 million.
However most observers were agreed that in the long-term, the deal makes a lot of sense for Mylan, not least for the fact that its reliance on the US market has been dramatically reduced. Natexis Bleichroeder analyst Corey Davis told Bloomberg that “the name of the game in generics right now is to be bigger and to find new sources of growth.'' He added that the US market is saturated, and buying Merck Generics was “what a company like Mylan has to do to survive.''
The bidding for Merck Generics reached the limit of analysts’ forecasts but Mylan does not feel it has overpaid and chief executive Robert Coury has been saying that it was a one-of-a-kind opportunity to get hold of a quality asset. It is also true that with just one acquisition, the company has achieved all the scale necessary in all to compete in the highly-competitive and rapidly-consolidating generics sector. The new entity will rank third worldwide behind Israel’s Teva, which most people expected to be victorious in the Merck Generics bidding war, and the Sandoz unit of Novartis.
Short-term, however, the deal could be quite painful and Wachovia analyst Michael Tong said in a research note that "financial risk outweighs strategic rationale in the near to medium term."