Merck/Medco Case Analysis
CASE 5.1: MERCK ACQUISITION OF MEDCO
Abstract
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
Page
Introduction 4
Company Profiles 4
Relationship between Merck and Medco 6
Announcement of the Bid 7
Acceptance of the Offer 8
Motivations behind the Merger 8
Recommendation 10
Abstract
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
Page
Introduction 4
Company Profiles 4
Relationship between Merck and Medco 6
Announcement of the Bid 7
Acceptance of the Offer 8
Motivations behind the Merger 8
Recommendation 10