Hi all, please i need help on this Week 3 "you Decide". The professor complained about higher similarity index. Can anyone help out. The submitted file is attached to this mail.

Thanks

Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith Case Study of Merck's Acquisition of Medco Merck-Medco Acquisition Analysis By John Olotu Keller Graduate School of Management, 2016 Professor: Gene Smith FIN 561- Mergers and Acquisition 1 Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith Table of Contents 1.0 Face Page.................................................................................1 2.0 Table Contents...........................................................................2 3.0 Executive Summary.....................................................................3 4.0 Industry Overview.......................................................................3 5.0 SWOT Analysis ................................................................................................4 6.0 Rationale for the merger.................................................................5 7.0 Reasons for the merger..................................................................7 8.0 Impact on Marketing and Sales.......................................................8 9.0 Marketing and Sales Reflections.......................................................9 10.0 Operations Reflections.................................................................13 11.0 Financial Considerations...............................................................13 12.0 Recommendations......................................................................14 13.0 References...............................................................................15 2 Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 3 3.0 Executive Summary The purpose of this research paper is to present the reader with the applied resolutions to solve the merger acquisition between Merck and Medco. It is recommended that Merck tender cash bid of $6.6 Billion dollars to acquire Medco Containment Services Inc. 4.0 Industry Overview The pharmaceutical industry faced significant growth during the last decade as companies, such as Merck, benefited from a lack of competition, substitute products, and powerless buyers. Merck & Co., Inc. was founded in 1891 and is a leading pharmaceutical company with headquarters in Whitehouse Station, NJ. First quarter earnings in 2012 were 11.7 billion dollars worldwide, with revenue being produced from pharmaceuticals, animal health, and consumer care. (Merck Financials 2012) Through science and innovation Merck is one of the largest healthcare companies in the world, delivering vaccines and medicinal needs to humans and animals. (Merck Sharp & Dohme Corp 2009-2012) The organization inside the United States of America is recognized as Merck and & Co, Inc., while outside the U.S., the organization is known as Merck Sharp and Dohme (MSD), or MSD Sharp & Dohme, and Schering-Plough in Ireland. (Merck KGA \"The Brand Merck\" 2011). Merck & Co., Inc. promotes and markets their products to physicians, healthcare providers, consumers, and customers. (Merck Sharp & Dohme Corp. \"Sales and Marketing\" 2009-2012). Merck & Co. Inc. employs the concept of DTC (direct-to-consumer) marketing, which helps consumers develop a greater level of awareness, with regard to new and current products of Merck & Co., Inc., and it also allows the company to gain more exposure to a broader audience. Merck & Co., Inc. currently has 6 programs that cater to the needs of individuals with a low income. Low income persons, whom normally cannot access prescription medications, are able to apply to the Merck Help program, which allows every person to gain access to the products that Merck has available. However, in the second half of the 1980's new hindrances were introduced which have impacted profit margins. Regulations such as the WaxmanHatch Act of 1984 reduced the requirements of generic drug manufactures when brining a drug to market. More notably, managed care plans began to take the place of traditional insurance-based health care for individuals, and these managed care organizations (MCO's) now have substantial buying power. Now prescription benefit management (PBM) companies, such as Medco, have become prevalent in the market place as managed care plans continue to grow in popularity. Even as we sit here deciding if the acquisition of Medco is the correct course of action it is estimated that 80% of the US population has transitioned to an MCO as compared to only 5% of the population in 1980. (Mullins, 2007) As you can see from the figure below the trend towards MCO's is only projected to grow stronger through the rest of the decade. (Hurley, 2000) Gone are the days of selling to several hundred thousand doctors and if we Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 4 are to survive this revolution we must critically analyze this decision to ensure that it will allow us to grow and profit. 5.0 SWOT Analysis Strengths: Merck is an industry trailblazer in the manufacturing of drugs while MCO's and individuals alike trust Medco. Merging two segment leaders in the pharmaceutical industry will give Merck a strong competitive advantage, as it will control the entire process from manufacturing to purchasing. The combined efforts of Merck and Medco will also rid the process of overlaps and/or excess. The savings realized will result in lower prices for consumers which will drive purchase quantities, as well as profits, higher than Merck would be able to realize independently. Weaknesses: One of the issues will be the integration of the two companies seeing as they are operating in two dissimilar segments within the same industry. Our Chief Operating Officer is quite concerned that the synergy of the two company's operations and cultures won't be realized and believes that the acquisition will result in an expensive experiment that will undermine shareholder value. I share his concerns and feel that this issue must be addressed if the integration of our two companies is to be successful. Opportunities: Obtaining Medco will open up many possibilities that were not previously available to Merck. Most notably, we will have a strong footprint in the managed care market giving us a competitive advantage against rival drug manufacturing companies. The extensive database kept by Medco on their thirty-three million customers will allow Merck to analyze the prescription practices of doctors and other care providers, the effectiveness of the manufacturer's drugs, and consumer behavior such as refill frequency. This information could become invaluable to Merck as the potential for increased sales activity will sure to be positively affected by our findings. Furthermore, we may be able to use this information to show the ineptness of drugs manufactured by our competitors and use those findings to justify the higher premiums being charged by Merck. Threats: I consider one of the biggest threats to this acquisition will be the political firestorm that might be sparked in the name of protecting consumers. As previously mentioned, regulations have already been enacted by Congress in an attempt to manipulate the health care markets and drive prescription drug prices lower. Should we move forward with the acquisition of Medco I am concerned that those in Washington will view our actions as a direct challenge to their legislative efforts. Additionally, there is the potential for a number of current Medco clients to question the ability of the company to provide Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 5 unbiased services, post-acquisition, which could cause a modest to significant runoff. Lastly, there is always the possibility of our competitors mimicking our actions, which may ultimately cause a price war to ensue, driving profit levels down across the industry. 6.0 Rationales for merger of Merck & Medco Increased Market Power The primary reason for both firms going in for mergers and acquisitions is their desire to increase their market power. Merck gains market power, when it is able to sell its goods or services at a price lower than its competitors or the cost of producing the product or service is much less as compared to its competitors. Merck may have core competencies but may lack the required resources and size to compete in the market. Thus, as the M& A is taking place with the intention of increasing the market power target competitors, suppliers, distributors, or business in the same industry, it is going to help the business prospects going forward. We know that, when two firms in the same industry but in different stages of the value chain merge, it is called a vertical merger. Here the merger between Merck & Company and the drug distributor, Medco Containment Services is a vertical merger. This merger will ensure that, Merck's products were distributed as it managed its prescription drug plans. There are different reasons for companies entering into vertical mergers. Here Merck & Medco merger will have reduction cost of communication, production co-ordination, better planning for inventory and production. Overcoming Entry Barriers When both the firms try to enter new market they often face many problems, some of which may act as barriers to its entry. As both the firms here are well established, post-merger they can sell their products and services in large volumes thereby gaining economies of scale. Economies of scale become a barrier to entry. Another barrier may be faced here, product loyalty. Creating enduring relationships with customers leads to product loyalty which may be difficult to overcome by Medco. As both are existing players in the industry, they need not spend more money in advertising as well. Cost of New Product Development Developing new products and launching them successfully in the market requires commitment of the firm's resources and the return on investment may take a long time. Moreover, the market acceptance of the new product is also unpredictable. According to a research 88 percent of the new products fail to achieve expected results, but here as Medco has presence in the market, it becomes easy to push the products post-merger. Generally, firms prefer M&As to avoid the internal costs of developing new products. Moreover, M&As also reduce the risks associated with the launch of a new product, as the product is already tested in the market. When Merck acquires the company Medco that already has an established product in the market, the acquiring company Merck can enter the market more quickly. Pharmaceutical companies use M&As to gain quick entry into the market and overcome the high costs of the product development. As patents on many key6 drugs expire after a certain period, firms which Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 6 do not have a strong R&D center are like to be left behind. Thus M&As seem to be preferred option for such companies. But here, we may say that, for both Merck and Medco, it is all favorable in all the aspects of merger. Increased Speed to Market As we have discussed earlier, M&As lead to faster market entry when compared to the time taken for new product development. Research has shown that M&As are the quickest route to new markets and new capabilities. The new capabilities can be used to introduce new products and enter markets and this can create an advantageous market position. However, the longevity of advantage may last, depends upon the rivals' competitive responses. Lower Risk Compared to Developing New Products / Rendering Services As normally it is a practice that, developing a new product involves a lot of risk. Mangers view M&As as risk-free method of getting entry into new markets. But one major drawback associated with increasing M&As activities is that they prevent investments in new product development. Research shows that M&As have become a means to avoid risk internal ventures. Many firms would not like to incur heavy expenses in developing new products, as acquisitions often seem to provide an economically more viable option. Here in case of Merck and Medco, we observe that, risk attach in case product would be very less, as Medco product lines continue in the similar lines. Increased Diversification Firms find it easy to develop and introduce new products in market, in which they have some experience. On the contrary, if a firm launches a product that has no relation to its existing portfolio of the products or services, there are lower chances of its success. Thus, in order to diversify, firms would prefer M&A route. M&A can be used for both related as well as unrelated diversification. M&A's are more common when firms want to diversify on a global level. Before taking over any M&A activity to diverse its product lines, a firm need to study and evaluate the fit between the acquiring and acquired firm. If the acquired firm and the acquiring firm are similar, there are greater chances of acquisition being successful, which is in case of Merck and Medco operating in the same Pharmaceutical industry. Reshaping the Firm's Competitive Scope The intensity of competition affects the profitability of a firm. To reduce the negative effect of competition, and reduce their dependence on a single or a few products, firms acquire other firms. If a firm is dependent on a single product for all its revenues and profits, the competitive scope of the company is like to be reduced. To avoid dependence on a single product, many firms venture into new industries through acquisitions. Here in case of Merck and Medco, we understand that, the business lines are different, hence all those lines will have coordinated synergy levels in the upcoming days. Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 7 7.0 Reasons for Merck and Medco Merger There are various reasons for the growth of merger and acquisitions. Some of these reasons are growth, technology, government policy, differential costs, productivity and different sources. Growth Growth is one of the primary motivating factors for M&As. M&A's provide an opportunity for firms to grow fast. A firm making profits in an ailing economy would not like to add investments in the same country. It makes perfect business sense for the firm to investment in an economy which promises faster growth. Firms which have operations in one particular state may not have a cost advantage because of the limited sales. If the operations are expanded to other states, due to the economies of scale the firms can gain cost advantage. Here Managed care plans typically provide members with medical insurance and basic health care services, using volume and long-term contracts to negotiate discounts from health care providers. In addition, managed care programs provide full coverage for prescription drugs more frequently than do traditional medical insurance plans. Industry experts' estimate that by the turn of the century, 90% of Americans will have drug costs included in some kind of managed health care plan, and 60% of all outpatient pharmaceuticals will be purchased by managed care programs. Hence we could view that, there is a bigger opportunity for the growth in the industry across in all lines of business. Technology A technology superior firm may go in for the M&As to exploit its technological advantage. On the other hand, a firm which lack technological advantage may go for M&As to gain access to superior technology. By using advance technology of the acquired firm, the acquirer can improve its competitive position and profitability both at state and country level as well. Merck could observe Medco's extensive database as the key factor motivating the merger. Medco maintains a computer profile of each of its 33 million customers, amounting to 26% of all people covered by a pharmaceutical benefit plan. Medco clients include 100 Fortune 500 companies, federal and state benefit plans, and 58 Blue Cross/Blue Shield groups and insurance companies. Numerous opportunities exist for Merck to utilize the information contained in Medco's database. First, the database will allow Merck to identify prescriptions that could be switched from a competitor's drug to a Merck drug. Merck pharmacists will then suggest the switch to a patient's doctor. This prospect of increasing sales is enormous. Government Policy Government policies and regulations relating to tariffs, quotas, can have a major impact on M&As. If a stage imposes tariffs and quotas to protect its regional industry, it will hamper drug supply. Threat of such restrictions encourages M&As. Environmental and other regulations can increase the time and cost required to build facilities. Thus, acquiring a company with facilities in place makes good business sense. Differential Costs like Labor, Productivity Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 8 Labor costs comprise a significant portion of the cost of production or service. Merck go for Merger to Medco to take advantage of the availability of cheap labor across all the regions. Because of company like Medco has cheaper man power with higher productivity. 8.0 Impact on Marketing and Sales The most obvious benefit will be the amalgamating of the nearly 33 million of Medco's customers and the extensive information that is kept on them. Merck would have access to the types of medications being prescribed including the manufacturers of those medications and the dosage level prescribed. This wealth of information would allow Merck to identify drugs that could be switched from competitor brands, and may serve to support the effectiveness, and therefore higher premium cost, of Merck drugs. Additionally, this acquisition would give us access to the major MCO's in the industry, which would help reduce overall marketing costs. Rather than soliciting individual doctors we would be able to concentrate our efforts on the larger groups that the MCO's service. Projections are that prescription drug cost will continue to a major percent of overall healthcare costs through the end of the decade as drug costs continue to rise. The largest pharmaceutical companies in the industry, which include Merck and Pfizer, attempt to define the product markets on the basis of disease type, condition type, or class of drugs. This type of market definition is ideal on the basis that each 1st generation prescription medication establishes a new market that offers 20 years of exclusive protection via product patent laws. Upon patent expiration the competition quickly floods the marketplace with less expensive generics. The defined product market includes the research and development, manufacturing, distribution, and sales of each prescription product, or class or drugs. Under these guidelines of product market definition, they are able to approach the individual product markets and devise plans that maximize revenues gained from \"gold standard\" drugs, with little investment of time toward drugs that are comparable to industry competition. This allows Merck to claim an entire market when the particular disease or condition is treated favorably with one medication. Looking at these prognostications I believe that it is even more crucial that Merck find a company that has a large influence on the prescription drug plans of MCO's so that we are better positioned to understand and meet the needs of consumers. Given that buyers have been able to establish much more leverage in negotiating prescription prices over the past few years it has become that much more important to capitalize on the information possessed by Medco. Failure to understand the changing market in which we operate could be detrimental to the existence of this company, as profitability may never recover should our competitors identify and leverage these kinds of databases first. Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 9 9.0 Marketing and Sales Reflections Marketing & Sales Medco currently maintains relationships with employers, plan sponsors, and managed care organizations and services over 33 Million individuals. The information collected on physician prescription practices, and patient records and refill tendencies will allow Merck to target their sales and marketing efforts to more effectively reach target markets. In addition, the data collected will be used to identify competitor drug deficiencies and pricing. Merck Co., & Inc. maintains a position in the industry which promotes their growth in emerging markets, secures their revenue producing products within their respective markets, and allows them to maintain a competitive advantage through innovative research and development. Merck's marketing aims to position the company for long-term and sustainable growth, and includes the following areas of their business: Investment Decision, Research & Development, Global Emerging Markets, and Merger & Acquisitions. Investment Decisions- Make Better Investment decisions. o Merck is becoming more selective with new strategies focused on making the best investment decisions, and synergizing with companies in the industry. Their medications for cholesterol, hypertension and heart failure produce the greatest revenue in the pharmaceutical prescription market. They recognize the amount of revenue generated by their products that are protected with a patent and the near-complete market loss as a result of patent expiration and generic prescription products that are priced 40-60% lower from Brand. Because of this relationship in revenue generation and patent protection, Merck see's the value that's accompanies FDA approval over 15 \"mediocre\" drugs versus 2 \"Gold-Standard\" drugs. Joint Ventures, Mergers, Partnerships- Eliminate Competition, Gain Co-exclusive Rights o These partnerships eliminate Merck's competition within geographical markets, as they create agreements that allocate markets between themselves, establishing a scenario of exclusive or co-exclusive rights that minimizes marketing efforts and corporate resources, while dominating their assigned and agreed markets. Johnson & Johnson Joint Venture- Merck and J&J are collaborating to design and commercialize their prescription therapies in the form of over-the-counter products. Aventis A.G. - They're focusing on the European vaccine market, as well as the animal health and poultry genetics. Merck-Medco- This focuses on the management and filing of prescription products, and the pharmaceutical prescription market. This joint venture will be responsible for generating roughly half of Merck's revenues. Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 10 Schering-Plough: This merger in 2009 increased profitability for both companies, because they divided the markets, thus removing competition and the costs associated with competing. Research & Development- Increase the Number of FDA Approved Drugs o Merck & Co., Inc. is one of the top pharmaceutical research & development companies, and currently has two (2) chemotherapeutic agents under review for FDA approval, and nineteen (19) candidates in the third o (3rd) phase of development, of which they anticipate FDA Approval. The pharmaceutical industries R&D participants compete on many levels, as their return on investments is determined by which prescription product reaches the marketplace first. In order to take full advantage of market ownership, through product patent and protection laws, there should a demand in the marketplace which is only being met with one product. The largest pharmaceutical companies spend between 15-30% of o their sales toward R&D. The number of approved drugs, in relation to financial investments, is what determines a pharmaceutical company's performance. Merck is dedicated to R&D, with 14,100 employees in the companies R&D activities, and financial investments amounting to $8.5 Billion in 2011, $11.1 billion in 2010, and $5.8 billion in 2009. In comparison to their competitors, Merck has a strong performance outcome, as they represent one of the industry's highest FDA product approved Pharmaceutical companies. Merck R&D sustains their competitive advantage on a global scale, and this commitment exceeds their competitors (Commission File No. 1-6571. 2012 February, 28. United States Securities and Exchange Commission. \"Merck & Co., Inc.: o Annual Report\"). Merck's strategies are based on innovation, as they recognize this as being the single most important factor which offers long term value for the customers, and shareholders (Merck Sharp & Dohme Corp. 2009-2012. o Newsroom. \"Merck Executing on Strategy to Position Company for Long-Term Sustainable Growth\"). Merck's operations expand on an international level, with eight (8) research centers and thirty one (31) plants dedicated to chemical processing, drug formulations, and packaging operations worldwide (Sharma, Geetika. 2012. High Table. \"Merck & Co., Inc. the leader in therapeutic segment\") Merck's Competition: R&D Investments versus Drug Approval Rate Company # of Approved Drugs Total R&D Spending (1992-2011) Pfizer Inc. 14 108,178 Johnson & Johnson 15 88,285 Roche Holding AG 11 85,841 Novartis AG 21 83, 646 GlaxoSmithKline 10 81, 708 Merck & Co., Inc. 16 67,360 Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 11 This table suggests that Merck & Co., Inc. reaches a higher FDA Approval/Investment ratio, for the exception of Novartis AG. Their investments made per product approved is: o Novartis AG: $3,983 billion for each FDA approved drug o Merck & Co., Inc.: $4,210 billion for each FDA approved drug Source: (Herper, Matthew. (2012 February, 2) Forbes. \"The Truly Staggering Cost of Inventing New Drugs\"). Global Emerging Markets- Gain Access and Dominate the Emerging Markets o Global Emerging Markets are largely represented by the United States, Germany, India, China, and Brazil. The largest companies in the pharmaceutical industry are on an acquisition spree, claiming their territories in the emerging markets through acquisitions, alliances, mergers, partnerships, and joint ventures, due to the reliability and volume of the Pharmaceutical prescription market. The global market has an expected growth rate of 5-8% through 2014. China has a higher expected growth rate at more than 20% annually. The next few years will significantly influence the future of global pharmaceuticals. The demographics of the Global o Pharmaceutical markets, and segments include: Demographics: Global Pharmaceutical Sector Market Size: 2009= $808 billion USD 2010 = $875 billion USD 2011 = $880 billion USD Emerging Markets with Highest Sales % in Global Market: United States= 28% of Total Global market sales Europe= 15 % of Total Global Sales Japan = 12 % of Global Sales Projected Sales for Emerging Pharmaceutical Markets China: GDP=$9.1 trillion USD o Sales for 2013 = $40 billion USD Brazil, Russia, India: GDP=$2-4 trillion USD o Dollars Added/Yr. = $5 billion- $15 billion USD per Year Source: (Industry Global Report. 2011. IMAP Inc. \"Pharmaceutical Global Industry2011) Mergers & Acquisition in Top 5 Emerging Markets Top 5 Countries- 2010 # of Transactions Value (USD) United States 114 25.6 Germany 18 5.4 India 48 4.9 China 105 3.4 Brazil 13 1.9 The following illustrates the high activity of Mergers & Acquisition in the top five leading Emerging Markets, and indicates that pharmaceutical companies are becoming extreme their expansion efforts, as they re-position themselves in at an angle that offers the most future potential. Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith o o 12 (2) Merger & Acquisition Examples: Novartis: Spent $250 million USD to acquire Aires Pharmaceuticals Focus= Cystic Fibrosis and Pneumonia pharmaceuticals Sanofi-Aventis: Spent $250 million USD to acquire BMP Sunstone Focus= Saturate China's over-the-counter pharmaceuticals Source: (Industry Global Report. 2011. IMAP Inc. \"Pharmaceutical Global Industry- 2011\") Competitors within Global Emerging Markets: Mylan, Pfizer, Eli Lilly (LLY - Analyst Report), GlaxoSmithKline (GSK - Analyst Report) and Sanofi-Aventis are all looking to expand their presence in India, China, Brazil and other emerging markets Operational A combined Merck/Medco company would result in the control of the entire drug manufacturing and selling process. Merck would have the ability to manufacture drugs specific to each patients needs with collected information being used to research and develop new drugs for sale. Due to the vertical nature of this acquisition Merck will continue to be run independently of Medco so that each division can focus on executing on their strengths within the industry. Overlapping operations, such as marketing and sales, will be consolidated at an estimated after acquisition savings of $1 Billion. Financial As mentioned, it is recommended that the tendered bid be comprised of all cash. While this will restrict the accounting methods for this acquisition, I feel that the use of the purchase method will benefit the shareholders more than the pooling method. The premium that is paid will be recorded as goodwill allowing for depreciation for up to 40 years. The CFO's preliminary calculations indicate an immediate positive return on EPS; however, there is concern over the growth of future stock price. 10.0 Operations Reflections One of the key operational considerations that must be addressed is whether to absorb Medco and completely integrate the manufacturing/selling process or allow it to operate as a subsidiary company under Merck. I believe that a complete integration would only serve to destabilize our efforts, as many of the MCO participants would become skeptical of the integrity and biasness of provided Medco services with some participants potentially opting to switch to other prescription benefit management companies. I would therefore recommend that Medco remain a separate subsidiary company operating under Merck. This will allow both companies to continue operating on their strengths. Merck will continue to focus operations within the medical, Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 13 clinical, and science areas while Medco will work to on maintaining their relationships with employers, plan sponsors, and managed care organizations. Each division will work to support and strengthen the other. Information on patients obtained by Medco will be used to help Merck research and develop new drugs that have greater appeal to MCO's and that address specific problems that Medco's database uncovers. 11.0 Financial Consideration At a purchase price of $6.6 Billion Merck would be paying an extensive premium to acquire Medco, which had reported revenues of $2.2B in 1992. The revenue generated was a 22% year over year increase from 1991, which had reported revenue of $1.81Billion. Medco has seen tremendous growth in both revenue and earnings since coming onto the scene in 1984. In fact, \"Medco's revenues increased an average of 47 percent annually, and its earnings gained an average of 45 percent a year\" (Medco Containment Services Inc. History, 1994). Continued growth of the stock price post-acquisition continues to remain a concern. The investment community will no doubt be scrutinizing the company's performance and with the added resources acquired from Medco shareholders will undoubtedly have high earnings and revenue expectations. Our Chief Financial Officer shares these concerns but is also optimistic that earnings per share of the combined company will see an immediate increase as compared to the projected earnings per share of Merck as a stand-alone company. Initial studies also indicate that an annual saving of $1 Billion would be realized through the consolidation of company operations. Redundancies in marketing operations will be eliminated as the two companies integrate and more precise marketing initiatives will result in the reduction of our overall sales force adding further annual savings post-acquisition. Another financial consideration is the proposed $6.6 Billion offer itself. If we formulate the offer so that it is strictly cash based we will be forced to record the transaction using the purchase method. This method would allow us to record the premium paid as goodwill and amortize it for up to 40 years. If instead we decided to make a stock bid to acquire Medco it would allow us to consider the use of the pooling method when recording the transaction. The advantage of this method is that we would be able to dispose of acquired assets at depreciated book value, sell them at their current book values, and record the any profits on sale of assets. This strategy might be useful if unforeseen issues and/or added expenses as a result of the merger were to surface and the need was present to quickly boost net income. 12.0 Recommendations After careful thought and analysis, it is my recommendation to the Board of Directors that Merck tender a cash bid of $6.6 Billion to acquire Medco Containment Services Incorporated. Medco has shown that Prescription Benefit Keller Graduate School of Management FIN 561-Mergers and Acquisition Professor: Gene Smith 14 Management companies are becoming a vital force within the pharmaceutical industry. Merck must adapt to the changing market place to remain profitable and competitive and the resources available through Medco will drastically change the ability of Merck to generate revenue. Acquiring Medco will give Merck the distribution channel needed to market its prescription drugs. Given the large amount of relationships serviced by Medco, and nearly 33 Million individual clients that rely on them, Merck's acquisition of Medco will yield vast amount of information about the drug prescribing habits of physicians and purchase and refill habits of consumers. The joint company will be able to market and sell Merck products at reduced costs due in large part to the databases created and maintained by Medco. Overlapping marketing operations will be combined and the overall sales force reduced as targeted marketing strategies are created using the information on hand. Overall synergy should be good as the research and development expertise of Merck will complement the distribution and information gathering abilities of Medco. While company culture and operational differences are of some concern, I believe they have only minimal impact on the acquisition as Medco will remain its own self-sufficiently operated company under Merck. Predictions from the CFO indicate that immediate positive earnings per share will be realized though some uncertainty remains regarding the future ability to grow share price. Lastly, the probable legislative changes to the health care industry require that we act now. As more individuals enroll in MCO's that utilize the services of Medco and other PBM's, the margins on our drugs continue to be compressed. Washington has become lenient toward generic drug manufacturers in an attempt to appease consumers while our R&D costs continue to grow at a rapid pace. Acquiring Medco now will aid Merck in retaining its position as a leader in the industry. 13.0 References 1. Medco Containment Services Inc. History. (1994). Retrieved November 7, 2015, from Funding Universe: 2. http://www.fundinguniverse.com/company-histories/medco-containment-services-inc-history/ Hurley, R. E. (2000). Markets at risk- current and future challenges in a managed care marketplace. Virginia 3. Commonwealth University. Mullins, J. (2007, August). A Recent History of the Pharmaceutical Industry. Retrieved November 07, 2015, from 4. Venture Navigator: http://www.venturenavigator.co.uk/content/154 Merck Financials (2012, April). Retrieved from http://www.merck.com/investors/financials/27-04-2012- 5. 1Q12SERelease.pdf Merck Sharp & 6. http://www.merck.com/about/Merck%20Vision%20Mission.pdf Merck KGaA (2011, November 2) \"The Brand Merck: Merck is Not the Same as Merck\" Merck Group. Retrieved 7. fromhttp://www.merckgroup.com/en/company/the_brand_merck/the_brand_merck.html Merck Sharp & Dohme Corp. (2009-2012) \"Sales and Marketing\". Dohme Corp. 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