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!!! You Decide Assignment - Week 3 - Guidelines Updated as of July - 2016 OVERVIEW This first \"You Decide\" assignment is based on the Merck - Medco Case in Chapter 5. It is a scenario (a bit real and a bit fictitious) of various executives making recommendations based on their own analysis to the Chairman-CEO, who in turn will add his own analysis and recommendations regarding the acquisition of Medco to the Board of Directors of Merck. The paper must be written in your own words, and you are welcome to make references to the outside sources you use; then you should list all of these sources in your Bibliography. Your paper should be written in hindsight of what happened after Merck acquired Medco. You should analyze the facts in historical format: Merck decided to acquire Medco, and then it had to divest it. Consider the following questions: What factors motivated Merck to acquire Medco? What factors forced Merck to divest Medco? What was the financial size and impact of this decision. GENERAL GUIDELINES FOR THE YOU DECIDE The Analysis on the Merck - Medco Case 1) You can comment on marketing synergy and operating synergy. 2) You can do some SWOT analysis: Looking for Strengths and Weaknesses of the two companies, and also looking for Opportunities and Threats in the deal. 3) I am also posting in Doc Sharing summaries of Merck's 1994, 1995, 1996 10-K's. Be sure to observe the level of revenues of Medco in relation to Merck's total revenues. . You are welcome to you these financials as part of your analysis. 4) Consider the market share rank of Merck at the time when this decision is being made (1993). How does Merck's market position compare with its competitors in 1993. This information should be free on the internet. 5) Consider, the $6.6 Billion price Merck paid for Medco. 6) Consider the stock price of Merck. If you go to Yahoo.Finance pages on Merck, you can find a stock chart, and you can select a chart that goes back 20 years. Where was Merck's stock price in 1992, what happened in 1993, and what happened after 1993 after Medco was acquired. 7) Then consider the Federal Trade Commission report of August, 1998, that Merck's acquisition of Medco was an anti-competitive. 8) Merck could not sell Medco through an IPO in 2002, and decided to spin off Medco to its shareholders in 2003. The IPO price would have been $20 - $22 per share for 46.7 Million shares of Medco: $934 Million to $1,027.4 Million 9) You are welcome to use outside sources from the internet, as well as the information I posted in Doc Sharing. Just make sure you state the information in your own words. Then list the source in the Bibliography at the end. EXAMPLES OF ANALYSIS SECTION - SUB-SECTIONS ANALYSIS - SUB SECTIONS You Can have about 5 Sub-Topics under the Analysis Section of your You Decide: 1) SWOT Analysis - This is strategic and covers all topics: Marketing & Distribution, Profit Margins for the two companies, Regulatory Risks. 2) Marketing & Distribution Issues in detail. 3) Financial Issues: Price to be paid $6.6 Billion. Merck, which is in a high profit margin industry is buying into a Low Profit Margin Industry (Medco). 4) Regulatory Risks: Possible Anti Trust Ruling re PMB's (Pharmacy Benefits Mangers). 5) The pullback of the IPO for around $1.0 Billion; then the spin-off to existing shareholders. SPECIFIC GRADING RUBRIC FOR THE YOU DECIDE Class, here is the grading RUBRIC for the You Decide: 1. One page \"Executive Summary\": You summarize your whole paper (including the analysis and the recommendation) in bullet format (with full sentences), double spaced: 25 points 2. Detailed analysis of the synergy, marketing strategy, financial and other issues. ( 5 - 7 pages, double spaced including any financial tables.): 90 points. Do not flood your paper with financial data, use the dollar information from the various sources in your discussion. 3. Conclusions (Half Page to One Page, double spaced): 10 points 4. Bibliography (One Page): 10 points 5. There should also be a cover page with the title of the paper and your name, and this does NOT count as one of the 8 - 10 pages. Please note that all items 1 - 4 above are double spaced. SAMPLE EXECUTIVE SUMMARY !!! Class, please note the posted Sample Executive Summary as a separate file in Doc Sharing. This file is on two pages, and the outline of the Executive Summary is on page 2. Be sure to scroll down to Page 2. WHAT HAPPENED TO MEDCO? On July 21, 20111, there was announcement from news sources that Express Scripts acquired Medco for $ 29.1 Billion. You might review news sources on the internet re the strategy of these two companies in the future for operating as one entity. Observing what is going on now, can help your SWOT Analysis with 20/20 hindsight. PLAGIARISM & CITATIONS !!!Class, be sure to read the section of the Syllabus on "Plagiarism and Citations." You are welcome to use references to support your positions on the You Decide; however, be sure to restate the information in your own words. Then use one of the styles suggested in the Syllabus to list your references for these outside sources in the Bibliography at the end of your paper. You are of course welcome to develop your analysis on this case. Running header: A Case Study Analysis: Merck and Medco Merger A Case Study Analysis: Merck and Medco Merger Umer Arif Fin 561 9/14/2016 Running header: A Case Study Analysis: Merck and Medco Merger The History of Merck and Medco For several years Merck & Company has discovered, developed, and brought patients medical vaccines that have changed the lives of patients worldwide In 1993, the organization settled on the choice to converge with Medco Contaminant Services Incorporated, one of the biggest solution benefits administration organizations in the United States of America (Weston, Mitchell, Mulherin, Pg. 124-125). Why was there a choice for Merck and Company and Medco PBM to combine the two organizations? The answer appears to be basic. According to numerous examiners, the merger would dispose of the opposition, and give Merck and Co. the capacity to achieve Medco's tremendous database of buyers through their oversaw care establishment plan of action. Despite the fact that Merck and Co. has conveyed imaginative and better promoting than extravagant pharmaceuticals, they have just come to around 10 percent of the medication market in the United States. Working as an oversaw care organization, Medco has contained expenses and has caught 22 percent of the business benefits market, offering doctor prescribed medications at a reduced rate, through the worker physician recommended drug arrangement. Medco worked as a go between and requested rebates on pharmaceuticals because of the tremendous volume that was created through the oversaw care foundation. Merck rejected this business bargain and wiped out the opposition through the Medco Acquisition. Case Study Analysis A few officers of the Board of Directors have some reservations regarding this business matter: Running header: A Case Study Analysis: Merck and Medco Merger A. The Chief Operating Officer is worried about Synergy. He feels that the way of life would not blend well, and it would make perplexity as an aftereffect of incorporation. He doubts the capacity of the organization keeping up money related solidness after the union. B. The Executive Vice President of Sales and Marketing is agreeable to the merger. He trusts it would update the association with the present market and would introduce more open doors for showcasing extension. C. The Chief Financial Officer is 50/50 on the choice to combine. She trusts the Earnings per Share would increment however has concerns with respect to the expansion of the stock cost after the business bargain. As the Chief Executive of Merck Co., the organization will consider a few variables before endorsement of the merger. We will fundamentally state targets of the merger, characterize the earth and lead an examination of the qualities and shortcomings of the relative environment, survey the potential environment, assess the Cost/Benefit investigation of choices, and probably select and detail an arrangement of activity Objective of the Merck/Medco Merger The objective for the M & A is to ultimately create a form of synergistic value, in which both companies, together will realize higher revenues and lower expenses. Merck and Co. and Medco both contain strengths and weaknesses in different business areas, which will contribute to or affect the main objective. The chart below lists some of the strong and weak characteristics of both companies: Running header: A Case Study Analysis: Merck and Medco Merger SWOT Analysis Strengths: Merck is an industry leader in the production of drugs. Medco is trusted by Managed Care Organizations and individuals alike. Merging two section leaders in the industry will give Merck a powerful competitive benefit, as it will have power over the entire progression from manufacturing to purchasing. The merger will also relieve the progression of overlaps and excess. The savings realized through the merger will result in lower prices for buyers. This will drive purchase quantities, as well as profits, higher. The merger will have many advantages than Merck would be able to realize independently. Weaknesses: Since the two companies are operating in two different parts of the same company, there would definitely be an issue of integration. The COO (Chief Operating Officer) is concerned that the synergy of the company's operations and cultures won't be realized. I also feel that this issue must be addressed if the integration is to be a success. Opportunities: Many possibilities will open up due to the Merger, which was not available if these companies were independent. Most importantly, we will have an advantage in the MCO market giving us an aggressive advantage over other drug manufacturing companies. The wide-ranging database kept by Medco on their 33 million customers will allow Merck to evaluate the prescription practices of doctors, the effectiveness of the drugs, and consumer behaviors (i.e. refill frequency). Furthermore, we may be able to use the information retrieved to show the incompetence of drugs manufactured by our competitors. Running header: A Case Study Analysis: Merck and Medco Merger Threats: One of the major threats in this acquisition is the possible political firestorm that might be started in the name of \"protecting\" the public. As I have mentioned before, Congress have enacted various regulations to manipulate the health care industry and also to constrain prescription drug prices lower. So if we go ahead with this merger I am apprehensive that the politicians in Washington as a challenge to the various legislations enacted. In addition Medco's current clients may question the company's ability to provide unbiased service after the acquisition and thus might cause some runoff. Finally, competitors might mimic our actions and a price war may be caused and drive profit levels down in the entire industry Rationales for merger of Merck & Medco Improved Market Power The major reason for these firms to merge is the need to increase market power. Merck will achieve a higher market power when its goods and services are sold at a lower price than its competitors. Merck has the competency but does not have the needed resources and size to dominate the market. Therefore the Merger and Acquisition is taking place to increase the market power, suppliers, businesses and distributors and will help the business vision in the future. There are two major kinds of mergers namely, Vertical Mergers and Horizontal Mergers. This merger between Merck and Medco is a vertical merger. The merger will make sure that, Merck's products are distributed well and also its prescription drug plans are well managed. Of the various reasons firms have for making vertical mergers, the specific reason for Merck-Medco merger is for the reduction of cost of communication, better planning for production and inventory and production co-ordination. Running header: A Case Study Analysis: Merck and Medco Merger Conquering Entry Barriers When various firms merge, one of the problems that will be faced is the barriers for entry. Fortunately in this case both of the companies are well established, so after the merger they can sell their products and services in large volumes and gain economies of scale. Product loyalty is also another entry barrier. Creating enduring relationships with customers leads to product loyalty which may be difficult to overcome by Medco. Since both companies are already existing players in the industry, they don't need to spend too much money on advertisement. Cost of New Products There needs to be a great commitment when we want to successfully launch new products in the market and the return on investment may take longer than anticipated. Furthermore, how the market will accept the new product is unpredictable. According to a research 88% of new products and services fail to achieve expected results due to this unpredictability. Since Medco has presence in the market already, it's not a concern to push products and services after the merger. Usually, companies prefer vertical Mergers to avoid the internal costs of developing products and services. In addition, Mergers and Acquisitions also decrease the risks associated with the launch of a new product since the product is already tested in the market. Pharmaceutical firms use Mergers and Acquisitions to gain a faster entry into the market and conquer the high costs of the product development. As patents on many key medications and drugs expire after some period of time, firms need to have a strong Research and Development center in order not to be left behind. Therefore Mergers seem to be ideal option for these kids of companies. Increased Diversification Running header: A Case Study Analysis: Merck and Medco Merger Companies find it easy to create and introduce new products in markets in which they have some experience. In contrast, when companies launch new products that have no relation to its existing portfolio, there are lower chances of success. So, for companies to diversify, M&A route is preferred. Mergers and Acquisitions can be used for both related and unrelated diversification. In case of Merck-Medco, since they are operating in the same Pharmaceutical industry, there are greater chances of the acquisition being successful. Technology A technologically advanced company may go in for the Merger and Acquisition to take advantage of its technological advances. Alternatively, a firm which lack technological advantage may go for Merger and Acquisition to gain access to greater technology. By using the advances technology of the acquired firm, the acquirer can increase its competitive position and increase profit margin both locally and internationally. Merck could make use of Medco's extensive database as a major factor inspiring 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 federal and state benefit plans, 100 Fortune 500 companies, and 58 Blue Cross-Blue Shield groups and insurance companies. Merck can use the information in Medco's database for several important decisions. The database will allow Merck to identify prescriptions that could be switched from a competitor's drug to Merck drug. Merck pharmacists will then suggest the switch to a patient's doctor. What goals we would like to achieve? Running header: A Case Study Analysis: Merck and Medco Merger The organization would like to empower the operation of the drug selling and distribution process. As Merck manufacturers and markets the drugs, we would like to reach the customer base on a larger scale. Access to the Medco management process would allow Merck to communicate with industry bosses, plan supports and oversaw care associations, expanding EPS over the 10 percent that Merck is in the blink of an eye ready to reach and present future business open doors. While income builds, we additionally anticipate that costs will diminish by downscaling on showcasing costs. Money saving advantage Analysis The expense of the securing would be roughly $6 billion dollars. There are a few approaches to procure the objective organization: (1) an all money exchange (proposed by the CFO of the organization), (2) an all stock exchange, or (3) a money and stock exchange. In the event that we direct an all money exchange, Merck will buy the basic shares exceptional and keep up value on the accounting report. In an all-stock exchange, our value would be influenced, and Merck would need to give the shareholders of the objective organization offers in the guardian organization for each offer claimed in the objective organization. The main way this would profit the organization is if the shares keep up the same quality, which would be considered of "merger of the equivalents. Tending to Executive Leaders Concerns and Plan Execution Since we have characterized the fundamental destinations, we have to address the worries of the administrators of the firm and execute an arrangement of activity. Let's first address the issues with respect to Synergy. The Chief Operating Officer expressed that the way of life of the organizations would not blend well. As the CEO of the organization, I can't help contradicting this announcement. The way of life of the organizations Running header: A Case Study Analysis: Merck and Medco Merger will make an exceptionally efficient, positive operation. The product offerings that are accessible through Merck and Co. will achieve a bigger client base and will thusly build income and lessening advertising costs. The Merger will make quality to both organizations; they will be more profitable together, than working autonomously. I think in a time of 2 or 3 years, the cooperative energy would add to more than 20 percent of the monetary benefits of the organization. Next, we address the worry of the Marketing from the Vice President of Sales and Marketing. He is all for the obtaining. He trusts that it is an incredible route from Marketing development and levering the oversaw care market. I should concur with the Marketing VP. As expressed some time recently, Merck has a to a great degree solid promoting procedure that will just fortify with this merger. The showcasing open doors will increment, by expanding the objective business sector through taking advantage of Medco's overseen care framework and stretching out promoting techniques to the businesses, plan supports and oversaw care associations. It will likewise permit them to build the aggressiveness in the pharmaceutical business sector making extra imaginative promoting methodologies. The last issue within reach is significant to the financing of the merger. The Chief Financial Officer is thinking about the merger, be that as it may, she propose that the objective organization be procured through an all money exchange. The expense to get the organization is $6 billon dollars. The most essential component in making sense of the financing is to consider how the exchange would influence the shareholders of the organization. As per the CFO, income per offer will be influenced decidedly amid the underlying obtaining, notwithstanding, may diminish a great many. This is typical movement, because of the vulnerability of how the organizations would execute as a unit. Running header: A Case Study Analysis: Merck and Medco Merger As the CEO of the organization, I am suggesting that the objective organization be procured through an all money exchange, as we need to keep up positive value on the asset report. My worries seeing EPS are the same as the CFO. When we report the merger, the business sector response might be ideal or unfavorable. In the event that we get shares of the objective organization, they might be overestimated, consequently bringing about a diminishing in the estimation of the organization. Running header: A Case Study Analysis: Merck and Medco Merger References Retrieved on 1.18.2016. https://litigatio essentials.lexisnexis.com/webcd/app? action=DocumentDisplay&crawlid=1&srctype=smi&srcid=3B15&doctype=cite&docid=63+U. +Cin.+L.+Rev.+1767&key=564cc70c7938c8b8fbc5e89c9f38d8ab Retrieved on 1.18.2016. http://articles.baltimoresun.com/1993-11- 19/business/1993323090_1_medco-merck-wygod Retrieved on 1.18.2016. http://www.getfilings.com/o0000950123-94-000559.html Retrieved on 1.21.2016 https://hbr.org/1999/11/stock-or-cash-the-trade-offs-for-buyers-andsellers-in-mergers-and-acquisitions week 3 paper.docx by Umer Arif FILE WEEK_3_PAPER.DOCX (25.71K) T IME SUBMIT T ED 17-SEP-2016 11:36PM WORD COUNT 2285 SUBMISSION ID 706688477 CHARACT ER COUNT 13107 week 3 paper.docx ORIGINALITY REPORT 77 % SIMILARIT Y INDEX 0% 0% 77% INT ERNET SOURCES PUBLICAT IONS ST UDENT PAPERS PRIMARY SOURCES 1 77% Submitted to Keller Graduate School of Management St udent Paper EXCLUDE QUOT ES OFF EXCLUDE BIBLIOGRAPHY ON EXCLUDE MAT CHES