Is It Worth Investing in the Merck / Schering Merger Now?

I was doing some homework on the Merck (MRK) - Schering (SGP) merger and thought what would you make if the deal took place today. Merck and Schering-Plough expect to complete the transaction in the fourth quarter of 2009. The details of the merger states for every 1 share Schering, shareholders would receive 0.5767 shares of Merck + 10.50 in cash. You have to look back at March to see Schering's price in the 15-20 range. Investors who got in early and had Schering stock then are doing ok with the deal, but for those looking at the prices today, be careful. I wouldn't buy up Schering shares right now just to get some Merck stock.

So let's calculate this at today's rates. Schering closed at 28.24 (however after hours has dropped to 27.38) and Merck closed at 32.56 (dropping to 32.21 afterhours). 100 shares bought of Schering is $2824. 0.5767 X 32.56 of Merck is 18.78. 18.78 x 100 is $1878. Plus $10.50 x 100 is $1050. So 1878 + 1050 is $2928, which means a net profit of (2928-2824) $104. So you are receiving considerably less equity with only 57.67 shares of Merck and 104 bucks in your pocket. For a thousand shares of Schering, you would make $1037.35 but would have to fork out $28,240. The deal would net you a profit of 3.67%. Hmmm... 3.67 percent is the going savings rate these days at the bank.

Is it worth the trouble here? I really don't know. Merck does have a higher yield dividend than Schering but unless you are a huge owner of Schering shares I don't see the value in buying up a ton of Schering stock at this price. If the stock for Schering goes any higher I can actually see some losing cash. So unless Merck's share price goes up considerably in the next few months, I'd say put your money in the bank or buy some nice bonds these days. Sure Schering's price was a lot lower in March in the lower 15 dollar range, but for investors getting in late on the deal, it's not worth it.

Comments

[SHADY_OAKS:]

I am not certain when this article was written, I can only assume it was written several months ago, as the interest rate at most banks is not NO WHERE near the 3.67% return quoted in this article.

Even CDs are paying considerably less than 3%. So come on folks, if you are going to evaluate something based on ROI, how about using real world numbers?

Aug 23 11:59 AM

[Bhutani:]

However the 3.67% return is over three-and-a hlaf to four months. On an annualized basis this is a return is over 10% (not counting any trading comissions). Not bad!!!!!

Aug 23 12:41 PM

[BioPharma I...:]

I guess you are right, it used to be around 3 percent. I was just saying it wasn't that much. If invested right now it's not that much and I seek bigger returns than 3 percent. If you got in earlier in the year you are doing fine!!!! Right now expect about a hundred bucks on 100 shares. And a lot less equity in Merck Shares than Schering at the 0.5767 rate. Hold off on Schering unless they go down considerably from their current price.

Aug 23 08:33 PM

[Technical A...:]

If you do the arbitrage properly, the return is even less than 3.67%. In order to lock in your profit and remove any risk of price movement you would also sell short 57.67 shares of Merck. That leaves only the risks of the deal falling through or being delayed.

Aug 23 10:40 PM

[Tom B:]

May I ask a dumb question? I have some MRK. For every 1 share of MRK, I end up with 1 share MRK?

Aug 24 01:02 AM

[gene1031:]

Pick your poison... but a clear winning position would be to sell the out-of-the-money puts on either, and you won't have to worry about the return. Instead, you will be pretty well assured that you will pocket the put premiums without risking assignment. Much better alternative, and the % return = incalculable, since you have not put-up any risk capital. My take on both stocks = they both are fairly priced now.

Aug 24 08:11 AM

[BioPharma I...:]

Option call are great for both of these. Mrk long is the best option in my opinion. Merck is a solid investment for the future. No worries. I was just doing a little math.

Aug 26 05:33 AM