Mylan Laboratories
(NYSE:MYL) shares fell over 11% today after the company agreed to pay
$6.6 billion for the generic-drugs unit of Merck KGaA. The acquisition
will create a leading global generic drug manufacturer with combined
revenues of $4.2 billion in 2006 and 10,000 employees.
Strong
competition and tight profit margins in the generic drug industry has
forced a wave of consolidation in the sector. Mylan had been trying to
find a new target after its failed bid to acquire King Pharmaceuticals
in 2005 thanks to Carl Icahn's intervention. Meanwhile, Merck KGaA was
the world's #3 generics business by revenue in 2006 and makes a great
strategic fit with the company for the long-term.
Many analysts
and shareholders questioned the wisdom behind the acquisition. Analysts
were surprised by the large bid, which came in at the top of most
estimated ranges, while shareholders were distraught by the massive
dilution and long payoff time-frame. The $6.6 billion mega-merger is
expected to be dilutive to earnings in the first year, earnings neutral
in the second year and finally positive in the third year.
Overall,
the merger will combine two great generic drug companies to create a
market leader. While this process clearly resulted in some short-term
pain, many investors are banking on the long-term picture to provide
ample returns long into the future. Either way, this is a stock that is
definitely
worth watching!
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