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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