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

Running header: A Case Study Analysis: Merck and Medco Merger

The History of Medco and Merck

For several years Merck & Company has developed, discovered, and produced patient's
medical vaccines that have transformed the lives of patients globally 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 establishment care 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.

Running header: A Case Study Analysis: Merck and Medco Merger

Case Study Analysis
A few officers of the Board of Directors have some reservations regarding this business
matter:
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 Managerial Vice President of Sales, as well as 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 concerns have on 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 the 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 Medco/Merck Merger

Running header: A Case Study Analysis: Merck and Medco Merger

The purpose of the M and A is to ultimately generate a form of synergistic value, in
which both organizations, together will realize lower expenses and higher revenues. Merck and
Co. as well as Medco both contains strengths and weaknesses in different business areas, which
will contribute to or affect the primary aim. The chart underneath lists some of the weak and
strong, characteristics of both companies:

SWOT Analysis
Concentrations: Merck is a leader in the production of medicines. Medco is trusted by
individuals as well as Managed Care Organizations. Joining two section leaders in the industry
will bestow Merck a powerful competitive benefit, as it will have power over the whole
progression from purchasing to manufacturing. The alliance will also decrease the progression of
excess and overlaps. The savings achieved through the merger will bring about lower prices for
consumers. This will motivate purchase quantities, along with the profits, higher. The merger
will have many benefits than Merck would be prepared to realize independently.
Deficiencies: Since the two organizations are operating in two distinct parts of the same
organization, there would unquestionably be a problem of integration. The Chief Operating

Running header: A Case Study Analysis: Merck and Medco Merger

Officer(COO) is concerned that the synergy of the organization's cultures and operations will not
be realized. I also know that this issue should be addressed if the merger is to be a success.
Opportunities: Numerous possibilities would open up due to the integration, which was
not available if these organizations were autonomous. Most importantly, we will have authority
in the MCO exchange giving us a competitive advantage over the other drug manufacturing
organizations. The broad-covering database kept by Medco on their thirty-three million clients
will allow Merck to assess the prescription practices of physicians, the effectiveness of the
medications, and consumer behaviors (like refill frequency). Moreover, we may be able to use
the erudition retrieved to show the inadequacy of drugs manufactured by our adversaries.
Threats: One of the main threats in this acquisition is the political firestorm that might be
inaugurated in the name of protecting the people. As I have stated before, Congress have
established various regulations to manage the health care arena and also to restrain prescription
drug rates lower. So if we go forward with this merger, I am worried that the politicians in
Washington as a provocation to the various legislations passed. Also, Medcos clients may
question the organization's ability to provide fair service after the merger and thus it may cause
some runoff. Finally, adversaries might mimic our operations, and a price war may be generated
and drive profit levels down in the entire industry
Rationales for merger of Merck & Medco
Improved Market Power

Running header: A Case Study Analysis: Merck and Medco Merger

The main reason for these organizations to merge is the necessity to increase market
power. Merck will realize a higher market power when its products and services are sold at a
lower value than its opponents. Merck has the knowledge but does not have the needed resources
and size to control the market. Therefore the integration and Acquisition is seeking to increase
the suppliers, market power, distributors and businesses and will help the company vision in the
future. There exist two major types of mergers namely, Horizontal Mergers and Vertical Mergers.
This merger between Medco and Merck is a vertical merger. The alliance will make sure that
Mercks goods are disseminated well and also its prescription medication plans are well
executed. Of the several reasons organizations have for obtaining vertical mergers, the real
reason for Medco-Merck merger is the decline of the cost of communication, proper planning for
inventory and production and reproduction co-ordination.

Conquering Entry Barriers

When numerous firms merge, one of the issues that will be encountered is the limitations
for entry. Luckily in this case both of the organizations are well established, so after the
amalgamation, they can exchange their products and services in large quantities and obtain
economies of scale. Product integrity is also another entry challenge. Bringing about enduring
relationships with clients, which lead to product loyalty which may be challenging to overcome

Running header: A Case Study Analysis: Merck and Medco Merger

by Medco. Because both companies are already established players in the business, they dont
need to waste too much money on ads.
Cost of New Products
There are needs to be a high engagement when we want to launch separate products in
the business actively and the return on investment will take longer than expected. Besides, how
the market will acquire the new product is variable. According to a research 88 percent of new
services and products fail to deliver expected returns due to this unpredictability. Because Medco
has a presence in the market already, it is not a concern to push commodities and services after
the merger. Normally, organizations prefer vertical Mergers to bypass the internal costs of
producing products and services. Also, Mergers and Acquisitions also reduce the risks connected
to the launch of a new commodity since the product is previously tested in the market.
Pharmaceutical organizations use Acquisitions and Mergers to gain a quicker entry into the
market and overcome the high costs of the product improvement. As patents on many essential
medications and drugs expire after some period, firms need to have an active Research and
Development hub in order not to be left backward. Therefore Mergers seem to be an ideal option
for these kinds of organizations.
Increased Diversification
Companies find it simple to create and launch new products in markets in which they
have some expertise. In distinction, when organizations launch new products that have no

Running header: A Case Study Analysis: Merck and Medco Merger

association to its existing portfolio, there are moderate chances of profit. So, for organizations to
expand, M&A route is favored. Mergers and Acquisitions can be utilized for both unrelated and
related diversification. In the case of Medco-Merck, since they are working in the same
Pharmaceutical arena, there are huge chances of the acquisition being lucky.
Technology
A technologically superior company may go in for the Incorporation and Acquisition to
take advantage of its advances. Also, a company which lack technological superiority may go for
Merger and Acquisition to obtain access to excellent technology.
By utilizing the advanced technology of the acquired company, the acquirer can improve
its competitive position and enhance profit margin both regionally and internationally.
Merck can make use of Medcos comprehensive database as a primary factor motivating
the merger. Medco manages a computer profile of each of its 33 million clients, amounting to 26
percent of all people covered by a pharmaceutical benefits plan. Medco clients incorporate
federal and state compensation plans, 100 Fortune 500 companies, as well as 58 Blue Cross-Blue
Shield groups along with insurance companies.
Merck can utilize the information in Medcos database for numerous important decisions.
The database will enable Merck to recognize prescriptions that could be acquired from a
competitors drug to Merck medicine. Merck pharmacists will also suggest the switch to a
patients physician.

Running header: A Case Study Analysis: Merck and Medco Merger

What goals would we like to accomplish?

The company would like to enable the operation of the medicine selling and distribution
process. As Merck produces and markets the medications, we would like to reach the client base
on a larger scale. Admittance to the Medco administration process would enable Merck to
communicate with management 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 procuring the objective organization: (1) an all money exchange (proposed by the
CFO of the organization), (2) an all stock market, or (3) money and stock exchange.
If we direct an all money exchange, Merck will buy the underlying shares exceptional
and keep up the 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.

Running header: A Case Study Analysis: Merck and Medco Merger

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.
Lets first address the issues on 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 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

Running header: A Case Study Analysis: Merck and Medco Merger

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. An 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.
As the CEO of the organization, I am suggesting that the objective organization is
procured through an all money exchange, as we need to keep up the 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. If 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

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