Merck merger hinges on regulatory OKs; Rohm gains from Dow's tardiness; United Tech on the hunt

By Cristal Cody

Tupelo, Miss., March 10 - Merck & Co., Inc.'s $41.1 billion takeover of Schering-Plough Corp. should succeed, barring any regulatory problems or a move by Johnson and Johnson to trigger a change-of-control provision, an analyst said Tuesday.

Rohm & Haas Co. shareholders will receive almost an extra $1.00 a share from a ticking fee that Dow Chemical Co. must pay to close the deal.

In other action on Tuesday, the chief executive officer of United Technologies Corp. said the company is looking for acquisitions and has $2 billion to spend. An analyst told Prospect News that United Technologies probably will focus on targets in the aerospace industry.

On Wall Street, stocks moved up Tuesday in response to news from Citigroup Inc. that the bank was profitable for the first two months of this year. Citigroup shares gained 40 cents, or 38.10%, to close at $1.45.

The Dow Jones Industrial Average soared by 379.44 points, or 5.80%, to 6,926.49.

The broader indexes also made gains.

The Standard & Poor's 500 index added 43.07 points, or 6.37%, to close at 719.60, while investors pushed up the Nasdaq Composite index by 89.64 points, or 7.07%, to 1,358.28.

Merck's buyout hinges on antitrust

While Kenilworth, N.J.-based Schering-Plough controls the international marketing rights to inflammatory treatment drug Remicade, Johnson & Johnson holds the U.S. marketing rights.

New Brunswick, N.J.-based Johnson and Johnson could challenge Schering-Plough's deal with Merck, which would give the company "bargaining power in purchasing non-core Schering-Plough assets such as the consumer health and animal health divisions," the analyst said.

Schering-Plough produces more than 1,000 products in three segments: prescription medicines, animal health vaccines and consumer health products that include the Dr. Scholl's foot-care line.

Whitehouse Station, N.J.-based Merck's biggest-selling products include allergy medicine Singulair and the Gardasil HPV vaccine.

Merck and Schering-Plough executives were confident on Monday that the deal, structured as a reverse merger, will not trigger the change-of-control clause.

Under the terms, Schering-Plough shareholders will receive $10.50 in cash and 0.5767 of a Merck share for each Schering-Plough share.

According to regulatory filings with the Securities and Exchange Commission on Tuesday, the deal includes a $1.25 billion termination fee. However, if all conditions are met and the merger does not close because of a lack of debt financing, Merck must pay Schering-Plough a $2.5 billion fee.

The merger is expected to close in the fourth quarter.

"Shareholder approvals are likely, given the significant estimated synergies and earnings accretion," the analyst said.

The deal is expected to require regulatory approvals from the Department of Justice or the Federal Trade Commission and the European Competition Commission as well as antitrust clearance in Brazil and Japan.

Merck and Schering-Plough have complementary product lines, but "we would not rule out an EC phase II or an HSR second request investigation" to determine if any assets need to be divested, the analyst said.

"However, we believe that competition issues are unlikely to be a deal-breaker and that pharmaceutical divestments are typically easy to structure," the analyst said.

Merck shares added $1.21, or 5.76%, to close at $22.20, and Schering-Plough's shares closed up 95 cents, or 4.72%, at $21.08 on Tuesday.

Shares of Johnson and Johnson rose $1.18, or 2.53%, to close at $47.78.

Dow ticking fee

To get their $15 billion deal done, Dow plans to slash jobs at Rohm & Haas and aggressively pursue $1.3 billion in synergy savings.

That's up from Midland, Mich.-based Dow's original synergy estimate of $910 million.

Dow shares rose 54 cents, or 8.53%, to close Tuesday at $6.87.

Shares of Rohm & Haas jumped $4.00, or 5.41%, to close at the bid price of $78.00.

However, shareholders will receive about an extra 97 cents a share due to the $3 million daily ticking fee that Dow must pay for not closing the deal by Jan. 10.

The ticking fee is based on 87 days between the original closing date of Jan. 10 and the new closing date of April 1, an analyst said Tuesday.

To find savings, Dow said it will terminate 3,500 new jobs at Philadelphia-based Rohm & Haas and sell off some of the company's business units, including the Morton Salt division.

Dow already has lowered its dividend for the first time in nearly a century to save about $1 billion a year.

Rohm & Haas was considered a feather in the cap for Dow when it first made the bid last summer. Rohm & Haas produces chemicals for a variety of industries, including cosmetics and marine use.

The two companies reached the agreement to close the deal on Monday after a trial was scheduled to start in a lawsuit Rohm & Haas had filed to force Dow to close on the merger.

Rohm & Haas' two major shareholders, the Haas Family Trusts and Paulson & Co., will purchase up to $3 billion of preferred equity from Dow to reduce the amount of debt financing required to fund the deal.

United Technologies scouts for friendly action

United Technologies CEO Louis Chenevert said in an investors conference on Tuesday that the company is a willing buyer but will shy away from any hostile takeovers this year.

Hartford, Conn.-based United Technologies manufactures a variety of products that include jet engines, helicopters and Otis elevators. The company failed in a bid last year to acquire automated teller machine manufacturer Diebold Inc. for $2.63 billion.

A market source told Prospect News on Tuesday that the aerospace field seems to be the particular market United Technologies would focus on for acquisitions.

"We may be seeing a lot of activity," the source said. "It's probably a mix of public and private companies that would make sense and could fit into Hamilton Sundstrand."

United Technologies' Hamilton Sundstrand division creates aerospace products such as flight systems, engine control systems and fire and protection systems.

Deal sizes probably will range from $200 million up to $1 billion for products that fit with the company, the source said.

United Technologies usually undertakes three to six transactions a year.

"I don't see them adding a new leg to the stool," the source said. "They're going to stick to their knitting in terms of key markets and customers."

Shares of United Technologies gained $3.23, or 8.60%, to close at $40.79 on Tuesday.

Mentioned in this article:

Citigroup Inc. NYSE: C

Dow Chemical Co. NYSE: DOW

Johnson & Johnson NYSE: JNJ

Merck & Co., Inc. NYSE: MRK

Rohm & Haas Co. NYSE: ROH

Schering-Plough Corp. NYSE: SGP

United Technologies Corp. NYSE: UTX

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