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It is fun to see real bickering over a takeover. It makes a change from neatly pre-packaged leveraged buy-outs. US drug benefits manager Express Scripts’ proposal to buy larger rival Caremark shows the former’s “desperation” to “interfere” with the latter’s agreed deal with retail pharmacy group CVS, according to Caremark. The spurned suitor, meanwhile, has proposed directors for its target’s board and urged investors to block the CVS deal – which it has also attacked in a lawsuit.
Caremark favours a premium-free, all-stock “merger of equals” with CVS. The combination – with a market capitalisation of about $50bn – could, over time, realise the value enhancements touted by proponents of the deal. The Scripts offer, half in cash, is worth about 10 per cent more. But it would involve a delay for antitrust clearance and high leverage.
Weighing a seemingly solid, friendly deal against a higher but riskier one is a classic board dilemma. MCI’s former shareholders, for example, are probably regretting the company’s sale to Verizon, agreed in spite of a higher bid from Qwest. Since the deal was done in May 2005, the leveraged upstart’s shares have more than doubled, while Verizon’s have only edged higher. On the other hand, Guidant’s former owners might, with hindsight, wonder if they should have taken blue chip Johnson & Johnson’s stingy offer a year ago against Boston Scientific’s higher bid. Today, with Boston shares down more than 20 per cent, J&J’s cash and stock package would be worth more.
At the same time, investors are often disappointed if a company that starts dating ends up single. CVS may yet win over Caremark shareholders with a better offer. But if shareholders vote down the CVS deal, Caremark might need to change its tune and talk to Scripts – or invite other offers. Entertainment value aside, the Caremark board’s dismissive attitude to Scripts looks short-sighted.