Merck-Schering Roundup: Layoffs More Likely at Schering; Insiders Traded Fortuitously; How Merck Timed the Deal
LAYOFFS? In the Merck/Schering-Plough merger, layoffs will likely fall most heavily on the Schering employees. This is not just because Merck is the acquiring company and will place its people in the driving seats. (That, of course, will be part of it.)
Rather, it's because Schering has more fat to cut than Merck. For every dollar Merck spends on sales, marketing and management costs, it earns back $3.24 in revenue. At Schering, the same dollar only earns back $2.69.
The two companies believe that there is $3.5 billion in efficiencies to be made in the combined entity. If Merck is to avoid reducing the productivity of its combined sales force it must slash away at Schering's less effective battalions.
INSIDER TRADES? The WSJ notes that Schering's stock experienced a runup right before the deal was announced, hinting that insiders let their knowledge of the impending deal slip, allowing some to trade advantageously. (You can see the increase in SGP stock on Friday, before the deal was announced, in the graphic.)
From Jan. 1, 2008, until May 14, 2008, SGP insiders bought and sold SGP stock. Nothing unusual there. Much of it was a result of scheduled acquisitions under compensation structures for executives and directors. But after May 14 until yesterday, not a single insider sold any stock. They only acquired it, according to Yahoo Finance's Insider Transactions database. Over the same time frame, acquisitions and sales of Merck stock were mixed among Merck insiders in the first half of 2008. After May, excluding options exercized at $0, Merck insiders only disposed of their stock.
What a happy coincidence for all these people!
BNET would like to make it clear that it is not accusing anyone of wrongdoing and there are no allegations of wrongdoing against any executive or director of Schering or Merck.
WHY NOW? Separately, some are asking why Merck chose to move on Schering at this point in time. Steve Scala of Cowen & Co.:
"Deal appears strategically sound although the timing of the announcement is less clear; why is Merck making this acquisition now?" Scala wrote. "Perhaps Schering wanted some clarity on the Singulair patent trial, which has now concluded."Perhaps. But there may be a simpler explanation, one that was given as the rationale for the Pfizer-Wyeth hookup. It's that Schering is much cheaper now than it was a year ago. In July 2008, SGP was $22.32. It then fell to $15.28. SGP then rose to $18.72, just before insiders knew that the deal was about to close.
Overall, SGP appeared to be in a slow but bumpy recovery. Perhaps Merck just wanted to take it out before it got any higher, while it was a still a steal.