Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online-views/  Investors unhappy, Mylan stock dips
BackBack

Investors unhappy, Mylan stock dips

Investors unhappy, Mylan stock dips

Premium

Mylan Laboratories Inc. investors are cringing. The US drug firm has agreed to buy the generic business of Merck KGaA of Germany for $6.7 billion (Rs27,470 crore)—about 50% more than its own market value. Mylan has a current market capitalization of $4.4 billion. Merrill Lynch, Citigroup and Goldman Sachs are providing full financing.

This is just two years after activist investors, led by Carl Icahn, forced it to abandon a potentially value-destroying $3.8 billion bid for King Pharmaceuticals Inc. Shareholders are just as unhappy with its Merck deal. They pushed Mylan’s stock down 12% on Monday.

There’s little strategically wrong with the purchase. Merck’s unit had sales of $2.5 billion in 2006. But Mylan is paying far too much. It claims the deal will generate cost savings of $250m. That may be a stretch. It’s more than recent pharma deals have yielded, and the limited geographic overlap between the two companies probably doesn’t leave much scope for cutting. But even if it hits that target, the investment will only return 7%—less than Mylan’s 8% cost of capital.

Surely activists will step in again and vote the deal down, right?

Nope. Mylan is buying a division, not a company, so it doesn’t have to put the deal to a vote. Worse, it expects to issue $1.5-$2 billion in equity and convertible bonds to pay for it, but not until after the sale closes. That won’t require investor approval. So, Mylan can cram a 40% dilution of its equity down shareholders’ throats.

This won’t win it any friends. Mylan boss Robert Coury’s credibility still suffers from the company’s bungled King deal, and its shares haven’t budged in four years. And now it has suspended its dividend to conserve capital.

But the real salt in investors’ wounds is that the Merck deal makes Mylan a less attractive buyout target.

The Merck auction showed that lots of companies are willing to pay outlandishly high prices for generic drugs firms. So, it shouldn’t be a surprise if activist investors rally Mylan’s disgruntled shareholders—and try to put the company itself on the block.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 16 May 2007, 12:28 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App