Merck KgaA threatens Bayer's takeover of Schering

With only days to go before Bayer's takeover offer for Schering expires on 14 June, failed rival bidder Merck KGaA appears to have re-entered the fray.

Bayer's takeover offer of Euro 86 per share, which is conditional on a mimimum acceptance threshold of 75%, was initially to have expired on 31 May but was extended by two weeks to 14 June. By 7 June, Bayer held almost 40% of the shares in Schering, while Merck KGaA, which launched a hostile takeover bid for Schering before it was trumped by Bayer, still held 6%.

Since then both Bayer and Merck have been feverishly buying shares in Schering. By 10 June Bayer had bought a further 23% of the outstanding Schering stocks directly on the market, while rival Merck raised its stake 18.6%. Bayer's stockholding is now said to stand at 61.52%, still well short of the 75% acceptance level it needs by 14 June to complete the takeover.

It appears that some Schering shareholders who had already tendered their shares to Bayer may have changed their minds after Merck said on Thursday it had raised its stake in Schering to more than 10%. Bayer said that as of 9 June, 38.43% in Schering shares had been tendered to it while a day earlier, it announced the figure was 40.19%.

In March, Bayer agreed to buy Schering for €86 share, trumping a hostile bid from Merck of €77 a share. At the end of April, Darmstadt-based Merck was still saying that it was not interested in holding onto the nearly 5% of shares in Schering it bought prior to its takeover bid. However, on 9 June it announced in a filing with the US Securities and Exchange Commission that it owned 10.1% or 19.2 million Schering shares.

Merck said it acquired the shares to secure its investment position in Schering in the event the Bayer offer is ultimately unsuccessful. If Bayer fails to reach the 75% threshold, German takeover law prevents Bayer making a new bid for a year. Merck could make a fresh try during this time, possibly in partnership with another bidder.

Another explanation offered by analysts is that Merck is acting on financial motives, trying to force Bayer to increase the offer to above €86 per share. Merck may also agree to swap its stake for access to patents, distribution channels or some sort of co-operation with the new company.

The Bayer Group has declared itself "surprised" at Merck's actions in respect of Schering, saying the company's approach is incomprehensible.

Merck is now paying a price for Schering shares which, just a few weeks ago it described as unjustified for the takeover of the company. This was the reason Merck gave at the time for withdrawing its takeover offer. "Merck's actions therefore have all the semblance of a blocking tactic designed to hinder Bayer's acquisition of Schering shares. Such an approach is not known to have been taken by strategic investors in the past."

Furthermore, Merck has not notified the market of its subsequent intentions, leaving investors and the parties involved uncertain as to its strategy.

"We still believe that merging the pharmaceuticals activities of Schering and Bayer is a very logical approach that should create sustained value," said Bayer ceo Werner Wenning. "We are therefore resolved to pursue the proposed takeover."

Analysts and traders believe Bayer will still succeed. "We don't think the deal is endangered," said Silke Stegemann from the Landesbank Rheinland-Pfalz. "Most institutional shareholders only tender their shares very late."

Analysts at Merck Finck brokerage also said that Merck's move could delay Bayer's takeover plans, but they saw the deal going through eventually. "We think that Bayer will take over Schering at the end of the day and we do not expect that the offer price will be increased," it said, but added that there was a risk that Bayer will not reach a 75% holding by the deadline.

The collapse of a Bayer-Schering deal could hurt Merck as it would result in a fall in Schering shares, diminishing the value of its holding.

The European Commission and US antitrust authorities have both given their approval for the takeover.