Breaking up could be hard to do for Merck and Schering-Plough--even if Schering got a better offer elsewhere. Walking away from the deal would cost Schering $1.25 billion under the two companies' merger agreement. And if Merck backs out because it can't get the money together, it will have to pony up twice that much: $2.5 billion.
Will a $1.25 billion walk-away fee be enough to keep Johnson & Johnson from swooping in like Douglas Fairbanks to snatch Schering away? Well, UBS's Catherine Arnold predicts that J&J would have to offer at least 10 percent more for Schering-Plough than Merck, or $25.98 a share versus Merck's $23.61. That's about $4 billion, or $5.25 billion including the breakup money.
Arnold tells BusinessWeek that J&J isn't the type to jump into a bidding war, but it's "not impossible" that it might try to woo Schering away. Given the challenging drug market--and its need for more new drugs--the company could step out of the box to "[pursue] what we believe to be the most attractive target in the pharma space."
And given the fact that other analysts say Schering could go for as much as 20 percent more than Merck's current bid, that extra $1.25 billion doesn't look so onerous. Investors are already trading up Schering stock, which closed $1 higher yesterday at almost $21. Stay tuned.