Merck to Buy Schering-Plough in $41 Billion Mega-Merger

March 9, 2009

The big news this morning is that Merck (MRK) is buying Schering-Plough (SGP) for $41 billion. This is the latest mega-merger in the pharmaceutical industry. A few weeks ago, Pfizer (PFE) announced a $68 billion merger deal with Wyeth (WYE).

What caught my attention about today's deal is that Merck is financing nearly half of it in cash. This is a very important message to investors because it's a reflection of how cheap the stock market is.

Put yourself in the shoes of a CEO. You want your company to gain market share so what's the best way? You can either go out and work for it, or just grab your checkout and buy your nearest rival. Since stock prices are so low, option #2 is looking pretty good.

I wouldn't be surprised if another company, like Johnson & Johnson (JNJ), swoops in and makes an even higher bid for Schering-Plough. I expect to see more mergers in the upcoming weeks.

I currently rate Merck and Pfizer as sells, but I do like Johnson & Johnson. However, my favorite large-cap health care stocks are Amgen (AMGN) and Gilead (GILD).