Bayer, the German pharmaceuticals and chemicals company, on Thursday night made an agreed 16.3 billion euro ($19.7 billion) all cash bid for Schering, thwarting a rival hostile offer of 14.6 billion euros ($17.6 billion) from Merck.
The deal would cement Bayer's dominant position as the most powerful German drugs company, but would leave family-controlled Merck and Altana struggling with weak product pipelines.
The maker of aspirin is understood to have approached Schering with a friendly "white knight" bid just days after Merck made its hostile bid, according to people close to the situation.
Merck launched a 77 euro-a-share unsolicited offer for Schering on March 14, which valued its Berlin-based rival at 14.6 billion euros. Bayer's bid is for 86 euros a share.
Schering immediately rejected the bid as too low and hired Morgan Stanley and Dresdner Kleinwort Wasserstein to advise it on other alternatives. Merck is being advised by Deutsche Bank and Goldman Sachs.
The Bayer/Schering deal will not preclude Merck from returning with a higher offer. Although Merck has not ruled out sweetening its terms, Wilhelm Simson, chairman of Merck's supervisory board, has said the company would first wait to see if other bidders came forward.
Merck had planned to finance its bid through a combination of bank debt, cash, a rights issue, and a 1 billion euro investment from the Merck family and has said it is committed to maintaining its investment-grade rating.
Schering is the world's largest maker of birth-control pills. It derives around 16 per cent of its sales from Betaseron, a multiple sclerosis treatment and also makes substances introduced into the body to make organs visible on X-rays.
However, both Bayer and Merck would be particularly interested in Schering's oncology business, which has treatments for breast, prostate and colorectal cancer at different stages. That division accounted for 197 million euros in sales in 2005.
Bayer, which, invented aspirin more than 100 years ago, is headed by Werner Wenning, chief executive. During the past 18 months, it has bought the over-the-counter drugs unit of Roche, the Swiss drugs company, and spun off the bulk of its chemicals operations as a new listed entity called Lanxess.
The group has also placed its hopes in bringing to market new home-made patented drugs, with U.S. regulators giving a potential blockbuster anti-cancer drug the green light late last year.