Merck & Co. Inc. has adopted a severance benefits plan aimed at protecting key managers in the event the company is taken over — a growing possibility since the withdrawal of arthritis drug Vioxx sent shares tumbling.
Merck said in a regulatory filing that under certain circumstances the company's management committee and other vice president-level managers, or about 230 people, would receive a package including cash, health benefits, possible retirement benefits and help with financial planning.
On Sept. 30 Merck withdrew Vioxx from the market after a study showed it doubled the risk of heart attack and stroke. The move sent its shares plunging and erased more than $25 billion from its market value.
"Merck's plan signifies the company's valuation has fallen so low that another company could try to acquire it, and that Merck's management is vulnerable," said Deutsche Bank analyst Barbara Ryan.
"Merck formerly was a company whose size made it more likely to be an acquirer rather than to be acquired, but the reverse is now true," Ryan said.
The company said the package would kick in if Merck were subject to a change in control, defined as: an acquisition of more than 20 percent of the company; the current board ceasing to constitute a majority of the new board; liquidation; or a merger, consolidation or reorganization.
Exceptions would apply if shareholders of Merck held at least 60 percent of the securities of the successor company prior to its merger with Merck, or if members of the board, before the transaction, constituted a majority of the board of the successor company.
Merck's embattled chief executive, Raymond Gilmartin, has consistently said he is not interested in a merger.
Participants in the plan must sign a release of claims against the company, and a commitment not to solicit company employees for two years following the change in control.
Ryan said the plan, by guaranteeing pay and benefits to senior managers, could discourage them "in the short run" from jumping to rival drugmakers.
But she said morale at the company and the mood of shareholders will continue to be sorely tested because Merck's earnings will likely decline through 2007, in part due to the slated loss of U.S. patent protection in 2006 on its Zocor cholesterol fighter.
Ryan said the two companies most likely to make a bid for Merck, were a bid to emerge, are London-based drugmaker GlaxoSmithKline Plc and Novartis AG of Switzerland.
She said Glaxo wants to grow into a company closer to the size of New York-based Pfizer, the world's largest drugmaker, and that Glaxo would also bolster its line of heart drugs by acquiring Merck.
Ryan said Novartis would greatly expand its U.S. sales force, a longstanding aim, if it were to buy Merck.