Germany drugmaker Merck KGaA unveiled a surprise 16.6-billion-Swiss franc ($13.3 billion) deal on Thursday to buy Swiss biotech firm Serono, creating a new force in European pharmaceuticals.
Merck, which earlier this year failed in its bid to buy rival Schering, said it had struck a deal with Serono's founding Bertarelli family to buy their 64.5-percent stake, and would make a public offer for the rest of the shares at the same price of 1,100 Swiss francs a share in cash.
Merck shares were down 5.6 percent at 73.96 euros at 0750 GMT on worries that the company had overpaid for its Swiss rival. Shares in Serono were suspended from trading, with the offer price represents a 20 percent premium to Wednesday's closing price.
The Bertarelli stake also gives Merck 75.5 percent of the voting rights in Serono, which is Europe's biggest biotech group.
The deal is the latest in a string of mergers among mid-sized drug firms, which are struggling to compete against industry giants like Pfizer and GlaxoSmithKline.
Combined, Merck and Serono would rank as one of Europe's biggest drug groups with a market value of around $32 billion, annual sales of almost $10 billion and a research budget of around $1.3 billion.
To finance the deal Merck plans to raise 2-2.5 billion euros in equity, issue a bond and a syndicated loan after paying through existing funds and bridge financing.
The deal comes after Serono's Chief Executive Ernesto Bertarelli had moved to seek takeover targets after abandoning attempts to find a buyer.
We have a number of discussions ongoing (but) obviously we will have to consider those discussions under this new light, Bertarelli told Reuters in an interview.
Analysts said they were taken by surprise by the Swiss company's about-turn.
Keeping in mind that Bertarelli announced an acquisition strategy and that assigned Serono the role as predator planning acquisitions, today's news is a complete surprise to the market, Tilman Dumrese, senior analyst healthcare a Sal. Oppenheim, said.
But Equinet analyst Martin Possienke said that the deal had promise in the longer run.
Even though the valuation does not imply a bargain, the strategic rationale of an expanded pharma business might pay off over time. Short-term we expect Merck shares to experience pressure, he wrote in a note.
The deal translates to a 10-15 percent premium to the sector's valuations on a price to earnings basis, Equinet said.
And at 22 times 2005 operating earnings it is more than the multiple of 18 Bayer paid for Schering after beating Merck out of the race.
The deal gives Merck much-needed additional critical mass, bulks up its lackluster pipeline and mitigates some of the negative impact from generic competition to diabetes drug Glucophage.
Europe's mid-sized drugmakers, like Merck and Serono, have found themselves at a pinch-point in a global pharmaceutical industry facing tougher markets and rising research costs.
Many rely on only a handful of medicines and once these products reach the end of their life cycle there is not a large enough development pipeline to replace them.
Serono, founded 100 years ago, has turned itself into a major biotech player in the past two decades but is over-reliant on one drug, Rebif for multiple sclerosis, which accounts for more than half of its sales.
As a result, while both Merck and Serono have enjoyed good growth rates recently, analysts say their future as standalone operations is far less certain.
(Additional reporting by Ben Hirschler in London)