CASE 5.1: MERCK ACQUISITION OF MEDCO

Abstract

Corporate mergers and acquisitions (M&A) have become popular across the globe

during the last two decades due to globalization, liberalization, technological developments,

and competitive business environment (Fisher & Siburg, 2009). The synergistic gains from

M&A may result from efficient management, economies of scale, profitable use of assets,

exploitation of market power, and the use of complementary resources (Mitchell et al, 2004).

Theoretically it is assumed that mergers improve the performance of the acquiring firm due to

increased market share and synergy impact.

This paper reviews the acquisition of Medco Medco Containment Services,
Wygod formed Medco as a

holding company so he could buy National Pharmacies for $30 million in cash and Porex

stocks. National Pharmacies, owned by APL Corporation, was a vitamin distributor and a

small mail-order prescription drug business. It had yearly revenues of about $25 million and

profits of about $400,000. Wygod eliminated the vitamin business and built up the mail-order

drug business. Although Medco was not the first mail-order prescription company, it was the

first company that aggressively sold its services to large corporations, labor unions, and

health plans. Through the computer network system Medco was able to gather information on

consumer prescription drug spending and sell that information to the nation's largest health

plan sponsors. This system forms the core competency of Medco (Datamonitor, 2004).

Medco specialized in maintenance drugs for high blood pressure, arthritis, diabetes,

and other chronic diseases. Patients still shopped at local pharmacies for antibiotics and other

prescriptions needed for acute illnesses, but chronic ailments which called for regular drug

therapy were increasingly being serviced by Medco and smaller mail-order companies.

Medco claimed to save at least 20 percent on most prescriptions because it encouraged the

use of generic drugs and it could negotiate healthy discounts from manufacturers (Medco

Containment Services, Inc., 2011).

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