Versum Sticks With Merger Plan as German Merck Barges In

(Bloomberg) -- German pharmaceutical group Merck KGaA offered $5.9 billion for Versum Materials Inc., aiming to break up a plan by the U.S. company to combine with another maker of semiconductor components.

Merck’s $48-a-share offer would dismantle a proposed $3.8 billion merger between Tempe, Arizona-based Versum and Entegris Inc. The German company’s offer is 52 percent higher than Versum’s price before the planned merger was announced last month and a 16 percent premium to its closing share price Tuesday.

The drugmaker’s bid “would deliver immediate and certain cash value to Versum stockholders and employees, shielding them from the significant integration, operational and market risks” of the Entegris merger, Merck Chief Executive Officer Stefan Oschmann said in a letter to Versum’s board.

Versum said that it still believes in the strategic and financial rationale of merging with Entegris, and its board will review the Merck proposal. Representatives for Entegris didn’t respond immediately to a request for comment.

The news lifted Versum as much as 18 percent, putting its market value at about $5.3 billion, slightly above that of Billerica, Massachusetts-based Entegris, which fell as much as 4 percent. Merck, not affiliated with U.S.-based Merck & Co., fell as much as 4.9 percent in Frankfurt.

Deal Mode

Merck is in aggressive deal mode, just completing an agreement worth as much as $4.2 billion to collaborate on an experimental cancer drug with GlaxoSmithKline Plc. Its sluggish performance-materials division is also in need of a boost, and Oschmann said earlier this month that the semiconductor field has many small and medium-sized assets with attractive technologies.

“Given the hostile nature of Merck’s approach to Versum we wouldn’t be surprised if Merck had to raise its offer at least once to secure the acquisition,” Richard Vosser, an analyst with JPMorgan Securities, said in a note.

Merck had been looking at Versum since it was spun out of Air Products & Chemicals Inc. in 2016, and is mostly attracted by its long-term strategic value, according to people familiar with the matter. The company had done considerable work on a potential offer internally and was caught off guard when Versum announced its merger with Entegris, the people said, asking not to be identified as the deliberations were private.

Companies typically canvass potential suitors before announcing deals and Merck’s interest in Versum was thought to have been known among dealmakers, the people said.

Merck’s performance-materials unit accounted for about 17 percent of third-quarter sales, and unlike the company’s health care and life science divisions, it probably had flat sales for 2018, according to the company. With Versum on board, semiconductors would become half of the performance materials business, and the company sees 60 million euros in annual synergies by 2022, Chief Financial Officer Marcus Kuhnert said on a conference call.

Diverse Model

The purchase would “strengthen the company’s diversification profile as it would increase its exposure to the fast-growing electronic materials market where it would become a leading player,” said Knut Slatten, a pharma analyst at Moody’s Investors Service. It would also lead to “a more balanced split in between its three core divisions.”

Oschmann has defended Merck’s maintenance of a diverse business model while big pharma rivals including like Glaxo narrow their focus on developing complex, innovative treatments. The company’s liquid crystals, used to make flat-screen displays and once a growth driver, are facing more competition and fetching lower prices.

Consolidation has been extensive in the chip-equipment sector as more products boast connections to the internet. Merck’s offer steps between two producers that have the same top three customers in Taiwan -- Taiwan Semiconductor Manufacturing Co., Intel Corp. and Samsung Electronics Co. -- according to data compiled by Bloomberg.

Merck received financial advice from Guggenheim Partners LLC and legal advice from Sullivan & Cromwell. Versum was advised by Lazard and Simpson Thacher & Bartlett LLP.

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