Mylan Lab’s Proposed Merger with King Pharmaceutical (Abridged) Case Solution & Answer

Mylan Lab’s Proposed Merger with King Pharmaceutical (Abridged) Case Solution

Case Overview

Mylan Inc., is considering a merger with Kings Pharmaceuticals. However, the merger deal could only be completed with the approval of the shareholders. In this scenario, the major shareholders of Mylan have conflicting ideas with Perry Capital being in the favor of the deal unlikely to Carl Icahn, UBS Asset Management and High River,which have denounced the deal calling it a “Stupid deal”. As the deal requires majority of votes, to get finalized, so Richard Perry: the owner of Perry Capital, has purchased additional Mylan shares to neutralize Icahn’s votes for the deal. This has resulted in the lawsuit filed by Icahn-against the Perry Capital. The report contains an analysis of the shareholders’ concerns; the valuation of each firm before and after the merger and the synergy valuation followed by recommendations.


Concerns of Mylan’s Investors

Majority of the Mylan Inc.’s shareholders were not in the favor of the deal, concerning the 61% premium on King’s shares. Looking at the economic and financial conditions; both companies were not in good positions. The firm was facing liquidity problems with an inclusion of increasingly declining current assets.

But since there is a compulsion of the consensus of both the companies’ shareholders to be present over the matter, so the management of the Mylan Company and King Pharmaceuticals Inc. were very much concerned regarding the fact that how would they convince the shareholders of the Mylan Company,as they were not agreed to the proposal. For that reason, one of the major investor in the King Pharmaceuticals Inc. Perry Capital, bought the shares just above the shares held by another major shareholder of the Mylan Company, in order to get the project approved.

Just after the announcement of the merger; the stock prices of the Mylan Company started to fall from $18.51. On the other hand, the prices of the stock of King Pharmaceuticals Inc. were on a rising trend, because the shareholders of the King Pharmaceuticals Inc. were in the favor of the proposed merger of their company with the Mylan Company. After seeing the totally different trends in the prices of both the companies’ stocks; it is suggested that Mylan’s shareholders should not vote in the favor of the merger, because their wealth would decline if they do so.  Taking under consideration the perception of the  King Pharmaceuticals Inc.’s shareholders; the shareholders should vote in the favor of the proposed merger, as their wealth will increase with the refusal.


Perpetuity growth model of the discounted cash flow valuation is conducted to determine the value per share for King and Mylan (See Exhibit 1). Details of supplementary calculations and assumptions are given as follows:

  • Discount rate is taken as 15% on general basis.
  • A perpetuity growth rate is assumed to be 3% on a general basis.
  • Tax rate is calculated by dividing the provision for income taxes by income before taxes.
  • The investment is assumed to be for the undefined periods.
  • Enterprise value is calculated by the formula given below:

EV = Last year Cash Flow*(1+g)/(r-g)

On the basis of the aforementioned calculations and assumptions; the value per share for King and Mylan equal to $16.88 and -$0.67, respectively. This implies that the King’s shares are undervalued at a market price of $10.34 as compared to the Mylan’s shares that seem to be overvalued…………………….

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