New Foe for Caremark-CVS

Updated from 3 p.m.

Caremark (CMX Quote) and CVS (CVS Quote) aren't finding strong support for their proposed merger outside their own boardrooms.

Institutional Shareholder Services -- the heavyweight proxy advisory firm -- urged Caremark shareholders Monday to reject a so-called merger of equals with CVS. Three other proxy firms have issued negative opinions of the proposed transaction as well.

ISS published its eagerly awaited opinion a week ahead of a special meeting of Caremark shareholders. They must decide whether to accept CVS's offer, consider a rival bid from Express Scripts (ESRX Quote), or open the door for other potential suitors instead.

"We conclude that the alternative ESRX proposal could potentially lead to a 'superior proposal' that may provide better value for CMX shareholders," ISS stated. "Given the deal was initially struck at a nil-premium, there is limited downside for CMX shareholders if the CVS deal does not go through."

Shares of CVS and Caremark slid Monday, while Express Scripts rose 2%.

Earlier on Monday, CtW Investment Group found plenty wrong with Caremark's current plans as well.

For Caremark shareholders, CtW said, the proposed CVS merger is a bad deal that continues to look even worse over time. CtW said it remains skeptical of the rising synergies that Caremark and CVS have promised to achieve. The companies first estimated synergies of $400 million but, faced with competition from Express Scripts, repeatedly upped that figure.

"It is unclear why an additional 25% worth of synergies would be discovered in a three-week period -- including the Christmas and New Year's holidays -- that would not have been apparent in the prior 11 months during which the synergies consultant was no doubt intensively studying both companies' operations," CtW wrote.

Ultimately, CtW suggested that Caremark had crafted a deal that favored company leaders over ordinary shareholders and should not be trusted as a result.

"From the beginning, the Caremark board's decision to approve the CVS merger agreement appeared problematic," CtW stated. "The Caremark board failed to adequately negotiate with either CVS or Express Scripts and has created -- but done nothing to dispel -- suspicions that directors and management have their own interest in a deal with CVS. ... We therefore urge you to vote the company's white proxy card against Proposal No. 1, which seeks to approve the Caremark merger."

CtW is also suspicious of generous stock option grants given to execs including CEO Mac Crawford. The company has denied any wrongdoing. But CtW says "we suspect that the Caremark board and management may have an inappropriate self-interest in the proposed CVS deal."

Meanwhile, CVS CEO Thomas Ryan looks rather conflicted to some. Ryan is poised to become CEO of the new CVS-Caremark. Notably, the combined company has laid out plans to hire an affiliate of Bank of America -- where Ryan serves as a director -- to handle a big stock buyback program following the merger.