As

Mylan Laboratories

(MYL) - Get Report

continues to press ahead with its acquisition of

King Pharmaceuticals

(KG)

, some analysts say Mylan may become a vulnerable target if the marriage isn't consummated.

"If the deal does not go through, we would see Mylan as a viable acquisition target, and this should help create some floor to the stock," said Corey Davis, of J.P. Morgan, in a recent report to clients. Davis, who has a neutral rating on Mylan, didn't identify potential suitors.

Beset by financial problems and government investigations, King reported in late October that it might have to restate earnings due to a large build-up of returned products. "We think this decreases even further the likelihood that the King merger goes through or at least an opportunity to renegotiate the terms," said Davis. (He doesn't own shares; Mylan has been a J.P. Morgan client in the last 12 months.)

David W. Maris, of Banc of America Securities, speculated that Mylan could be in play if the King deal collapses. "If it fails, and new management is voted in, it could lead to the sale of the company," he said. "The current management doesn't want to sell."

Maris is one of many analysts who disliked the deal from the day it was announced on July 26 -- and that's before investor Carl C. Icahn started buying Mylan shares, shorting King's, and began waging a proxy fight to bust up the deal.

Maris likened the deal to buying a car because it looks nice rather than because it will run reliably in the long run. "King hasn't been that reliable," said Maris, who has neutral ratings on both companies. (He doesn't own shares; his firm says it does and seeks to do business with companies mentioned in research reports.)

"We don't believe this makes sense," Maris said.

Tough Talk

Icahn has used stronger language, and it's getting stronger. Until recently, he had been promoting his opposition to the deal as an effort to improve Mylan shareholders' value. Late last month, however, as he raised his stake in Mylan to 9.78% from 8.9%, Icahn sounded more like a corporate raider than a passive investor.

Icahn said he was willing to "run a slate of directors and propose a new management team" unless Mylan scraps the King transaction. Icahn is Mylan's largest shareholder.

"Naturally, we would prefer to work with Mylan in a cooperative way," Icahn added in his Oct. 29 letter to Robert J. Coury, Mylan's vice chairman and CEO, which was included in a document filed with the

Securities and Exchange Commission

. "However, if necessary, we will take such actions as are appropriate to protect our interests and those of our fellow shareholders," said Icahn.

Coury fired back. "Among other things, we believe Mr. Icahn's letter attempts to validate his short position in King by continuing to bash King," Coury said last week.

Analysts who believe Mylan is headed for a bloody battle with Icahn say Mylan could be takeover bait.

"In terms of dealing with our clients, no one thinks that Icahn wants to be in the generics business," said one pharmaceutical industry analyst, who requested anonymity. He doubted a U.S. brand-name drug company would want to buy Mylan, even though Mylan is developing a proprietary blood pressure drug. Mylan's size would make it difficult for most of its peers to make an attractive offer, the analyst said.

Two possible candidates are

Teva Pharmaceutical

(TEVA) - Get Report

, the Israeli company that is the world's biggest generic drug dispenser, and the Sandoz generic unit of the Swiss drug giant

Novartis

(NVS) - Get Report

. The analyst likes Sandoz, pointing out that Novartis has said it wants to aggressively expand its generic drug business over the next few years. (He doesn't own shares in the companies; his firm doesn't have an investment banking relationship.)

"If Mylan fails

to buy King and its stock stays at current levels, it could be attractive to other generic companies," said Sena Lund, of Cathay Financial, an investment research firm. Lund said that a potential suitor could be a foreign or domestic company looking to expand or diversify. (Lund has a neutral rating on King and no rating on Mylan. He doesn't own shares in either company; his firm doesn't have an investment banking relationship.)

Ominous Signs

There are many knocks against the deal in which Mylan would pay 0.9 shares of its stock for each share of King's stock. Opponents say the companies aren't a good strategic fit; they complain Mylan is paying too much. They also claim King has too many financial and legal problems.

King is being investigated by the Department of Health and Human Services and the SEC, relating to underpayments to Medicaid and other government health programs and to inadequate record-keeping and internal controls. King recently said it believes it can settle these investigations without losing government contracts or without having to face criminal charges.

Meanwhile, King and Mylan just issued dreary earnings reports. King's results were below analysts' estimates; Mylan removed the suspense by preannouncing an EPS range that trailed Wall Street's consensus. King's EPS results have fallen below the Wall Street consensus in six of the last seven quarters.

A Convoluted Courtship

If analysts wonder why Mylan is fighting so hard for King, they should have witnessed the courtship. For several months early this year, King was talking to Mylan while negotiating with another suitor. The mystery suitor dropped out; then Mylan and King broke off talks temporarily. Then, Mylan and King resumed discussions, according to the Mylan-King merger proxy.

The proxy says Jefferson J. Gregory, then chairman and CEO of King, received a telephone call in late January from the CEO of an unnamed drug company, who was interested in a "strategic business combination." For several weeks, top managers of both companies discussed a deal. But on Feb. 19, Gregory said he would retire as CEO, adding that he would remain in the job until King's directors appointed a successor.

That announcement prompted Mylan's Coury to set up a meeting with Gregory in early March. Top executives of both companies also began talking even while King continued negotiating with its original suitor. In late March, King broke off talks with the other company.

But on May 5, King and Mylan cancelled negotiations, the proxy says. On May 7, Coury sent a letter to King reaffirming his interest. On May 14, Gregory quit as chairman and chief executive. Three days later, Kyle P. Macione, King's president, resigned.

As King was installing an interim CEO and a nonexecutive chairman, Mylan kept pressing the issue. On June 30, Coury sent a new proposal to King. A few weeks later, both sides agreed to a deal.