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New Foe for Caremark-CVS

The big merger finds another critic, a filing shows.

Updated from 3 p.m.





(CVS) - Get CVS Health Corporation Report

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


, 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.

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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.

Banc of America Securities "would receive significant compensation" for its role in that buyback, Monday's regulatory filing shows. The bank already stands to pocket millions as an adviser to Caremark, the filing adds.

Caremark supplied the new information a week ahead of a scheduled shareholder vote on the company's proposed merger with CVS. Directors at both Caremark and CVS have unanimously endorsed the so-called merger of equals of their companies. However, they face fierce opposition from investors who want a premium for their shares and who back a higher offer by rival pharmacy benefit manager Express Scripts.

Late last week, proxy advisory firm Glass Lewis urged Caremark shareholders to reject the current merger proposal and wait for something better. Glass Lewis feels that Caremark's board settled for too little too fast and, therefore, has failed its shareholders so far.

"Perhaps involving Express Scripts in a formal process -- prior to announcing a deal with CVS -- would have elicited an even higher offer from CVS," Glass Lewis mused on Friday. "But this board will never know. ... This board appears to have decided to get married before it ever went on a date."

Of course, Caremark itself suggested that the company was focused on other matters entirely when making its wedding plans.

"This possibility was not discussed or considered by the Caremark board of directors in approving the CVS merger agreement and recommending that the shareholders vote to approve it," the company insisted on Monday. Moreover, "the same possible loss of standing (by suing shareholders) would be present if the proposed Express Scripts transaction were consummated in a merger that resulted in the elimination of Caremark's public stockholders."

Glass Lewis has offered no support for Express Scripts' current proposal, either. Rather, the firm feels that Caremark should start all over -- seeking competitive bids this time around -- and secure a better deal going forward.

"This could mean sacrificing a bird in the hand without knowing exactly what's in the bush," Glass Lewis acknowledged on Friday. "Yet we don't feel this is a 'deal-or-no-deal' scenario with Caremark shareholders having only two suitcases in front of them: one with all the money and the other with nothing."

"In our opinion," the firm wrote, "interested suitors are likely to put forward their best offers only when they are forced to compete."