Caremark ( CMX) shareholders don't seem to be on board with management's less-is-more message.

The Nashville, Tenn., mail order pharmacy formally rejected an unsolicited $26 billion cash-and-stock takeover bid from rival Express Scripts ( ESRX) late Sunday. Caremark said shareholders will fare better under a $21 billion all-stock merger with CVS ( CVS), the giant retail pharmacy chain.

Caremark portrays Express Scripts as a jealous suitor that, desperate to derail the CVS deal, has promised more than it can deliver. Caremark claims Express Scripts could stir up "significant, if not insurmountable," antitrust issues if it keeps trying to get its way.

It's no surprise that Express Scripts rejects those criticisms. But increasingly, it's not alone.

Some critics have started to question Caremark's motives. They say recent regulatory filings show Caremark leaders will make out much better than shareholders in the CVS deal. And they note that Caremark was facing challenges on many fronts long before the merger was announced.

"Express Scripts put together this fantastic presentation, justifying why Caremark should do the merger with them," says Massachusetts investment strategist Peter Cohan, who has no financial stake in any of the companies. "This Express Scripts offer looks clearly better for shareholders. So I'm wondering: Why is Caremark just kind of blowing them off?"

Investors wondered the same thing Monday, sending Caremark down 2% and both of its suitors down fractionally.

Careworn at Caremark

Filings show that Caremark and CVS started flirting a full year before announcing their engagement. At that time, current industry threats -- particularly cheap generics from Wal-Mart ( WMT) -- had yet to even surface.

But Caremark had its own problems. Among other things, Caremark had come under fire from government investigators for allegedly bilking the Medicaid program out of hundreds of millions of dollars. The same week that Caremark and CVS first met to discuss how the two companies might fit together, Caremark lost its bid to throw out the whistleblower lawsuit that had prompted the Medicaid probe.

Three weeks later, in November of 2005, Caremark disappointed investors with a revenue miss that put pressure on its shares. The following day, Caremark's full board met for the first time to discuss strategic opportunities for the company.

Less than a week after that, CEO Mac Crawford began a stock-selling spree that would net him more than $150 million over the course of just two months. His final sale came in January of last year, just before TheStreet.com exposed an FBI probe of the company. Caremark and CVS met again, signing a nondisclosure agreement about their discussions, shortly after the FBI story appeared. The government has since dropped the case.

Crawford has also stopped selling his stock. However, he has come under scrutiny for collecting favorably priced stock options as part of a huge backdating probe. He has denied any wrongdoing.

Still, Crawford has now inked a deal with CVS that allows for his retirement from the executive suite -- but ongoing service as chairman -- at a time when other executives embroiled in backdating scandals have been booted out the door. Moreover, he stands to collect a handsome severance package as he leaves.

Caremark shareholders, feeling shortchanged by the all-stock CVS deal, have gone so far as to sue Caremark's directors for allegedly pursuing the merger in order to avoid personal liability resulting from the stock options probe. For its part, Caremark claims that the allegations "lack merit and intends to defend them vigorously."

Playing the Field

Filings show Caremark and CVS haven't been faithful companions all along.

In late March, with PBMs facing mounting calls for increased transparency, CVS CEO Thomas Ryan called Crawford and arranged to terminate the merger negotiations until his company could complete a big acquisition within its own field.

By May, Caremark's board was again meeting to discuss strategic alternatives. The following month, CVS finalized its purchase of a smaller drugstore chain. CVS struck up its old flame with Caremark a couple of months later -- but reached out to another PBM as well.

CVS seemed bent on Caremark by September. But Caremark itself flirted with the unnamed other PBM, with both parties even signing a confidentiality agreement, in early October. In the end, CVS and Caremark wound up finalizing their wedding plans on Halloween night.

Since then, of course, Express Scripts has stepped forward with its sweeter offer. Express Scripts promises to pay more for Caremark -- half of it in cash -- and give Caremark investors a controlling stake in the new company to boot. Moreover, it foresees even bigger payoffs ahead.

"The growth story of CVS and Express Scripts can be told in two lines," Express Scripts says. "If one had invested $100 in CVS in 1997, one would have approximately $315 today. (But) if one had invested $100 in Express Scripts, one would have $1,531 today."

Nice Payday

For his part, Crawford has expressed faith in his current plans. Upon his resignation, Crawford is entitled to receive up to $40.8 million in severance payments. However, last month's regulatory filing states, "as an indication of his commitment to the (CVS) merger and his confidence in the long-term economic benefits to be derived from the merger," Crawford has agreed to accept just $26.4 million instead.

Still, Crawford could leave CVS with some headaches in the process. Notably, that same filing reveals, the newly combined company will be on the hook for covering "all past and present officers and directors of Caremark ... for acts and omissions occurring at or prior to the effective time of the merger."

Calling off the deal won't be cheap, either. If one party halts the merger, it must pay a $675 million breakup fee to the other.

Express Scripts hasn't even promised that much in annual savings. But some fear Express Scripts -- as a fellow PBM -- could stumble over the regulatory hurdles already cleared by CVS and see its own deal blocked in the end.

"Maybe the board has weighed these risks and sees good reasons to stick with the CVS deal," strategist Cohan suggests. Still, "I get the impression that the board didn't do enough due diligence about a possible deal with Express Scripts in the first place.

"If I were a Caremark shareholder, I would be outraged -- or annoyed at the very least -- about leaving all of that money on the table."

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