Goldman Sach Rates Merck a Convicted(?) "Buy" -- Jami Rubin, Analyst

[UPDATED: 08.10.09 @ 3 PM EDT -- Wellington has halved its position in Schering-Plough, effective July 31, 2009 -- just reported in a Schedule 13 filing, ten minutes ago. More above, but this explains why the "Buy" rating from Goldman Sachs had very little effect on the price today.]

Or, "An odd choice of words, no?" However, to be crystal-clear, here, I believe Ms. Rubin has satisfied her SEC Reg AC duties -- I just find the below highly relevant, to our analysis of her genuinely-held convictions.

Jami Rubin, previously of Morgan Stanley, now employed at Goldman Sachs, just issued an upgrade on Merck's shares, setting a target of $38 for the next twelve months. Wow. Three thoughts, here -- but first, her quote, per Business Week -- online edition:

. . . .With an expanded pipeline and historical precedence to exceed cost-cutting expectations, the potential for accelerating new revenue growth could drive significant bottom-line leverage: a recurrence of the upswing following Vioxx in late 2005. . . .

That's an odd way to couch one's "convicted Buy" recommendation, no? So, I guess "what's old is new, again".

More precisely, my three thoughts, here:

(1) Goldman Sachs (Ms. Rubin's current employer) rendered the first of two financial fairness opinions (contained in the June 25, 2009 definitive proxy-solicitation materials, filed with the SEC) that Merck's bust-up of Schering-Plough, albeit styled as a proposed reverse merger with Schering-Plough, is "fair", from a financial point of view, to Schering-Plough. That is, Merck is not getting a steal.

(2) Morgan Stanley (Ms. Rubin's most recent prior employer, as late as mid-2008) rendered the second financial fairness opinion (contained in the June 25, 2009 definitive proxy-solicitation materials, filed with the SEC) that Merck's bust-up of Schering-Plough, albeit styled as a proposed reverse merger with Schering-Plough, is also "fair", from a financial point of view, to Schering-Plough. That is, Merck is not getting a steal.

(3) Both Goldman Sachs, and Morgan Stanley were leads -- on Schering-Plough's $3.8 billion of financings -- one being the 6% Mandatory Convert, and the other being a series of euro, and dollar denominated debt traunches -- in August and September of 2007. The Convert was pegged at a Schering-Plough common stock price of $27.50, at closing. Schering-Plough's common has not approached that price since December of 2007 -- almost two full years. Clearly, should Merck's shares rise, and the deal go through, by definition, Schering-Plough's shares, in exchange, will rise, proportionately, as well.

Now, both of her firms -- present and past -- feel Schering-Plough is getting a fair price in the deal. But she hinges her "Buy" upgrade on cost-cutting by Merck, post bust-up.

Fascinating. Could this be a kiss and make up recommendation -- to cover all that the clients of both firms lost in the ensuing two years? Who knows. But I do think the above is relevant, when evaluating Goldman's "convicted Buy" -- of today. How did the firm come to be so convicted? That is what we ought to ask ourselves, as rational investors.

For more of Ms. Rubin's recent history with Merck vis-a-vis Schering-Plough, while still employed at Morgan Stanley -- read this.

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[Editor's Nota Bene: Coincidentally (or perhaps not so), Goldman also just placed Lilly on its "convicted Sell" list -- I'll go see, but I bet Goldman hasn't done much offering work for Lilly in the last two years (Nope. It would seem as though it hasn't). And, slightly-relatedly, consider also the remarks of this Goldman Sachs internal lawyer, at a conference at Tulane this Spring.]