MERCK dramatically pulled out of the auction for Schering yesterday after Bayer, the rival German drugs group, entered the fray with a €16.3 billion (£11.25 billion) “white knight” offer.

Bayer secured a recommendation from Schering’s board for an €86-a-share cash offer late on Thursday, scuppering a hostile €77-a-share bid from Merck, Europe’s oldest drugs developer.

Shares in Schering initially jumped more than 5 per cent on the German stock exchange, amid hopes that Merck would trump the agreed deal with a €90 to €95-a-share counter offer. But the price came back as Merck’s board rushed out a statement saying that the company had decided not to pursue a deal.

Michael Roemer, Merck’s chief executive, said that the board remained convinced that a combination would have been a “good option” but added that the company would now continue to build its own drugs and chemicals businesses.

Schering said that talks with Bayer began on March 13 after it became clear that independence was no longer an option.

Under the proposed deal, the combined business, to be based in Berlin, will be called Bayer-Schering Pharmaceuticals. The company will generate healthcare sales in excess of €15 billion a year, including pharmaceuticals revenues of about €9 billion and will boast strengths in several therapeutic areas, including fertility, cancer and heart disease.

“Both businesses are complementary and together they will be even more competitive internationally,” Hubertus Erlen, Schering’s chief executive, said.

The deal, which if successful will mark Bayer’s biggest acquisition in its 142 years, will create a new champion in Germany’s much-depleted pharmaceuticals sector and signal a new commitment to drug development at Bayer.

The company, best known for inventing aspirin in 1897, has been struggling to make strategic sense of its research and development business since 2001, when it was forced into a costly recall of Baycol, the heart drug, because of safety issues. Werner Wenning, Bayer’s chief executive, said that the management would look for cost synergies out of the enlarged entity but declined to elaborate. However, in comments that will alarm unions, he gave warning that up to one in ten of the combined workforce, equivalent to 6,000 jobs, would go in the coming years.

Herr Wenning said that Bayer would use its €3 billion cash pile to part-finance the bid. The deal will be refinanced through the sale of new shares and the launch of long-term bonds as well as from the proceeds of the sale of two subsidiaries, HC Starck and Wolff Walsode.

Allianz, the Munich-based insurance company that is Schering’s biggest shareholder, declined to say yesterday whether it would accept the new bid or hold out for a possible revised offer from Merck. However, the group reiterated previous statements in which it has said that it would act as a “normal shareholder”.

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