The shares of Forest Laboratories, Inc. (NYSE:FRX) surged more than 27% to $91.04 per share after the company announced its agreement to sell itself to Actavis Plc (NYSE:ACT) for $89.48 per share or $25 billion in cash and stock.

Brent Saunders, president and CEO of Forest Laboratories, Inc (NYSE:FRX) said, “The combination of Forest with Actavis creates a specialty company with annual sales of approximately $15 billion, a diversified portfolio and a geographically balanced business.”

“This compelling combination gives us more optionality to drive future growth and sustainable shareholder value due to our expanded geographic and therapeutic presence, ability to drive new product flow through R&D, strong balance sheet and consistent cash flow. The terms of the agreement provide Forest shareholders with cash and the opportunity to participate in the future growth of our new, stronger combined company,” added Saunders.

Transaction details

The acquisition price is composed of $26.04 cash and 0.3306 shares of Actavis Plc (NYSE:ACT) for every share of the common stock of Forest Laboratories, Inc (NYSE:FRX). The per share consideration of the sale price represent a 25% premium on the closing price of the stock of Forest Labs on February 14.

Paul Bisaro, chairman and CEO of Actavis Plc (NYSE:ACT) will lead the combined company. The senir management teams of the two companies will supervise the integration. The three members of the board of directors of Forest Laboratories (NYSE:FRX) will join the board of Actavis after the closing of the transaction.

Benefits from proposed merger

The merger of Forest Laboratories, Inc (NYSE:FRX) and Actavis Plc (NYSE:ACT) is expected to generate double-digit accretion in 2015 and 2016 including around $1 billion in operating and tax synergies, which will be obtained within three years after the completion of the transaction.

The acquisition is expected to create specialty brand revenues composed of approximately 50% of the total pro forma revenues of the combined company. In addition, the merger will deliver strong free cash flow of more than $4 billion in 2015.

Furthermore, the combined company will create blockbuster product franchises in the CNS, Gastroenterology, Women’s Health, Urology and Cardiovascular therapeutic categories. It will have emerging and sustainable portfolios in Infectious Disease, Respiratory, Cystic Fibrosis and Dermatology therapeutic categories.

Moreover, the combined company will have investment in new product development of more than $1 billion on an annual basis. It will also add more than half a dozen near and mid-term R&D products to the robust development portfolio of Actavis Plc (NYSE:ACT).

WBB Securities analyst Steve Brozak commented, “They have just figured out a way to maximize use of time” with doctors. There’s no way big pharma can compete with this.” Forest Laboratories Inc (NYSE:FRX) has a significant number of sales force in the United States with the ability to promote more than a half dozen products of the combined company for every doctor’s visit.

Smartstops.net, a stock market risk management service  shows that the risk level of the shares of Forest Laboratories, Inc. (NYSE:FRX) is normal.