Merck KGaA

Merck KGaA is a German multinational science and technology company headquartered in Darmstadt. It is the world's oldest operating chemical and pharmaceutical company, with roots tracing back to a family-owned pharmacy in 1668. Today, it operates across three distinct business sectors: Healthcare, Life Science, and Electronics. A crucial point for any investor to understand is that Merck KGaA is entirely separate from the American pharmaceutical giant Merck & Co., which is known internationally as MSD. The two companies share a common ancestry but have been independent entities for over a century. Merck KGaA is a global player in specialty medicines, a leading supplier of tools and materials for the life sciences industry, and a key innovator in high-tech materials for the electronics sector. This diversified structure makes it a unique case study in the corporate world, blending the stability of a family-controlled enterprise with the global reach of a modern conglomerate.

Don't get them twisted! Confusing Merck KGaA of Germany with Merck & Co. of the United States is one of the most common mix-ups in the investment world. Understanding their history is key to avoiding costly mistakes. Originally, they were one company. The American firm, Merck & Co., was established in 1891 as the United States subsidiary of the German parent, E. Merck (now Merck KGaA). However, following World War I, the US government confiscated the subsidiary in 1917, and it was later established as an independent American company. The result is a peculiar branding situation that persists today:

• In the United States and Canada: The German Merck KGaA must operate under the name EMD (Emanuel Merck, Darmstadt). So, if you see EMD Serono or EMD Electronics, that's the German Merck. The American company holds the rights to the “Merck” name in this region.
• Everywhere else in the world: The German company is known as Merck KGaA, while the American company operates as MSD (Merck Sharp & Dohme).

For investors, this means you must be crystal clear about which company's stock you are researching and buying. They have different strategies, different products, and are listed on different stock exchanges (Merck KGaA primarily on the Frankfurt Stock Exchange, Merck & Co. on the NYSE).

Merck KGaA's strength lies in its three powerful, yet distinct, business pillars. This diversification provides a buffer against cyclical downturns or challenges in any single market.

This is the company's traditional pharmaceutical and consumer health division. It doesn't compete in the broad primary care market like many pharma giants. Instead, it focuses on developing highly specialized treatments in areas like oncology, neurology, and immunology. This targeted approach allows them to build deep expertise and command strong pricing power for their innovative medicines.

Perhaps the crown jewel of the company, the Life Science division is a “picks and shovels” play on the entire biotechnology and pharmaceutical research industry. It provides the essential tools, chemicals, and equipment that scientists and drug manufacturers need to conduct research, develop new therapies, and produce biologics. Operating largely under the MilliporeSigma brand in the US and Canada, this business benefits from the overall growth of the healthcare industry, regardless of which specific drug becomes a blockbuster.

This division is a leader in high-tech materials. It manufactures liquid crystals and OLED materials used in nearly every modern display—from smartphones to televisions. It is also a critical supplier of specialty chemicals and materials for the semiconductor industry, making it a key player in the global technology supply chain. This segment links the company's future to major tech trends like 5G, artificial intelligence, and the Internet of Things.

For a value investor, Merck KGaA presents a fascinating mix of stability, diversification, and unique governance.

Here’s the rub: Merck KGaA is not your typical public company. The Merck family, through a holding company, still controls approximately 70% of the company's capital and voting rights. This structure has profound implications:

• Pro: The family's involvement fosters a genuine long-term perspective. Management isn't driven by chasing quarterly earnings but by ensuring the company's prosperity for generations to come. This often translates into prudent financial management and consistent strategic direction.
• Con: The significant family control raises questions about Corporate Governance. Minority shareholders have limited influence over major decisions. An investor must trust that the family's interests will continue to align with their own.

The company's three-pronged business model acts as a powerful Economic Moat. Problems in one area—like a drug patent expiring in Healthcare—can be offset by strong demand for semiconductor materials in Electronics or steady growth in Life Science. This structure creates a resilient, all-weather business that is less volatile than a pure-play pharmaceutical or chemical company.

Because of its distinct divisions, valuing Merck KGaA as a single entity can be misleading. A more sophisticated approach, such as a Sum-of-the-Parts (SOTP) Valuation, is often more appropriate. This involves valuing each of the three segments (Healthcare, Life Science, and Electronics) separately based on their respective industry multiples and growth prospects, and then adding them together. This method helps an investor see where the true value lies and avoid underestimating the strength of its less-publicized, high-performing divisions.