BOSTON (MarketWatch) -- Merck & Co. and Schering-Plough Corp. said Monday they plan to merge in a deal worth more than $41 billion as part of an effort to create a pharmaceutical giant that is less dependent on U.S. sales or on just a few blockbuster products.

It was the second major drug merger announced this year, as low valuations, coupled with Big Pharma's ongoing quest for diversified revenue streams, are making large-scale takeovers more attractive.

In January, Pfizer and Wyeth WYE, which have both been hit by increased generic competition, announced plans to merge in a deal worth $68 billion. Drug giant Roche is also pushing to buy the 44% of Genentech Inc. DNA, +1.77% that it does not already own. After bumping up its price on the deal last week to $93 a share, giving the deal a value of about $45 billion, Roche reportedly sweetened it further to $95 a share, The Wall Street Journal reported Monday in its online edition.

"That companies like Pfizer and Merck are hunting for acquisitions is not surprising, given the low returns on cash and the lower valuations of target companies because of market conditions," Tim Anderson of Sanford Bernstein wrote to clients Monday.

Before the opening bell Monday, the two major drugmakers said they have agreed to a merger that calls for Schering-Plough SGP, shareholders to receive $10.50 in cash and 0.5767 in Merck MRK, -1.03% stock for each share of Schering-Plough. Merck's total bid amounts to $23.61 a share. The combined company will be called Merck and headed by Merck Chairman and Chief Executive Richard Clark.

The offer represents a 34% percent premium over the closing price of Schering-Plough shares on March 6. Shares of Merck were down 8% at $20.83 in Monday afternoon, while Schering-Plough shares shot up 15% to $20.32.

Merck is currently the world's eighth largest drugmaker, based on market capitalization, with a value of roughly $48 billion. First is Johnson & Johnson JNJ, -0.03% , with a market cap of around $133 billion, followed by Pfizer. Schering-Plough is 12th.

On a conference call with investors Monday, Merck's Clark said that following the merger, no product would represent more than 10% of sales.

The chief executive also said that the deal would greatly bolster Merck's presence abroad, as around 70% of Schering-Plough's shares are made overseas, including more than $2 billion from emerging markets. The combined company is expected to draw more than 50% of its revenue from outside of the United States.

Merck added it will maintain its annual dividend at its current level of $1.52 a share.

Upon completion, Merck shareholders will own roughly 68% of the combined company and Schering-Plough shareholders the rest.

Job cuts coming

Both companies, which are based in New Jersey, already announced significant job cuts last fall. But the merger is likely to lead to additional reductions. The firms said they can achieve total cost savings of about $3.5 billion through the merger.

On the call, Clark said both companies will institute hiring freezes. He also told Dow Jones Newswires that Merck expects to reduce about 15% of its combined workforce.

Merck and Schering already are partnered on the cholesterol drugs Zetia and Vytorin. But sales of the drugs fell more than 20% in the fourth quarter on lingering concerns that they weren't any more effective than similar cheaper generic drugs on the market.

In addition, Merck's top line has been hammered in recent years by weakened sales for several of its best-selling products due to generic competition and a major recall.

In 2004, the company withdrew its once-hot pain reliever Vioxx from the market over health concerns. The company has since lost patent protection for other top sellers, including the osteoporosis drug Fosamax and hugely popular cholesterol product Zocor.

As a result, Merck is now heavily dependent on sales of its asthma drug Singulair, diabetes pill Januvia and two older blood-pressure products.

Schering-Plough's top line, for its part, has been dominated by the sales of Zetia and Vytorin, along with sales of its rheumatoid-arthritis drug Remicade, which is co-marketed with Johnson & Johnson. In 2007, the company purchased European biotech group Organon BioSciences, which specializes in animal health care, in an effort to diversify.

On the call Monday, analysts questioned whether the proposed merger would affect Schering-Plough's marketing rights to Remicade and an eagerly anticipated follow-on product called golimumab. See full story.

Shares of J&J were down 2% at $46.88 Monday afternoon.

Merck will finance the cash component of the deal with a combination of $9.8 billion of existing cash reserves and $8.5 billion from committed financing to be provided by J.P. Morgan.

Synergies, stronger pipeline

Merck expects the tie-up to result in annual savings of $3.5 billion beyond 2011, in part thanks to the full integration of the companies' existing cholesterol joint venture. Those savings would be in addition to those previously announced by the two companies as part of ongoing restructuring programs.

The deal is expected to boost earnings from the first full year after completion.

"The combined company will benefit from a formidable research and development pipeline, a significantly broader portfolio of medicines and an expanded presence in key international markets, particularly in high-growth emerging markets," Clark said in a statement.

He added that Schering-Plough's "considerable biologics expertise" would complement Merck's novel proprietary biologics presence to create the best pipeline in the industry. The tie-up will double the number of potential drugs Merck has in Phase III development to 18.

Cantor Fitzgerald's Stephen Pope said that the integration should go relatively smoothly as the deal unites two businesses with a similar mentality. The absorption of a biotech firm, for instance, could have been more difficult because of the difference in culture.

Once the deal is closed the board of the combined company will be made up of the Merck board plus three Schering-Plough representatives.

Fred Hassan, the chief executive of Schering-Plough, intends to participate in the integration until the close, according to the companies.