CLICK HERE FOR VIDEO: Bayer AG won a 17 billion euro ($21.5 billion) contest for Schering AG, the world's largest maker of birth-control pills, after German rival Merck KGaA accepted a sweetened offer for its stake.

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Schering investors will get 89 euros a share, or 3 euros more than Bayer's original bid in March, after Darmstadt-based Merck agreed to sell its 21.8 percent holding. Investors who have tendered their shares or commit to doing so today will get that price, Leverkusen, Germany-based Bayer said in a statement.

Bayer shares had their biggest gain in three years. Merck's holding, built up since Bayer's March offer, threatened to derail Bayer's plan to become Germany's largest drugmaker. Bayer wants to add Berlin-based Schering's best-selling multiple sclerosis treatment and Yasmin birth control pills to help its lagging health unit. Merck and Bayer may cooperate on other projects.

``This is very good news,'' Boris Schakowski, a fund manager with Union Investment in Frankfurt said in a telephone interview. ``This is value enhancing for Bayer and this is the best fit in our eyes for Schering. It's a financial gain for Merck, and since they have shown themselves to be cooperative, they have laid a foundation for further cooperation.''

Bayer shares rose 2.28 euros, or 7.5 percent, to 32.84 euros at 4:49 p.m. in Frankfurt after gaining as much as 9.8 percent, the most since March 2003. Shares of Darmstadt, Germany-based Merck climbed 4.05 euros, or 5.9 percent, to 72.50 euros. Shares of Bayer had declined 12 percent between June 8, when Merck said it had a 6 percent stake in Schering, and yesterday.

The spread on Bayer bonds narrowed. The extra yield investors demand to hold Bayer's 6 percent euro-denominated bond due in 2012 instead of government bond narrowed to 71.5 basis points, according to RBC Capital. This is more than the 68 basis points the spread hit when Standard & Poor's put the company on credit watch for downgrade on March 24 of this year.

Earlier Bids

Bayer's bid of 86 euros a share was accepted by Schering's board in March, beating a 77 euro offer from Merck. Today's offer is 3.5 percent more than Bayer's first bid. Merck will have a one-time gain of 400 million euros in the second quarter.

``We're very pleased about Merck's decision, because a lengthy competitive bidding process would have greatly affected Schering's future,'' Bayer Chief Executive Officer Werner Wenning said in the statement.

Schering sells drugs, such as Betaseron for multiple sclerosis, as well as substances that help make organs visible on imaging such as X-rays. The company lost its U.S. operations around World War II, and the American unit grew into Kenilworth, New Jersey-based Schering-Plough Corp. The companies aren't now affiliated.

Deutsche Bank is advising Merck, while Morgan Stanley and Dresdner Kleinwort Wasserstein are advising Schering. Bayer is being advised by Credit Suisse and Greenhill.

Merck bought 2.1 million Schering shares yesterday, the company said in a regulatory filing. Bayer filed a lawsuit in New York yesterday alleging that Merck violated U.S. law by failing to publicly disclose that it was acquiring shares of Schering. Bayer said today it will drop the lawsuit".