Pharmacy chain CVS (CVS) has increased its bid for Caremark (CMX) by $4 per share in an attempt to secure the pharmacy benefits manager. Rather than simply raise the per-share amount of its merger offer, CVS has chosen the unconventional route of sweetening its offer by promising a special dividend to Caremark holders should the deal go through. With CVS increasing the proposed special dividend to $6 from $2, their offer is now fairly comparable to the opposing cash and stock offer from rival Express Scripts (ESRX).

You may recall I already weighed in on this rare type of deal sweetener in January. I still believe offering a one-time special dividend to CMX holders is more like changing the deal terms from all-stock to cash and stock, since CMX shares will go down after a one-time large dividend is paid.

With the bids more similar now, I would expect Express Scripts to raise its offer shortly, perhaps as early as after the close today. They will not go the special dividend route. They want Caremark badly and realize that in order to convince Caremark holders to merge with a main competitor, and not a retail pharmacy, they will have to pay handsomely.

With consultants having already recommended investors reject the prior CVS offer, Express Scripts may very well land support for an increased bid, as they know that CVS is being very conservative with their special dividend strategy. All in all, I think Caremark prefers to do a horizontal merger with CVS, rather than a vertical integration with Express Scripts, but the offers must be at least comparable for such a move to survive a shareholder vote.

Full Disclosure: No positions in the companies mentioned