Genentech 050211 PDF

Preview

Summary

asas...

Description

FIN

Genentech

5/02/2011

Discussion Questions

1.

Why is Roche seeking to acquire the 44% of Genentech it does not own? From Roche’s point of view, what are the advantages of owning 100% of Genentech? What are the risks? Can Roche finance this deal?

Reasons for acquisition (100% ownership):  The old model that had served both companies since 1990 so well was beginning to show signs of wear  Market overlap/direct competition: Genentech was increasingly coming into direct competition with Roche in several US markets as well as markets outside the US  Product/strategy overlap: Genentech was encroaching on Roche’s traditional territory (developing small molecular products) while Roche was preparing to launch products in US that would compete with Genentech’s products  Existing ownership and operating model of Genentech left Roche few alternatives in addressing the increasing overlap and duplication between the two firms  A merger and full ownership would create new opportunities (ability to collaborate on a worldwide scale vs. competing and cannibalizing products)  Control of product licensing agreement which is to expire in 2015. By acquiring Gen, Roche would gain full control of the product pipeline vs. risking another the competitor bidding more for it and acquiring it  Cross-fertilization of R&D: With the current ownership status and to protect minority shareholders, Roche cannot share Gen’s IP which blocked the flow of informational between researchers at the two companies and hindered product development and research. Acquiring Gen would increase information flow and enhance collaboration and innovation by sharing information in R&D  Opportunities for cutting costs and streamlining operations due to current duplication ($750-850m savings in 5 years)  Unfettered access to Gen’s cash ($9.5bn)  100% ownership would eliminate worries about conflict of interest and minority shareholders and would result in more flexibility in decision making for Roche. Currently, although Roche is the majority shareholder, it does not have full control of the decision making process which is very prolonged due to the minority shareholders

Key Players / People  Arthur Levinson- Gen’’s Chairman and CEO  Franz Humer – Chairman of Roche Key terms  Tender offers

Additional topics

Risks of acquiring Gen:  Vital IP walking out of the door with some of Gen’s scientists, who would leave the company because of fear that Gen would lose its independence and entrepreneurial spirit  Cultural clash which would decrease the expected cost synergies and make the integration process difficult and prolonged. Roche is Swiss and Genentech is American  Taking on debt in a very difficult time and unpredictable market (all industries have been hit, even the less cyclical ones) and not being able to repay it/breaching covenants. “refinancing risk” when the bulk of payment for the deal is debt with short maturity Can Roche finance this deal?:  Yes. Given the current market environment, Roche cannot only depend on banks to raise the funds for the acquisition. It will have to finance the deal using some cash from its balance sheet ($19.7bn), issuing commercial paper, bonds and taking bank loans  It can issue bonds and demand for Roche’s bonds should be high because it offers a strong credit profile, which is exactly what credit investors are looking for in a downturn/financial crisis. The extra yield investors demand to hold high-grade bonds rather than government debt had more than tripled in 2008

2.  

As a majority shareholder of Genentech, what responsibilities does Roche have to the minority shareholders? To offer them a fair price for their shares which is in line with the value of the business and for them not to use the crisis as an excuse to undervalue the company and underpay for it Currently, the proposed purchase price offers only a slight 8.8% premium over the closing price of Genentech common stock the day prior to the announcement of the deal. When compared with recent similar deals involving other biotechnology companies that are neither as big nor successful as Genentech, the proposed purchase price appears particularly favorable to

Please include page numbers and references wherever possible, especially for key players, terms, and dates

Page 1 of 2

FIN

Genentech

5/02/2011

Discussion Questions  



3.

  

4. 



 

Key Players / People

Roche, and particularly unfair to minority shareholders Based on its voting power and power at the Board level, Roche has the ability to consummate the deal on terms favorable to it and detrimental to the interests of minority shareholders. Roche can actually force a merger at a price that is opposed by a majority of the remaining non-Roche shareholders Roche has long ago compromised the ability of minority shareholders to get competing offers or bids that could exponentially increase the price ultimately received for Genentech’s minority shares. This is because, in reality, competing offers from other firms are impossible without the specific approval of Roche Roche has protected itself by being the majority shareholder which impeded competing bids and has left the minority shareholders with no power, therefore it has to pay a larger premium for this lack of optionality for the minority shareholders As of June 2008, what is the value of the synergies Roche anticipates from a merger with Genentech? Assess the value of synergies per share of Genentech. What is the value of Genentech as a stand alone? [In your valuation, use the information in Roche Supplemental Valuation Data and a WACC of 9%. Note: you can toggle assumptions between the LRP and NFM in cell B3.] [see excel] The value of the synergies is c. $6.8bn over the next five years. Per share, (given the number of outstanding shares is 1,053, the value is $6.5/share As a stand-alone, Gen is worth c.$83bn (given the LRP forecasts– with no synergies $79/share, with synergies $92/share) and $116bn (given the NRM forecasts – with no synergies $110/share, with synergies $125/share) What should Franz Humer do? Franz should offer a price that is higher than $89/share (this is the 8.8% premium price), given Exhibit 12, the premium should be in the range of 15-20%. In addition, the price should be higher given Exhibit 14 (most analyst estimates are north of $85, ten of which indicate more than $89) Given the valuation, I don’t think that the NRM forecasts are realistic, however, I do think that the price should be slightly higher than the $92/share price with the LFP forecasts + synergies. This will make up for the lack of optionality that the minority shareholders have due to Roche exerting its power and hindering other competitors from bidding for Genentech Although there should technically be no control premium, there should be a lack of optimality and good faith premium that is higher than 8.8%. The price should be in the range of $95-$100 in my opinion Humer should start speaking to banks in order to see how much he can borrow to finance the deal. He should also start speaking to banks in regards to issuing bonds in the US and Europe to finance the deal

Please include page numbers and references wherever possible, especially for key players, terms, and dates

Page 2 of 2...