Advanced Corporate Finance
Final Case: Roche
Deadline: Wednesday, October 12th, 2011 9:00
Bor, Lisa van den
Roche, a global pharmaceutical company from Switzerland with Humer as chairman, had owned a majority stake (56%) in Genentech, a successful pioneer in biotechnology. Genentech had worked independently for a very long time, and most minority shareholders where employees of Genentech itself. On July 21, 2008 Roche had publicly offered to buy all of the remaining shares of Genentech (44%). After this offer of $89 per share had been open for six months, with little progress toward a deal, Humer wondered how he could bring Roche’s acquisition of Genentech to a successful conclusion.
To solve this case we will first look for the reason why Roche is seeking to acquire the 44% of Genentech and what the risks and benefits of this acquisition are. After that we will look at the financial part of the acquisition by computing the standalone value of Genentech in two different ways. Then we will discuss if Humer should launch a tender offer for Genentech’s dispersed shares, at what price he should do that and how the offer should be financed. Finally we will calculate the value of the synergies as a final step in solving this case.
By solving this case we would like to answer the question: ‘How could Humer bring Roche’s acquisition of Genentech to a successful conclusion?’
Since Roche and Genentech both operate in the pharmaceutical industry, but still have their own specialty, they can benefit from a partnership. Roche owns a majority stake in Genentech since 1990 and since 2007 this majority is equal to 56% of Genentech. Genentech had become an important part of Roche’s business representing 24% of Roche’s pharmaceutical product sales in 2008. In July 2008, Roche made public that they’d want to acquire the remaining 44% of Genentech. For Roche this acquisition beholds several benefits, but of course also several risks. These benefits and risk are stated below.
First of all since Genentech, in terms of revenue, is the second largest firm in biotechnology in 2007, a full acquisition will strengthen the market position of both companies. Genentech experiences an expanding growth in sales (see figure 1), so both companies notice more and more direct competition of each other in several U.S. markets. A merger of Roche and Genentech would take away the direct competition and create new opportunities and strengths, which would make them able to excessively work together on a world wide scale.
Secondly, if a merge would be realized this would result in a great cost reduction. Roche’s managers believed there was increasing duplication of effort and facilities at the two companies and, thus, opportunities to create value by cutting costs and streamlining operations. They identified that annual savings, realizable over five years, would lie between $750 million and $850 million, most of these savings would come from changes in manufacturing, general & administrative and commercial operations.
Another benefit of Roche owning 100% of Genentech, a merge of the two companies would give Roche access to all the intellectual property of Genentech. The concerns about property rights blocked the flow of information between researchers at the two companies. By the merge, they can share their intellectual property, which might facilitate product development and research. Thus the constraint between Roche’s and Genentech’s research and development efforts would disappear. Since the R&D pipeline of Genentech grew stronger by the day in the ten years before the announcement (see table 1 and figures 1 and 2), a merge would be a big advantage to Roche.
Finally, since the beginning of 2007, the free cash flow of Genentech grew largely. Roche could not access Genentech’s...