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(solution) Page 1 of 7 Case Study 1. Why is Roche seeking to acquire the 44%


Hello, I need to resolve the business case Roche's Acquisition of Genentech, and need the excels. I have found the document attached in Coursehero but need the Excell because there are some calculations that are obscure to me; and need to verify if they are correct and an explanation of them. Please, I need the Excel for the whole case. For example, I do not understand some tables in exercise 4. The reference of the case is 210040-PDF-ENG


Page 1 of 7 Case Study

 

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?

 

Roche already had 56% of shares of Genentech and now it seeks to acquire rest of the 44%

 

shares so as to get the benefits of synergies. The pharmaceutical companies have been unable to

 

introduce new products lately, and their only way to remain profitable is by mergers and

 

acquisitions. Roche also used this method. Acquisition will help the firm compete in the market

 

and thus will help it grow.

 

Advantages of owning 100% of Genentech?s shares: The merger will lead to formation of the world?s largest biotechnology company. Value of total benefit from synergies will be $5billion. This will be a result of M&D,

 

manufacturing, development and administrative costs reduction. Complete ownership will give the company complete access to technology and R&D

 

projects. It will also give the company access to its cash amounting to $9.5billion, which can also

 

be used to make payment for debt raised for acquisition. The company can also create a contract allowing it to distribute Genentech?s best selling

 

drugs.

 

Risks of owning 100% of Genentech?s shares: The acquired company?s minority shareholders are mostly its employees. The company?s

 

culture is like a family environment where all the employees work in cohesion.

 

Acquisition may destroy this culture. The culture of Genentech will have to be matched

 

and combined with the culture of Roche. This may create problems for the human

 

resources which may even lead to high employee turnover.

 

There is a chance that the company pays higher than the premium required for the

 

benefits of synergies. Such a situation may lead to drop in the prices of Roche?s shares.

 

For the deal, Roche has to borrow around $30 billion. The ongoing financial crisis could

 

make the debt financing even more difficult to obtain as well as more expensive.

 

The contract gives Roche the right to sell Genentech on non US markets, but only till

 

2015. After that the company faces a high risk of losing the right.

 

Genentech?s cancer drug, Avastin, may not be successfully tested and may be banned

 

from sale. This risk of loss of revenue will also have to be borne by the company.

 

New competitors may come with competing best selling drugs, which will again lead to a

 

risk of reduction in growth prospects. 2. As a majority shareholder of Genentech, what responsibilities does Roche have to the minority

 

shareholders? Page 2 of 7

 

The affiliation agreement signed in 1999 stated the obligations to minority shareholders, which

 

are as follows: Board approval is sufficient in case of a friendly bid. Roche can buy all shares for same

 

price When the takeover is hostile, in which Roche would get at least 90% of shares and would

 

hold them for at least 2 months, it will squeeze out the existing shareholders and will

 

merge the company. It is an optional measure and not a necessary one, as per Delaware

 

law.

 

As explained earlier, minority shareholders are majorly the employees of the company. It is

 

Roche?s duty to explain the benefits of merger to them and retain them. 3. 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. Please use a 9% weighted

 

average cost of capital in your analysis. Synergies are given in an exhibit.

 

Value of

 

synergies:

 

WACC 9% FCF

 

Terminal Value

 

Discounted

 

NPV 2009

 

$138.05

 

$5,431.22

 

$3,529.92

 

$1,423.28 Total value 2010

 

$362.36 $4,953.21 2011

 

$436.47 2013 and

 

2012 thereafter

 

$475.58

 

$488.81

 

Shares

 

Shares to buy

 

Value per

 

share 1052

 

463

 

$10.70 2013 cash flows are treated as a perpetuity (ignoring 2% long term growth rate).

 

4. Based on DCF valuation techniques, what range of values is reasonable for Genentech as a

 

stand-alone company in June 2008? Please exclude synergies from your valuation and use a 9%

 

weighted average cost of capital. You can assume that as of the end of June 2008, Genentech

 

held approximately $7 billion in cash, which included investments and securities that were not

 

needed in its daily operations. (Note: Exhibit 10 is a good starting point for this analysis.

 

WACC

 

Long term growth rate 9%

 

2% Page 3 of 7

 

annual growth rate

 

7%

 

Analysis using DCF techniques on long range plan (LRP)

 

Terminal value (discounted)

 

NPV of cash flow (2009-2018)

 

Enterprise value 42,785

 

29,890

 

72,676 Debt will be deducted and cash and securities will be added back to find the

 

equity value of the firm.

 

Enterprise value

 

Commercial paper

 

Long term debt

 

Cash and securitization

 

Equity value

 

Shares outstanding

 

Value per share 72676

 

-500

 

-2329

 

9000

 

78847

 

1052

 

74.9 Following table shows the possible values of value per share as affected by

 

different annual and long term growth rates. Annual/long term growth rates

 

5%

 

6%

 

7%

 

8% 1%

 

61

 

65

 

69

 

73 1.55

 

63

 

67

 

72

 

76 2%

 

66

 

70

 

75

 

79 2.50%

 

69

 

73

 

78

 

83 3%

 

72

 

77

 

82

 

87 Range of values per share is from $67 to $83 per share. This is in range of

 

Greenhill's own calculations.

 

WACC also has impact on the above range of values. Changing the WACC from 9% to even 8% or

 

10%, will change the range to $65 to $87. Fundamentals behind WACC:

 

Market risk premium

 

Beta (as of July 2008)

 

Beta of equity

 

Treasury yield (as of July 2008, 10 years)

 

Cost of capital 7.10%

 

0.26

 

0.3066

 

4.01%

 

6.18% Page 4 of 7

 

Commercial debt

 

Long term debt (AAA)

 

Total debt

 

Short and long term debt

 

Shareholders' equity 500

 

2329

 

2829

 

2829

 

15761 2.08%

 

5.67%

 

5.51%

 

15.21%

 

84.80% WACC = 0.0551*(1-35%)*0.1521 + 0.848*0.0618 = 5.744% Since the WACC is different from the initial 9%, we can assume that industry beta has been

 

used. Using the median beta, WACC approximates around 8%.

 

Company

 

Beta

 

Average

 

Median

 

Adjusted beta Amgen

 

Gilead Celgene

 

Genzyme

 

Biogen

 

Cephalon

 

0.454

 

0.894

 

0.766

 

0.658

 

0.767

 

0.384

 

0.653833

 

0.712

 

0.80992 Using median beta and adjusting it for "the Blume effect", the industry cab be calculated to be

 

0.80992. Unlevered beta is 0.68. Using these variables, WACC is around 8%.

 

Using 9% WACC is better for Roche as its success depends on pipeline production of

 

Genentech. This way the stand-alone risk will be taken into consideration. To assess the

 

riskiness in a better way, future success of drugs can be treated as real options.

 

5. What does the analysis of comparable companies (Exhibits 12, 13, and 14) indicate about

 

Genentech?s value within the range established in question 4?

 

First it is better to examine whether the other firms given are comparable or not. The companies given in

 

exhibit 13 are in the same industry as Genentech, i.e. Biotech industry. Size of Amgen (57396) and Gilead

 

(46073) is close to Genentech?s (88546). But the other companies have capitalization of ¼ or even less.

 

These firms could be highly risky or less liquid, so they should be ignored in the analysis.

 

Growth and risk:

 

Company

 

(Genentech)

 

Amgen

 

Gilead Sciences

 

Average Long term

 

growth Beta

 

0.454

 

10.5% (19.2)

 

(0.26)

 

0.894

 

24.7% (19.2)

 

(0.26)

 

17.60%

 

0.674 Though Gilead seems to be the closest competitor, yet both the companies will be taken up for analysis. Page 5 of 7

 

PE multiples

 

Trailing EPS

 

EBIT

 

Tax

 

Earnings

 

Shares

 

EPS

 

Amgen

 

Gilead

 

Average 5241

 

1834.35

 

3406.65

 

1052

 

3.23

 

12.6

 

25.4

 

19 Forward

 

EPS

 

5638

 

1973.3

 

3664.7

 

1052

 

3.48

 

40.802

 

82.25

 

61.53 12.1

 

22.1

 

17.1 42.15

 

76.98

 

59.57 Price per share of 76.98 calculated from Gilead?s forward P/E is in the same range as calculated above.

 

Subtracting cash and securitization and adding back debt will give a value of around 74.818.

 

EBITDA multiples EBITDA

 

Multiple

 

Amgen

 

Gilead

 

Average

 

Industry median

 

Enterprise value

 

Amgen

 

Gilead

 

Average

 

Industry median 2009

 

2008 (trailing)

 

(forward)

 

5833

 

6195

 

9.5

 

18.3

 

13.9

 

12 9.3

 

16.2

 

12.75

 

11.3 55413.5

 

106743.9

 

81078.7

 

69996 57613.5

 

100359

 

78986.25

 

70003.5 Values calculated above are totally different from the values calculated using the DCF analysis.

 

Enterprise Value/Revenue Revenue

 

Multiple

 

Amgen

 

Average

 

Industry median

 

Enterprise value 2009

 

2008 (trailing)

 

(forward)

 

13418

 

6195

 

4.1

 

6.7

 

4.8 4

 

5.9

 

4.3 Page 6 of 7

 

Amgen

 

Gilead

 

Average

 

Industry median 55013.8

 

124787.4

 

89900.6

 

64406.4 54140

 

105573

 

79856.5

 

58200.5 This measure is not a very good measure and is used only when companies do not have any earnings.

 

PEG is also not recommended.

 

Conclusion: Enterprise value is 72676 as per DCF technique, 74818 as per P/E multiple, and a range of

 

57000-100000 as per EBITDA multiple. These differences prove that using comparable for enterprise

 

valuation is a difficult task especially when the companies differ in size and risk. Nevertheless, these

 

multiples ensure that the stand alone valuation is within the range and thus the offer price of $89 per

 

share is the fair price.

 

These differences also explain differences in consensus by the Wall Street about the price targets.

 

$89 offer price falls within the range which would be suggested for Roche to pay.

 

Iron law of mergers and acquisitions

 

Closing price

 

81.82

 

offer

 

89

 

shares left to buy

 

462.88

 

value of offered price

 

41196.32

 

value at closing price

 

37872.8416

 

value of premium

 

3323.4784

 

value of synergies

 

4953.205073

 

syn. Excess of premium

 

1629.726673

 

Roche?s shareholders gain as the benefits of synergies are more than the premium paid. 6. How has the financial crisis affected Genentech?s value? What changes in valuation assumptions

 

occurred between June 2008 and January 2009?

 

Lifesaving drugs are necessities which are not affected by the changes in the economic

 

conditions. So the financial crisis also did not affect the revenues and earnings of Genentech.

 

However, the stock price moved with the market; it was the highest in August 2008 at $94 per

 

share immediately after the Roche?s first offer, and fell from September with lowest in October

 

and November. Page 7 of 7

 

The crisis did affect the cost of capital and cost of debt. So, the WACC of the company also

 

increased. Also the risky markets led to the increase in the cost of borrowing as the investors

 

moved to safer investment assets.

 


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