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?

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%

2009
2010
2011
2012
2013 and thereafter
FCF
$138.05
$362.36
$436.47
$475.58
$488.81
Terminal Value
$5,431.22

Discounted
$3,529.92

Shares
1052
NPV
$1,423.28

Shares to buy
463
Total value
$4,953.21

Value per share
$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