Case Study Paper Sample on Acquisition of Genentech Company

The Advantages of acquiring the 44% of Genentech Remaining Shares from Roche's Perspective

The 100% acquisition of Genentech Company would help Roche limited to avoid possible unhealthy competition between the two companies. In the year 2007, questions had started to emerge on the actual relationship between the two companies. The issues developed as a result of what was seen as Genentech coming into direct competition with Roche on the majority of US market. Roche would be in an actual position to access the necessary products from Genentech Company without negotiation for renewal of licenses. The total acquisition of Genentech Company would ensure that Roche takes complete control and representation in the management. The acquisition would lead to a formation of one the largest biotechnology and pharmaceutical company, hence enabling it to enjoy economies of large-scale and give a competitive advantage in the market. The competitive advantage would ensure a company growth through utilization of additional assets acquired from Genentech Company. The annual savings as a result of reduced duplication of duties would amount to $750 million to $850 million per annum over a period of five years.

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The risks of Total Acquisition of Genentech Company

Though the initial assessments indicate that there is a chance of growth in size and value through the acquisition of Genentech Company, there is a significant concern related to the actual cost of purchase which is estimated to be higher than the reasonable due to the premium payment as a result of synergy. The company would also be forced to make borrowings from financial institution and considerations has to be made on the availability of such funds and also the financing costs (interest rates) associated with the borrowings. The borrowing risks can partly be attributed to global financial and economic crisis. The acquisition process does not reduce the total market risk as a result of cut-throat competition from other companies producing similar drugs and products in the market. In a situation where a new entrant would join the market with more advanced products, the expected growth and productivity of the merger would be negatively affected. The underperformance would result in a drop in share prices and also the value of the new company.

The acquisition process accounts for the possibility that a new cancer drug Avastin may be tested and approved if that situation does not occur, the new company would have to bear the risk of loss of revenues. The performance of the company would be affected by the changes in organizational culture which would result from the broken relationships between the employees and management. For an extended period, some employees and management team also served as shareholders for the minority company and hence a sense of ownership. The introduction of the new management team would result in the introduction of new culture and break the existing ties. The overall result would be a loss of already qualified working team of employees and future human resource challenges.

The 1999 Affiliation Agreement

The affiliation agreement signed in the year 1999 was meant to protect the interests of the minority shareholders in Genentech Company who are mainly some employees and management team. The treaty imposed on some responsibilities to Roche Company over the minority shareholders. In case of the acquisition, the acquiring company was required to give the necessary explanations on the importance and benefits of such transaction to the minority shareholders. The approval of the board would be deemed to be adequate in case of a friendly bid. Roche Company would be forced to hold shares for at least two months in a situation of a hostile takeover where such stocks would be limited to at least 90%. Roche would not be required to get a share of the intellectual properties.

Value of the Synergies per share of Genentech on the Acquisition

The value of the synergy is obtained by assuming that the targeted leverage ratio is D/V=0 when determining the appropriate discount rate.

The discount rate is determined by the weighted average cost of capital WACC (Garcia, Saravia, & Yepes, 2016) by application of the formula:

WACC= Re*(E/ (D+E) +Rd*(1-t) *(D/ (D+E)

The return on equity (Re) for Genentech and Roche is provided as 23.3% and 21.5% respectively.

Return on debt (Rd) was estimated as interest rate divided by total debt for a company. The value of synergy per share is determined to be $ 67.97.

The Reasonable Range of Values per Share for Genentech Company in the Year 2008

The reasonable range of values under CFC analysis method:

The range of values can be obtained through use of estimated growth rates as shown below:

estimated growth rates The annual long-term growth rate

1% 2% 3% 8%

share price (actual) estimated share prices

Genentech 81.82 82.64 84.29 86.82 93.77

The following information is essential if estimations were to be undertaken under the long-range plan:

• discounted terminal value 42785
• discounted cash flows 29890
• enterprise value 72675
• less: commercial papers -500
• less: debt -2329
• cash at hand 7000
• outstanding shares 1052
• equity value 76846
• value per share 73

The weighted average cost of capital would have a different effect on the value per share of the company. The value per share would range from $73 to $86. Using the analysis of comparable to determine the range of values involves the use of valuation multiples used by peers or similar companies.

Changes in Valuation Assumptions as a Result of the Financial Crisis

The estimated value of shares in the market using estimated growth rates, under the short term and long term expected growth rate indicates that the Roche can acquire the Genentech Company's remaining shares at the offer price of $89. The DCF analysis method suggests that an acquisition price of $89 is much higher than the current market value of the company's share price. The comparable analysis methods suggest that an acquisition price of $89 is slightly higher than the market price. Though the comparable analysis method is the best method to determine a benchmark value for multiples used in the share valuation process, it can turn to be unreliable since the companies involved are thinly traded (Matthews, 2016). The available comparable companies seemed smaller in value and size and therefore posing a major setback for the analysis. The actual long-term growth for the year 2008 was 19%, and the same is expected for the year 2009.

The companies are dealing with medical drugs that can be considered to be necessities. Though the financial crisis may affect the purchasing power of the clients, it is expected that the demand ought to remain relatively stable. The stock prices for Genentech increased from 81.82 to 84.09 in the year-end 2009. The enterprise value also increased by a small margin from 89,070 to 89,356 between the year 2008 and 2009. The financial crisis in most cases affects the cost of debts since the financial investors will tend to allocate funds to investments with higher returns to ensure the safety of the investment capital.

The Best Option for Franz Humer

The senior manager has to make critical decision on the disagreements arising on issues related to forecasts and valuation of the company. Genentech Company's senior management believed that the starting price for negotiation should be $112 per share while Roche maintained a rate of $89 per share. The senior management of Roche Company was initially faced with three alternatives, and they believed that none of the available options was ideal. The first alternative was to meet the required asking price of $112. The reason behind this option is behind the fact that the management of Genentech Company may not accept any kind of compromise. The second alternative would involve tendering the company's shares through engaging the Genentech's shareholders directly.

The second alternative would involve bypassing the board and the committee. The second method would, however, result in further challenges such as disagreements between the management and employees of Genentech Company that could result in additional human resource challenges. The management of Roche Company would be required to comply with the affiliation agreement that was designed to protect the minority shareholders. The third option would involve the acquiring company waiting to reduce the uncertainty surrounding the performance of Genentech Company. However, the future prices of the Genentech Company would be affected either positively or negatively from the ruche's perspective. The future costs of Genentech Company would be significantly influenced by the outcomes of clinical trials of Avastin, a cancer treatment drug.

The best option is, therefore, to acquire Genentech Company at the asking price of $112. The decision is based on the fact that though Genentech company's' per share prices had reduced to $70 during the financial crisis, they have currently recovered and trading at a price of $84. The share prices had previously risen to $98 in August, and this is a clear indication that if the company achieves the estimated long-term growth rate of 19.2%, the price of $112 would be justifiable in the long-term. In a situation where the clinical tests of the Avastin cancer treatment drug would turn positive, the new asking price per share would be too higher for Roche Company, and it would be impossible to raise finances to acquire Genentech Company. The importance of merger and synergy is to raise the company's value.

References

Garcia, C., Saravia, J. A., & Yepes, D. A. (2016). The weighted average cost of capital over the life-cycle of the firm: is the overinvestment problem of mature firms intensified by a higher WACC?.

Matthews, G. E. (2016). Stock-for-Stock Mergers: An Empirical Study of Fairness Determinations in Fairness Opinions. Business Valuation Review, 35(4), 120-134.