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Roches Acquisition of Genentech

By Group 2 Amol Ghorpade Anurag Bhatia Basant Rajvaidhya Madhusudan Sharma

Background Information
Roche & Co. Genentech

Roche seeking to acquire the 44% of Genentech

Reasons Advantages Risks

Responsibilities towards minority shareholder Range of Equity value for Genetech as a Standalone company Analysis of comparable companies What Franz Humur do?

Background Information

Roche & Co.

A pharmaceutical company based in Basel Founded by Fritz Hoffman-La Roche in 1896 Pharmaceutical research institutes:
Roche Institute of Molecular Biology, New Jersey Basel Institute of Immunology, Basel

Companies acquired:
Nicolas, a non-prescription drug company (1991) Syntex, a bioscience company (1998) Boehringer Mannheim, a diagnostics leader (1998)

Humer, CEO (1998-2001), became Chairman of the board in 2001 Financial stress in 2001 and 2002 ($2.9 bn loss) Innovation & Strong sales of diverse portfolio of drugs Revenues = $43.2 bn, Net Earnings = $10.3 bn (2008)

Found in 1976 by venture capitalist Robert Swanson and scientist Herbert Boyer Combined scientific excellence with business acumen and patent their discoveries Raised $35 million in 1980, first biotech company to go public Share price went from $35 to $88 within the first hour of trading Between 1998 and 2008, operating revenue increased to $13.4 billion Vertically integrated researching, producing and selling its products

Roche seeking to acquire the 44% of Genentech it does not own

Genentech was increasingly coming into direct competition in U.S. markets Genentech established R&D activities outside the U.S. Genentech begun to encroach on Roches traditional territory by developing small molecular products Merger of two companies would create new opportunities Strategic analysis of Synergies - $750 mn to $850 mn annual savings

Advantages of Owning 100% of Genentech

Largest Biotechnology company in the world Complete ownership of technology, R&D projects and patents held by Genentech Extract $9.5 bn of Genentechs cash and cash equivalents Extend their contract to distribute Genentech best selling drugs and eliminate the risk of losing the contract

Lawsuits from minority shareholders Loss of human resources in critical areas such as R&D Availability of funds for bridge loans Paying higher premium than real value of synergies Bad test results

Roches responsibilities towards Minority Shareholders

Roche should not share Genentechs intellectual property Roche should try to explain all positive effects of the merger Roche should inform employees that how would synergies benefit them Roche should clear fear of loss of jobs Employees should continue to have power to make decisions

Range of Equity Value using DCF

Analysis of comparable companies

Analysts expectation of Genetechs value was $84.99/share which was $3/share less than Roches offer Comparable companies have synergy value greater than the premium paid. Roche valued Genetech at multiples close to that of Gilead sciences which was much above the actuals Considering the recession that started at the end of 2008, Roche still valued the multiples above the actual multiples for Genetech in year 2008-09

What Should Humer Do?

Risks & Payoffs

Raising the offer price close to $112: Risk There is no guarantee that special committee would agree to compromise & Roche will not be able to go back to $89 Payoff Market conditions are volatile and Special Committee may agree to an offer closer to their own offer

Risk & Payoff

Tender offer between $67 to $83, with synergies offer can be given between $80.7- $96.07 Risk Can be considered as hostile move Can demoralise key employees Minority shareholders can speculate on the price Payoff Tender offer will circumvent special committee and break the deadlock

Risk & Payoff

Wait & Watch for the clinical trials of the superstar product of Genentech Risk Trials may be successful which may further drive the prices Payoff Trials may be unsuccessful which may hit the investors confidence in Genentech

Loss of investors confidence in Genentech is not good for Roche in long term (post-merger) Negotiate with the Special Committee for the price between $80.7- $96.07 before the results of the second round of trials are out Inconclusive results of the first trials and uncertainty about the results of second trials can be leveraged Both parties will share the risk of either price going up or down according to the trial test result