Novartis: An Analysis of the

Ciba-Geigy and Sandoz Merger

Team 10:
Minjal Dharia - Stefanie Duda - Jennie Ma
Andrew Schwartz - Siddharth Sekhri
 AGENDA

History
Ciba Sandoz Background
Motivations and benefits of the merger
Merger process
Obstacles
The new company: Novartis AG
Challenges
Strategies
Opportunities
Financial performance to date
 A MERGER OF TWO EQUALS

Sandoz Limited
Ciba-Geigy
Swiss Subsidiary
Swiss Subsidiary
Sandoz Corporation NYC,
Ciba-Geigy Corp
NY
Tarrytown, NY
Total Revenues = $13.0 billion
Total Revenues = $17.5 billion
 STRATEGIC SIGNIFICANCE OF MERGER

Background of rapid structural change in pharmaceutical/ biotech

market
Price pressures meant decreasing growth and margins of industry
Cost-containment efforts due to high development costs
Consolidation of suppliers gave them higher pricing power
Reach an optimum mix of business segments for synergy
 MOTIVATION AND BENEFITS
Motivations

Shared commonalities in crop protection, seeds, agribusiness and

animal health products
Jump to new business opportunities
Distance themselves from the unsure chemical markets
Benefits

Higher critical mass for key investments such as research &

development
More efficient & broader marketing & distribution of products
Lower cost of financing, increased liquidity
Leaner organizational structure
 THE MERGER PROCESS

March-April1996: Ciba and Sandoz announce merger

plans and validate with shareholders.
July 1996: The European Union approved the merger
August 1996: U.S. Federal Trade Commission agreed to
the formation of the new company in the fall of the same
year.
The merger is worth $27 billion- one of the largest in
international business
 THE MERGER PROCESS

Stock swap in which Ciba shareholders are paid a premium

Receive 1 1/15 for 1 share
Sandoz shareholders get 1 for 1 share
Sandoz shareholders obtained 55%, Ciba Geigy 45%.
Benefits of the deal:
Tax-free because both companies are Swiss
Cash outlay not required
Transaction structured as a share issue
 OBSTACLES

The EU and the US FTC had concerns regarding the monopolistic

nature of the mergers.
Required the demerger of the Specialty Chemicals Division
of Ciba and the Construction Chemicals and animal health
businesses of Sandoz
Ciba and Sandoz each had three classes of stock with varying
voting rights at the start of the 1990s.
Novartis had to transform the tangled equity structure into a
single class of shares last year.
 REGULATORY CONFLICTS/TRANSLATION EXPOSURE

Reconciling according to International Accounting Standards (IAS):

IAS rules allowed companies to write off goodwill rather than
depreciating it
Allowed applying pooling-of-interest accounting rules to the $27
billion Ciba-Sandoz merger, which avoided charges for goodwill-
the difference between the purchase price and book value of an
asset.
REGULATORY CONFLICTS/TRANSLATION EXPOSURE

But, the U.S. accounting principles (GAAP) challenged both IAS

rules:
The merger should include a restructuring charge for
annual depreciation of 700 million Swiss Francs
Novartis had to follow US rules to list its shares in the US
Novartis would prepare its official accounts under IAS rules
and offer U.S. investors a bridging statement with adjustments
according to U.S. accounting principles in a footnotes
Cash flow and cash earnings per share would remain the same
under both IAS and US GAAP.
 NOVARTIS AG

Novartis = re-birth toward life sciences

Market Value > $60 billion
Standing
segments of Healthcare (59%), Agrobusiness (27%), and Nutrition
(27%)
Largest worldwide marketer of crop protection chemicals
Second largest seed & animal health company
Second largest pharmaceuticals company in the world
Sales = $13 billion
4.5% share of global market sales
 CHALLENGES

Novartis promised annual savings of 1.8 billion Swiss Francs

Needed to get rid of 10,000 jobs or 10% of the payroll
Needed to cut drug development time from 11 to 7 years
Needed three strong selling drugs annually
To match No. 1 Glaxo PLC
Soaring costs of biotech and genetic research tools
Shares are underrepresented in the US
Listed as ADRs on the NYSE
 CULTURAL CLASH

Sandoz

Was autocratic and hierarchical

Operated most functions at the business segment level
Measured performance by EBIT and return on sales
Ciba

Was collective and informal

Matrix organization
Measured performance by division contribution
Novartis

Used Sandozs organizational system

Measured performance by EBIT and return on net assets
 STRATEGIES

Sold off non-core business units

Boosted R&D spending
Sharpened marketing in the US
Increased sales force and advertising
US sales jumped to 43% of revenues
Made strategic acquisitions such as Pfizers drug Enablex,
beating out GlaxoSmithKline

CEO Daniel L. Vasella

 WILL NOVARTIS BUY ROCHE?

Bought a 20% share in May 2001

Now owns 32.7%
Would mean $45 billion in sales and 7% market share
Roche is opposed to any such merger
Remains to be seen how aggressive Novartis CEO
Daniel L. Vasella will be.
 NOVARTIS ADR FINANCIAL PERFORMANCE
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