ROCHE HOLDING AG:THE GENENTECH ACQUISITION

A CASE STUDY

Amara fatima MS(1601) strategic finance amarafatima199@gmail.com THE ISLAMIA UNIVERSITY OF

BAHAWALPUR pakistan

ROCHE HOLDING AG:THE GENENTECH ACQUISITION

Swiss pharmaceutical company Roche Holding AG made an offer to acquire all remaining outstanding shares of US Biotechnology leader Genentech for (us dollar)USD89.00 per share in cash.

After 6 month equity market down 35% then Roche announced its recommitment to deal with a discount offer of USD 86.50 in cash per share of Genentech stock.

Collection criteria for funding To pay for the deal Roche needed a massive (in bulk) USD 42

billion in cash . To meet the need management planned to sell USD 32billion

in bonds at various maturities from 1 year to 30 years in three different currencies (US DOLLAR ,EURO AND BRITISH POUND)

The sale would begin with the Dollar-Denominated offering.

ROCHE IN 1894 Swiss bankers fritz hoffman –ls Roche,at the age of 26,joined

Max carl traub to take over a factory . Company’s primary product company primary products were

I. Sleeping agents II. AntisepticsIII. Vitamins Company had already expanded to 35 countries In 1990 company known as Roche acquired a majority of stake in Genentech

a South San Francisco biotechnology company for USD 2.1 Billion Since 1990 Roche had maintained focus on its two primary business

units

Cont’d1. Pharmaceuticals 2. Medicals diagnostics End of 2008Roche’s total revenue was just 50 billion. Roche was one of the

leading pharmaceutical company in the world.Genentech Genentech a South San Francisco biotechnology company

research primary focused on developing products based on Gene splicing or recombinant DNA to treat disease such as cancer and AIDS

Benefit for ROCHE for acquisition Roche have a great benefit in holding the company because of its

biologics market as well as stronger presence in the US market.

Market condition

Before 2007 the financial market was very well. but Since October 2007 world equity market had been dramatic declined over

45% Equity market and credit market had been declined.

In result 1. large no of investment& commercial banks had failed .2. Sharp increase in unemployment rates 3. Large decline in overall economics activities4. There was a great depression in the marketIn response Govt made massive investment in financial and industrial institutionsFor stimulate the liquidity central banks reduced the interest rates Due uncertainty in market global investors use ‘flight to quality’ move their capital to

Govt securities such as US treasuries .“Flight to quality” means action of investors moving their capital away from the

riskier investment to safest possible investment. this flight usually caused by the uncertainty in financial market.

cont’d Benchmark yield was declined but borrowing rates were

highBenchmark mean“ standard by which something can be judge or measured “ Credit spread (corporate yield- benchmark yield) were

expand to historic level.But despite the uncertainty in the credit market Pizafer

(pharma)had recently agree to acquire wyeth.5 banks are agree to give payment for the deal.

The bond offering process

Because of the complexity of market and price corporation typically hired investment bankers to provide assistance .

According to the size of deal Roche hired 7 type of banks for 3 different currencies deals.

Roche would publically traded their bonds. It was decided that Roche should a mix of bonds at

different maturities and in different currencies . By matching the cash flows of these currencies Roche was

able to reduced the exchange rate risk Coupon was to be set according to the anticipated

yield .and bonds would be issued at par.

Cont’d Payment The coupon payment of the shorter duration were to be

floating and interest to be paid was equal to the LIBOR plus credit spread.

Longer duration were to have fixed coupon payment for the duration of the bond.

In case of Roche if investor demand showed strong demand on four year euro tranches Roche could issued more at that price or lower the coupon and pay lower interest payment

The Genentech Deal

July 21,2008 Roche publically announced an offer to acquire the 44.1% of Genentech’s shares that he did not acquire already own.

Offer price USD 89.00 represented 19% premium over the last month price

Genentech BOD’S stated that the Roche undervalued the company

Tender offer Fall in capital market Genentech awaited for the clinical results On january 30, 2009, roche launched the tender offer Share holder accept the offer

The financial proposal Roche could not issue equity to Genentech shareholders Company maintain two type of share

1. Bearer share 2. Profit participation share Both share have equal rightsTraded on Swiss stock exchange

CASE QUESTION 1. What are the business and financing risks associated

with the acquisition of Genentech?Answer:There had been decline in equity and credit market ,

Roche need an amount of 42 billion in bulk in cash and planned to sell 32 billion bonds. The ongoing turmoil in the world financial market would increase the complexity of the risk

Another business risk associated with merger and acquisition is Genentech’s willingness to sell shares for the reduced offer.

Roche was in the process of planning how to fund the acquisition but all of their planning would be fruitless if Genentech refuse to accept the offer.

A financial risk is also associated due to the financial market is reluctant to interest rate, central banks had lowered interest rate and the massive “flight to quality” of global investors moving capital to Govt securities overall borrowing are rising and credit spread were expand to historic level.

So none of these reason would effect

Cont’d2.Is this a good time to do the deal?Answer:This is not a good time for deal because of current market

condition as mentioned in the case, over the past 18 month there ha been a dramatic decline in equity and credit market

The world equity market prices had declined over 45% and both commercial and investment banks are failing

And the market uncertainty was accomplish by the “flight to quality” so all of these points would negatively effect the ROCHE deal.

Cont’d3. Do you believe the bond issuance will have an

impact on Roche’s bond rating?Answer :Yes bond issuance will have an impact on Roche’s bond rating

because it is determined by the issuers financial strength or its ability to pay bon’s principal and interest in time at maturity

Exibit 12 shows that ROCHE ‘S debt and interest expense will both increase with the acquiring Genentech. the rating of bond will go down because it would be assumed that Roche needs more time to pay the principal and interest and have not the capacity to meet its financial commitment.

Cont’d4.What are the prevailing spreads for non-Roche

bonds? Do you think these spreads are similar to investor’s required yield for the Roche bonds?

Answer: The prevailing spreads for the non-Roche bonds are shown in

Exibit 6The investors required yield is the return that a bond must

offer in order to be worth the investment.The yield spread is the difference b/w yields on different debt

instruments.And these spread should be similar to the investor’s required

yield for roche bonds because the yield spread can give idea to investors that how much they should request for the required yield.

cont’d5.What is your specific recommendation for the coupon rate

for the Roche 5-year, 10-year, and 30-year U.S. dollar bonds?

Answer:The coupon rate is the amount of interest paid per year based on

the face value of the bond ,the coupon rate is used to compute the payment amount of the bond, when using basis point plus fed fund rate then the coupon rate would be for 5,10 and 30 year are as follow. Roche rating is AA and A+bond basic point

Year Fed fund rate

Basic point Coupon rate

5 .25 202/100=2.02

2.02+.25=2.27

10 .25 204/100=2.04

2.04+.25=2.29

30 .25 242/100=2.42

2.42+.25=2.67

CONT’D ROCHE WITH A+ bond rating Year Federal fund

rateBasic point Coupon rate

5 .25 226/100=2.26 2.26+.25=2.51

10 .25 226/100=2.26 2.26+.25=2.51

30 .25 242/100=2.42 2.42+.25=2.67

Cont’d So Higher coupon rate better bond return

and lower maturity is better than higher maturity.

Cont’d6. What would your coupon rate recommendation be

for the 7-year bond in euro?Answer: At that time 1 Euro was equal to 1.18 USD So coupon rate for 7 year would be this 224 basis point in USD 224 /1.18=189.83SO COUPON RATE is 189.83/100 par value = 1.8983

CONT’D 7.What is going on at Roche?Answer: According this case Roche is the leading

pharmaceutical in world and already expanded in 35 countries and now he wants to acquire the research expert GENENTECH CO. in full to capture the pharmaceutical market of the world, but there is dramatic decline in world market which create hurdle in its mission.

Cont’d8.Is this an easy time to be going to the public bond

market with a massive offering?Answer: according the this case and all previous discussion

on the credit and equity market condition this is not an easy time to be going to the public bond market with massive offering

Because there is more risk and investor are reluctant to invest in this market condition

And there is no surety for the success in acquisition because of fluctuation in market.

Cont’d9.How do we assess the impact of the bond offering

on Roche’s credit rating and default risk?Answer: we assess the bond offering on credit rating by

analyze the return on bond and its maturity time, if maturity is short term and return is according to investors

requirement the and roche in time then the credit rating would be stable or high

Cont’d How do we estimate the risk premium associated

with the estimated default risk? Answer: FORMULA = R =Rf +Rp

2 .5 =3.59- Rp 2 .5 -3 .59=Rp -1 .09=RpR =Estimated expected return on your given stockRf = risk free rate Rp= risk premium

THANKS FOR CONCERNTRATION