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A CASE STUDY

Amara fatima
MS(1601)
strategic finance
amarafatima199@gmail.com
THE ISLAMIA UNIVERSITY OF
BAHAWALPUR pakistan
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.
IN 1894
Swiss bankers fritz hoffman ls Roche,at the age of 26,joined Max carl
traub to take over a factory .
Companys primary product
company primary products were
I. Sleeping agents
II. Antiseptics
III. 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
1. Pharmaceuticals
2. Medicals diagnostics
End of 2008
Roches 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.
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 activities
4. There was a great depression in the market
In response
Govt made massive investment in financial and industrial institutions
For 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.
Benchmark yield was declined but borrowing rates were high
Benchmark 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.
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.
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
July 21,2008 Roche publically announced an offer to
acquire the 44.1% of Genentechs shares that he did not acquire
already own.
Offer price USD 89.00 represented 19% premium over the last
month price
Genentech BODS 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
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 rights
Traded on Swiss stock exchange
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
Genentechs 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
2.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.
3. Do you believe the bond issuance will have an impact
on Roches bond rating?
Answer :
Yes bond issuance will have an impact on Roches bond rating
because it is determined by the issuers financial strength or its
ability to pay bons 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.
4.What are the prevailing spreads for non-Roche bonds? Do you
think these spreads are similar to investors required yield for
the Roche bonds?
Answer:
The prevailing spreads for the non-Roche bonds are shown in Exibit 6
The 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 investors required yield for
roche bonds because the yield spread can give idea to investors
that how much they should request for the required yield.
5.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
ROCHE WITH A+ bond rating
Year Federal fund rate Basic 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


So Higher coupon rate better bond return and
lower maturity is better than higher maturity.
6. 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=189.83
SO COUPON RATE is
189.83/100 par value = 1.8983
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.
8.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.
9.How do we assess the impact of the bond offering on
Roches 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
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=Rp
R = Estimated expected return on your given stock
Rf = risk free rate
Rp= risk premium