SEMINAR IN FINANCE (TASK 2)

By:
Alti Asri Ladiba Disan 00000004347
Carrina Chittra 00000002182
Ignatius Mario 1305000977
Irka Dewi Tanemaru 00000000670
Iswandi 1305000510
Nikolas Sulistio 1305002790

FACULTY OF BUSINESS AND ECONOMIC

UNIVERSITAS PELITA HARAPAN

KARAWACI

2017
 Roche Holding Ag: Funding The Genentech Acquisition

Background
In July 2008, Swiss pharmaceutical company Roche Holding AG (Roche) made an offet to acquire
all remaining outstanding shares of U.S. biotechnology leader Genentech for USD89 per share in cash but
six months later, equity markets down 35% so the offer became USD86.5 per share. To pay the dealoo,
Roche needed USD42 billion in cash, so the management planned to sell USD32 billion in bonds at
various maturities from 1 year to 30 years in different currencies because it can not fully available through
bank debt.

In mid-February 2009, Roche was ready to move forward with what was aticipated to be the
largest bond offering in history. With considerable ongoing turmoil in worl financial markets and
substantial uncertainty surrounding the willingness of Genentech minority shareholders to actually sell
their shares for the reduced offer USD86.5, Roches financing strategy was certainly bold.

Roche
In 1894, Swis banker Fritz Hoffmann-La Roche, joined Max Carl Traub to take over a small
factory on Basels Grenzacherstrasse from druggists Bohny, Hollinger & Co. The first two years,
Hoffmann-La Roche bought out his partner and ebtered F. Hoffmann-La Roche & Co. in the commercial
register and in the early years, the primary products included sleeping agents, antiseptics, and vitamins. In
1930, the company had already expanded to 35 countries and continued in the decades following the
Second World War.

In 1990, the company known as Roche, acquired a majority stake in Genentech for USD2.1
billion. Genentechs research focused primarily on developing products based on gene splicing or
recombinant DNA to treat diseases such as cancer and AIDS. The acquisition gave Reoche a strong
foothold in the emerging biologics markets. Since then, Roche maintained focues on its two primary
business units, pharmaceuticals and medical diagnostics. In 2004, Roche sold its over-the-counter
consumer health business to Bayer AG for nearly USD3 billion and in 2008, Roche expanded its
diagnostics business with the acquisition of Ventana Medical Systems for USD3.4 billion. By the end of of
2008, Roches total revenue was just shy of CHF50 billion, its contributed 70% from pharmaceutical and
over 90% of operating profit.
Market Condition
Since October 2007, world equity market prices had declined over 45%, and many of commercial
and investment banks had failed. Broad economic activity was also affected. With large declines in overall
economic activity and the global labor market was shedding hobs, resulting in sharp increases in
unemployment rates. In response of it, world goverments made massive investments in financial,
industrial institutions and also central banks lower the interest rates in effort to stimulate liquidity.
Because of it, the market was uncertainty and accompanied with a massive flight to quality as global
investors moved capital to U.S. Treasury Securities, thereby driving down U.S. benchmark yields to
historic lows.

Despite of the uncertainty in the credit markets, corporate transactions were reawakening in the
pharmaceutical industry. Pfizer had recently agreed to acquire Wyeth for USD68 billion. To pay the deal,
Pfizer lend USD22.5 billion from five banks and the remaining USD45.5 billion through issuance of a
combination of cash and stock.

The Bond offering process

Roche hired three banks as joint lead manager for the U.S. dollar deal (banc of America Securities,
Citigroup Global Markets, and JPMorgan) and four bankers for the euro and pound sterling deals
(Barclays Capital, BNP Paribas, Deutsche Bank, and Banco Santander). Because Roches bonds would be
publicly traded, it had to file with the appropriate regulatory agencies in the countries where the bonds
would be issued. Simultaneous with the drafting of the documentation by legal teams, the underwriting
banks debt capital markets and syndication desks began the marketing profcess.

The initial phase of this process was the road show. During road show, the management teams
for Roche and the banks held initial meeting with investors from all over the world. During the road show,
banks received feedback from investors on the demand for each tranche. Determining the final size and
pricing of each issue was an iterative process between the investors, banks, and issuer.

The best option for Roche was a mix of a bonds at different maturities and currencies. Roche can
reduce exchange interest rate by matching differing maturities and currencies to the companys operating
cash flows in those currencies. To ensure that the bond offering raised the targeted proceeds, the coupon
rate was set to approximate the anticipated yield. Following market conventions, the U.S. dolar bonds
would pay interest semiannually and the euro and sterling issues would pay interest annually.In the case of
Roche, if the investors showed strong demand for the four-year euro tranche, Roche could decide to either
issue more at that price or lower the coupon and pay a lower interest rate on the four-year euro issue.
The Genentech Deal
On July 21, 2008, Roche publicly announced an offer to acquire the 53.9% of Generentechs
outstanding shares. The offer price of USD89 represented a 19% premium over the previous one-month
share prices for Genentech. Roche management believed that economies justified the premium with an
estimate that, following the transaction, the cmbined entity could realize USD750 million to USD850
million in operational efficiencies. Following the offer, Genentechs stock price shot up beyond the
USD89 offer price with the anticipation that Roche would increase its offer.

On August 13, 2008, a special committee of Genentechs board of directors respodned to Roches
offer and stated that the offer substantially undervalues the company. Without the support of
Genentechs board of directors, Roche needed either to negotiate with the board or take the offer directly
to shareholders. If sufficient shareholders tendered their shares, the deal would go through regardless of
the support of the board. Over the six month, the capital markets fell into disarray, credit markets
deteriorated, Genentech shareholders realized that Roche might not be able to finance an increased bid for
the company and the share price continued to decline through the end of the year.

On January 30, 2009, Roche announced its intention to launch a tender offer for the remaining
shares at a reduced price of USD86.5. The revised offer was contingent on Roches ability to obtain
sufficient financing to purchase the shares. The announcement was accompanied by a 4% price drop of
Genentechs share price to USD80.82. Genentech was awaiting the announcement of the clinical trial
results for several of its next generation of potential drugs, including its promising cancer drug Avastin.
The analyst of Leerink Swann, Bill Tanner, warned Genentech shareholders that the stock was overvalued
and that if upcoming Genentech drug trials showed mediocore results then the stock would fall into the
USD60 range and he encourage the shareholders to take the sure USD86.5. But the analyst of Zachs
Investment Research, Jason Napadano, dont know why Genentech would tender their shares for
USD86.5, which is only 10% above todays price, when they can get closer to USD95 to USD100 if they
wait.

The Financing Proposal

Given of the ownership structure, Roche was forced to finance the deal entirely of debt and current
cash on hand because the company controlled by Oeri, Hoffman, and sacher families and it maintained
two classes of shares, bearer and profit-participation shares. Both share classes had equal economic rights
and traded in the Swiss Stock Exchange, but the bearer shares were the only shares with voting rights and
the founding family controlled over 50% of it. In the event Roche were to issue equity to Genentech
shareholders, this dual-class share structure owuld have to revisited, and the family might lose control.
 When Roche originally announced the transaction, the company had intended to finance the
acquisition with a combination of bonds and loans from a variety of commercial banks but the collapse of
financial markets caused many of them demand a much bigger of interest rate on the loan. As the result,
Roche was limited to the bond market for the majority of its financing. Despite the magnitude of the debt-
financing need, the investment banks assisting in the deal expected that Roches cash flow was stable
enough to manage the additional level of debt.

To ensure that Roche raised the necessary capital, it was important to correctly anticipate the
required yield on each bond and set the coupon rate at the rate that would price the bond at par. This was
done by simply setting the coupon rate equal to the anticipated rate. It was critical that Roche correctly set
the price, despite the immense uncertainty in capital markets.

Questions
1. What are the business and financing risks associated with the acquisition of Genentech? Is this a
good time to do the deal?

Genentech is a biotechnology company that researches primarily on developing products such

as treatment of cancer and AIDS. Roche are looking forward to acquire this company since its benefit
for holding stronger presence in the US market and make it a leading company in term of biologics
market.

Meanwhile Roche is considering having an acquisition of Genentech, we have a report of the

market condition back then. There had been decline in equity and the credit market. Roche need
around $42 billion in bulk in cash and planning to sell $32 billion worth of bonds. As we all know, the
ongoing turmoil in the world financial market will increase the complexity of the risk. Another risk
mentioned is the Genentechs willingness to sell shares for the reduced offer. Genentechs willingness
to sell the shares on reduced offer raised another problem. Another financial risk is also associated to
the financial market, which is reluctant to interest rate. Central banks have had decided to lower the
interest rate and the massive flight to quality of global investors moving capital to government
securities. We assume that the economic recession generates lower trust level. Which leads to the
changing of risk averse level, the risk takers will tend to become risk averse, means the market will
tend to have government bonds rather than riskier corporate bonds. This condition causes the Roches
effort to sell bonds are significantly more complicated.

This is not the best time for the deal, since the current market condition over the past 18
months have been in a dramatic decline in equity and credit market. We could clearly see that the
 world equity market price had declined over 45%, and followed by the falling of commercial and
investment banks. We could conclude that the market uncertainty was accomplished by the flight to
quality, which would negatively effect the Roches deal.

2. Do you believe the bond issuance will have an impact on Roches bond rating?

3. What are the prevailing spreads for non-Roche bonds? Do you think these spreads are similar to
investors required yield for the Roche bonds?

First we have to define what are the non-Roche bonds. From Exhibit 11 we can see that the
non-Roche bonds are:

Company S&P rating

U.S. dollar-denominated

Altria BBB

AT&T A

Johnson & Johnson AAA

McKesson BBB+

Novartis AA

Pfizer AA

Schering-Plough AA

Verizon A

Warner Chilcott BB

Euro-denominated

Anheuser-Busch InBev BBB+

Imperial Tobacco BBB

John Deere A

Schering-Plough AA

Volkswagen A

Pound sterling-denominated
 Bayer AG A

Imperial Tobacco BBB

Tesco A

Graph 1. Spreads for non-Roche Bonds

600
AAA
500
A
400 AA-
BBB+
300
BBB
200 BB-

100

0
0 5 10 15 20 25 30 35

From Exhibit 12, we can get the information that Roche a AA- company. So we can see the
spreads for AA- companies from Graph 1. The non-Roche bonds are not similar to investors required
yield for the Roche bonds. Of course the reason is because there are so many variation in the ratings of
non-Roche bonds.

4. What is your specific recommendation for the coupon rate for the Roche 5-year, 10-year, and 30-
year U.S. dollar bonds?

The coupon rate is the interest rate paid on a bond by its issuer for the term of the security.
Coupon rates changes will be affected by basis points and fed fund rate. The coupon rate is the amount
of interest that the issuers paid per year to the bondholders based on the face value of the bond. When
using a basis point and the Fed fund rate, we calculate coupon rate

Coupon rate = Basis point + Fed fund rate

As we know that the bonds rating for Roche is AA in S&P 500 and Aa1 in Moody's rating. We
will calculate the coupon rate for 5,10, and 30 years for AA and A+ rating.

Coupon rate calculation for AA rating

Year Fed Fund Rate Ba s i s P oi n t s C o u p o n r a t e

5 0 . 2 5 202/100= 2.02 2 . 0 2 + 0 . 2 5 = 2 . 2 7
 1 0 0 . 2 5 204/100= 2.04 2 . 0 4 + 0 . 2 5 = 2 . 2 9

3 0 0 . 2 5 242/100= 2.42 2 . 4 2 + 0 . 2 5 = 2 . 6 7

Coupon rate calculation for A+ rating

Year Fed Fund Rate Basis Points Coupon rate

5 0 . 2 5 226/100= 2.26 2.26+0.25= 2.51

1 0 0 . 2 5 226/100= 2.26 2.26+0.25= 2.51

3 0 0 . 2 5 242/100= 2.42 2.42+0.25= 2.67

As we can see for AA and A+ the coupon rate is always increasing. And we can say that Roche is a
good company in bonds because of the rating. AA rating is said that the company is in a good or secure
position. So the higher coupon rate makes better return and lower maturity is better than higher maturity.
Because we can see that there is no big difference between 5 years or 10 years. So I recommend to pick
the lower maturity than the higher maturity.

5. What would your coupon rate recommendation be for the 7-year bond in euro?

Analysis & Recommendation