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

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.

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 .

ROCHE

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

I.
II.
III.
.

company primary products were

Sleeping agents
Antiseptics
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

Contd
1.
2.

Pharmaceuticals
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.

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 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.

contd
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.

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.

Contd

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 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

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 rights
Traded on Swiss stock exchange

CASE QUESTION
What are the business and financing risks associated
with the acquisition of Genentech?
Answer:

1.

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

Contd
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.

Contd
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.

Contd
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.

contd
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

.25

202/100=2.0
2

2.02+.25=2.
27

10

.25

204/100=2.0
4

2.04+.25=2.
29

30

.25

242/100=2.4
2

2.42+.25=2.
67

CONTD

ROCHE WITH A+ bond rating

Year

Federal fund
rate

Basic point

Coupon rate

.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

Contd

So Higher coupon rate better bond return

and lower maturity is better than higher
maturity.

Contd
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

CONTD
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.

Contd
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.

Contd
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

Contd
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

THANKS FOR CONCERNTRATION