UV5641 Rev. Oct. 5, 2012 This case, based on publicly available data, was prepared by Brett Durick (MBA ’11), Drew Chambers (MBA ’11), and Michael J. Schill, Robert F. Vandell Research Associate Professor of Business Administration. This case is dedicated to Courtney Turner Chambers, in recognition of the sacrifice and contribution of all Darden partners. Copyright ¤ 2011 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to XXXXXXXXXX. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ROCHE HOLDING AG: FUNDING THE GENENTECH ACQUISITION We are confident that we will have the financing available when the money is needed...The plan is to use as financing partly our own funds and then obviously bonds and then commercial paper and traditional bank financing. We will start by going to the bond market first.1—Roche Chairman Franz Hume In July 2008, Swiss pharmaceutical company Roche Holding AG (Roche) made an offer to acquire all remaining outstanding shares of U.S. biotechnology leader Genentech for (U.S. dollars) USD89.00 per share in cash. Six months later, with equity markets down 35%, Roche announced its recommitment to the deal with a discounted offer of USD86.50 in cash per share of Genentech stock. To pay for the deal, Roche needed a massive USD42 billion in cash. To meet the need, management planned to sell USD32 billion in bonds at various maturities from 1 year to 30 years and in three different currencies (U.S. dollar, euro, and British pound). The sale would begin with the dollar-denominated offering and followed up soon after with rounds of offerings in the other currencies. In mid-February 2009, Roche was ready to move forward with what was anticipated to be the largest bond offering in history. With considerable ongoing turmoil in world financial markets and substantial uncertainty surrounding the willingness of Genentech minority shareholders to sell their shares for the reduced offer of USD86.50, Roche’s financing strategy was certainly bold. 1 Sam Cage, “Roche Goes Hostile, Cuts Genentech Bid to $42 Billion,” Reuters, January 30, 2009. For the exclusive use of H. ALMEERThis document is authorized for use only by hamad almeer in Financial Management taught by Jeff Harris from August 2013 to December 2013.
-2- UV5641 Roche In 1894, Swiss banker Fritz Hoffmann-La Roche, 26, joined Max Carl Traub to take over a small factory on Basel’s Grenzacherstrasse from druggists Bohny, Hollinger & Co. Following a difficult first two years, Hoffmann-La Roche bought out his partner and entered F. Hoffmann-La Roche & Co. in the commercial register. In the early years, the company’s primary products included sleeping agents, antiseptics, and vitamins; by the late 1930s, the company had already expanded to 35 countries, an expansion that continued in the decades following the Second World War. In 1990, the company, by then known as Roche, acquired a majority stake in Genentech, a South San Francisco biotechnology company, for USD2.1 billion. Genentech’s research focused primarily on developing products based on gene splicing or recombinant DNA to treat diseases such as cancer and AIDS. The acquisition gave Roche a strong foothold in the emerging biologics market as well as stronger presence in the U.S. market. Since the 1990s, Roche had maintained focus 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. In 2008, Roche expanded its diagnostics business with the acquisition of Ventana Medical Systems for USD3.4 billion. By the end of 2008, Roche’s total revenue was just shy of (Swiss francs) CHF50 billion. The pharmaceutical division contributed 70% of the total Roche revenue and over 90% of the operating profit. Roche was clearly one of the leading pharmaceuticals in the world. Exhibit 1provides a revenue breakdown of Roche’s 2008 revenue by geography and therapeutic area, as well as a detailed overview of Roche’s top selling pharmaceutical products. Roche and Genentech’s financial statements are detailed in Exhibit 2 and 3, respectively, and the stock performance of the two companies is shown in Exhibit 4. Market Conditions The past 18 months had been historic for global financial markets, with dramatic declines in equity and credit markets. Since October 2007, world equity market prices had declined over 45%. Large numbers of commercial and investment banks had failed. The global labor market was shedding jobs, resulting in sharp increases in unemployment rates. Broad economic activity was also affected, with large declines in overall economic activity.In response to what some feared would become the next Great Depression, world governments made massive investments in financial and industrial institutions. In an effort to stimulate liquidity, central banks had lowered interest rates. The market uncertainty was accompanied by a massive “flight to quality” as global investors moved capital to government securities (particularly U.S. Treasuries), thereby driving government yields to historic lows. Exhibit 5 shows the prevailing yield curve in U.S. dollars, euros, and British pounds. With For the exclusive use of H. ALMEERThis document is authorized for use only by hamad almeer in Financial Management taught by Jeff Harris from August 2013 to December 2013.