Mylan Laboratories desires to purchase King Pharmaceutical to exploit synergies. Shareholders have reacted to the proposal with ambivalence, and the decision of Mylan Laboratories on whether to proceed or not with the merger is uncertain.
Lucy White and Matt Kozlowski
Harvard Business Review (214078-PDF-ENG)
February 04, 2014
Case questions answered:
- Does this deal create value? Is this a good deal for Mylan Laboratories? For King Pharmaceutical?
- Shareholders in both Mylan Laboratories and King Pharmaceutical must vote in favor of the merger for it to go ahead. What does the reaction of the firms’ stock prices to the announcement of the merger suggest about how each group should vote?
- Use the information contained in market prices to form an assessment of the likelihood of the merger being consummated.
- What is Perry Capital trying to achieve and why? Consider the various ways in which they could structure their trade in order to achieve this end. Should the SEC aim to prevent future similar trades, and if so, how?
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Mylan Laboratories' Proposed Merger with King Pharmaceutical Case Answers
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Mylan Laboratories’ Proposed Merger with King Pharmaceutical
This report analyzes Mylan Laboratories’ proposed merger with King Pharmaceutical to revitalize Mylan’s struggling business. Mylan Laboratories desires to purchase King to exploit synergies.
Shareholders have reacted to the proposal with ambivalence, and Mylan’s decision on whether to proceed or not with the merger is uncertain. Finally, we will see how Mylan can take advantage of the escape clause triggered by King’s financial restatements and possibly exit the merger deal.
A primary characteristic of a successful merger deal is value creation. Mylan Laboratories supports the merger primarily based on the synergies, estimated to be around $100 mil. However, a DCF valuation and a multiples valuation analysis show that the deal is no more attractive for Mylan’s shareholders if the entirety of the synergies is not effective.
Indeed, by implementing the news regarding the earnings restatements, the current price offer of $16.659 is overstated. In fact, the price of $13.44 would be more appropriate (Exhibit 1).
Nonetheless, we have to keep in mind the potential cost-reducing synergies by acquiring King Pharmaceutical’s activities and its valuable sales force. If the $100 Mio synergies stated by Robert J. Coury are genuine, then the merger could become beneficial as King’s share price increases to $17.39 (Exhibit 1).
However, we have to keep in mind that around 70% of buying firms in the M&A process overestimated savings made by such a process. This is why we added 50% successful synergies in our analysis. As a milestone, we estimated synergies to be at least 81% effective to make the deal interesting for the buy-side (Exhibit 3).
In the case of full synergies, the creation value for Mylan Laboratories’ shareholders is around $201.4 Mio. At the same time, a loss of $336.76 and $874.92 Mio is incurred if the synergies are effective at 50% and 0%, respectively.
Due to the uncertainty about the synergies and the possible losses that shareholders could face, we advise Mylan not to accept the deal proposal.
As shown in Exhibit 2, these results are taken with less consideration in our analysis regarding the multiples valuation. In fact, the SEC investigation and earnings restatement affecting King’s accounting have not been included in the financial statements yet.
Hence, the Mylan Laboratories board could possibly…
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