This case study "Roche's Acquisition of Genentech" focuses on the challenge faced by the CEO of the Roche Group. He is thinking of going with a hostile tender offer for the publicly-owned shares of Genentech, Roche's biotechnology subsidiary. This case study allows students to look into strategies of Roche in relation to Genentech and the complexity of a hostile tender offer.
Carliss Y. Baldwin; Bo Becker; Vincent Dessain
Harvard Business Review (210040-PDF-ENG)
February 26, 2010
Case questions answered:
- What are the business and financing risks associated with Roche’s acquisition of Genentech? Is this a good time to do the deal?
- Do you believe the bond issuance will have an impact on Roche’s bond rating?
- What are the prevailing spreads for non-Roche bonds? Do you think these spreads are similar to investors required to yield for the Roche bonds?
- What is your specific recommendation for the coupon rate for the Roche 5-year, 10-year, and 30-year U.S. dollar bonds?
- What would your coupon rate recommendation be for the 7-year bond in euros?
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Roche's Acquisition of Genentech Case Answers
This case solution includes an Excel file with calculations.
1. What are the business and financing risks associated with Roche’s acquisition of Genentech? Is this a good time to do the deal?
There are several business and financing risks associated with Roche’s acquisition of Genentech.
With intense declines in equity and credit markets by over 45%, getting loans or credits from banks got really difficult. A lot of commercial banks have gone bankrupt, and since the global market entered into one of the worst global depressions ever, getting finance was really hard.
In a way to improve the economy, multiple governments lowered their interest rate and invested in financial and industrial institutions in an effort to stimulate liquidity, making the market invest in long-term securities raising the price of long-term bonds.
The company may face a downgrade credit rating as they continue to increase their debt, leading to higher interest payments and this could affect the deal. A business risk could be Genentech’s willingness to sell shares for the reduced offer.
2. Do you believe the bond issuance will have an impact on Roche’s bond rating? Exhibit 12
Yes, since Roche’s bond rating is determined by its financial strength, emitting new debt will raise the interest and debt expense making the rating go down from the actual AA to A.
In Exhibit 12, at the acquisition of Genentech, we can observe the increase in the total debt, the interest expense reducing the liquidity in the company, and its leverage to debt.
It will have a not greater effect on the bonds, but after the merge of the companies, it will recover and get better at pricing bonds and stocks.
3. What are the prevailing spreads for non-Roche bonds? Do you think these spreads are similar to investors required to yield for the Roche bonds? Exhibit 11
The prevailing spreads for non-Roche bonds…
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