Day 120 in MIT Sloan Fellows Class 2023, M&A and PE 5 "Squeeze out"
Roche and Genentech case
Franz Humer, CEO of the Roche Group, must decide whether to mount a hostile tender offer for the publicly-owned shares of Roche's biotechnology subsidiary, Genentech. The case provides opportunities to analyze Roche's strategy with respect to Genentech, the pros and cons of merging the two companies with different cultures, the value of Genentech, and the tactics of a hostile tender offer.
Why? Why now? Why on the other side?
Roche already owned a majority of the shares of Genentech. Why they want to acquire Genentech 100%?
Why Roche need Genentech?
- cost saving and overlaps: There are some synergies in primarily manufacturing, G&A, clinical trials etc.
- Integrate R&D effort: IP conflicts because of minority share
- Genentech cash: Roche prefers to redeploy excess cash
- Competition between Roche and Genentech: Genentech has grown into a full-fledged pharma.
Why now?
- Drug licensing & marketing agreement - avoid 2015 rebid
- Share price after financial crisis
- Avastin clinical trial
Why? What are potential concerns from the Genentech side?
- Independence: culture and management need to be independent. There are some risk of losing critical people if acquisition is hostile.
Situations and available options
Two companies provide totally different valuation and Genentech denied an offer from Roche because of low price.
From Roche's perspective, there are some ways to move forward.
- Raise the buying price to the required one from Genentech. Negotiate with an independent committee.
- Go with a tender offer and negotiate with shareholders directly
- Wait and see how Avastin clinical trial goes
Four primary challenges
When Roche compares three potential options, it needs to consider the following points.
- The legal challenge: squeeze-out does not need to give Genentech an alternative offer.
- The emotional challenge: In the past relationship, Genentech has complex feelings about Roche. Especially what happened in 1999. (1 month 100% share holding)
Roche Exercises Its Option For All Genentech Shares - The New York Times
- The negotiating challenge: Difference in valuation. An average squeeze-out premium would be good to consider.
- The financing challenge: Roche does not have enough cash to acquire Genentech. And tender offer is more complicated because the price has not been fixed, and Roche can execute bridge financing only after the merger.
Consequence
Roche went to a tender offer, but it purchased shares much higher than the first offer. (lower than a request from Genentech committee)
The price was ultimately increased to $95 a share, with Roche agreeing on March 12, 2009, to acquire the remaining portion of Genentech for $46.8 billion.
