ACQUISITION CASE OF

NOVARTIS BY GLAXO SMITH

KLINE

SUBMITTED BYABHISHT NARAIN SINHA (ETU20141761)

AKASHDEEP GOEL (ETU20141779)
ARSHDEEP SINGH ARORA (ETU20141775)
ROHIT MADHOK (ETU20141765)
UNNATI SARASWAT (ETU20141757)

ABOUT THE TARGET: GLAXOSMITHKLINE

GlaxoSmithKline commonly called GSK is a leading pharmaceutical company

headquartered in Brantford, London. By 2014 it was the 3rd largest pharmaceutical
company in the world by revenues. GSK is a publically traded company with stocks
registered on London stock exchange and New York stock exchange. GSK has a
significant global commercial presence in more than 150 markets, a network of 86
manufacturing sites in 36 countries and large R&D centers in the UK, USA, Spain,
Belgium and China. GSK decided to merge with Novartis in the financial year
beginning 2015. Let us analyze the performance of GSK before the merger took place.
GSK seems to have a strong financial position as of December 2014. Its financially
very strong and has shown a tremendous growth in past because:

The world health organization as well as local governments in every country

provides patents to the companies working in pharmaceutical sector and
because of its high investments in R&D it has a lot of patents under its
umbrella.

The kind of medicines that GSK makes are not easily available in other brands
and due to low competition their sales have shown increase over past few
years. The turnover for the year 2013 was about $26,505 million. The
turnover by region can be seen in the below diagram.

Source-annual report GSK 2013.

The above diagram shows that USA is the biggest market for GSK products.

The net worth of GSK as of May 2014 as per Forbes magazine was $128.8
billion. The stock price at the time of deal was about $43 per share as on New York
Stock Exchange. Currently the stock price is about $48 per share.
GlaxoSmithKline PLC's Dividend per share for the three months ended in Dec. 2014
was $0.60.
In 2013, GlaxoSmithKline PLC's average Dividends per Share Growth Rate was 3.70% per year.
During the past 3 years, the average Dividends per Share Growth Rate was 1.90% per
year.
During the past 5 years, the average Dividends per Share Growth Rate was 6.70% per

year.
During the past 10 years, the average Dividends per Share Growth Rate was 7.70%
per year.
During the past 13 years, the highest 3-Year average Dividends per Share Growth
Rate of GlaxoSmithKline PLC was 20.80% per year.

The turnover of GSK was about $26,505 million in 2013, whereas the turnover
for 2014 was $23,006. The decline in the net turnover also reduced the net profit in
2014 to $4,806 from $5,628 in 2013. The declining turnover which led to low
operating and low net profit also led to decline in the EPS for 2014. This was an
alarming situation for the management of GSK, hence they decided to merge with
Novartis to improve the product range and increase efficiency in their operations.

ABOUT THE ACQUIRER: NOVARTIS

Novartis is a global leader in innovative pharmaceuticals, vaccines and consumer

health products. Novartis was created in 1996 through the merger of Ciba-Geigy and
Sandoz, two companies with a rich and diverse corporate history. Throughout the
years, Novartis and its predecessor companies have discovered and developed many
innovative products for patients and consumers worldwide. Novartis has been the
industry leader as per Forbes magazine 2013. Novartis leads the industry when ranks
are computed by sales. Novartis products are available in more than 180 countries
worldwide. Novartis is a Swiss based company, which is registered on Swiss stock
exchange and also on New York stock exchange.

Swiss multinational pharmaceutical company Novartis had a market value of

$227.44bn and $126.3bn worth assets as of May 2014. At the end of year 2014 the
share price was around 92 CHF whereas the share price was just 71.20 CHF at end of
2013.
During the past 12 months, Novartis AG's average Dividends per Share Growth Rate
was 3.60% per year. During the past Three years, the average Dividends per Share
Growth Rate was 6.80% per year.
During the past 5 years, the average Dividends per Share Growth Rate was 7.80% per
year. During the past 10 years, the average Dividends per Share Growth Rate was
11.00% per year.

Source- Annual report Novartis

The above diagram shows that Europe is the biggest market for Novartis followed by
USA.
Net sales for 2014 were $52,180 million and for the previous year they were
$51,869. The sales increased by 3% due to launch of new customer care products in
USA.

Net Income for the year 2014 was $10,280 million and for 2013 $9292
million. Due to rising net profit and a constant capital structure Novartis was able to
increase dividends by 6%. The return to shareholders reached at all time high in 2014.
The return to shareholders was about 34%. The sales and net profits of Novartis have
always shown a rising trend since 2000. Hence the investors are really optimistic
about the company.
The company is not a very high-levered company. The company has a debt
ratio of about 28% only as on year ending December 2014. Novartis has been using
its operating profits and equity to finance its projects and heavy research and
development expenditure, which can be seen in its low amount of leverage.
Since Novartis was performing best in Europe and GSK was leader in USA it
was a win-win situation for both the companies to have a merger in some of their
business lines so that they can use each others manufacturing activities and
distribution channels to increase their sales.

ABOUT THE DEAL

Announcement -In April 2014, Swiss drug maker Novartis AG which is parent
company of Novartis India entered into a joint venture with UK-based
GlaxoSmithKline which includes a combination of Novartis's OTC business and GSK's
Consumer healthcare business. The company will have 36.5 per cent share in the joint
venture upon the completion of the deal.

Approval by European commission and declaration (28th Jan 2015)

The objective of GlaxoSmithKline and Novartis mega merger to create robust, thrive
and flourish business in pharmaceutical business. GSK co-objective and key priority
to give return to shareholders and they have set a divided of 80p per share.

GlaxoSmithKline and Novartis have successfully entered into transaction which has
been approved by European commission includes the acquisition of Novartis vaccines
business excluding influenza vaccines on 28th Jan 2015.

Completion of swap of assets (2nd March)

GSK has acquired Novartiss vaccines business excluding influenza vaccines.

Novartis has divested this business to GSK for up to USD 7.1 billion
additionally GSK has to pay royalties. The USD 7.1 billion consists of USD 5.25
billion paid upon completion of transaction and up to USD 1.8 billion in future
milestone payments.

The creation of a consumer healthcare business between GSK and Novartis GSK will form a consumer healthcare business in joint venture with Novartis.
Majority of Stake will own by GSK which is 63.5. Novartis owns 36.5% of Stake
in the company.

GSK has divested its marketed oncology portfolio, related R&D activities,
rights for its AKT inhibitor and also grant of commercialization partner
rights for future oncology products to Novartis for an aggregate cash
consideration of USD 16 Billion.

Completion of this transaction represents a major step forward in the Groups

strategy to create a stronger and more balanced set of businesses across
Pharmaceuticals, Consumer Healthcare and Vaccines." Sir Andrew Witty, CEO,
GSK.

New Pharmaceuticals and Vaccines product total sales was 1.5bn

EMPIRICAL EVIDENCE OF DEAL:

The three way complex deal between GSK and Novartis is being hailed to be a
master stroke by the pharmaceutical giants. This deal has thrown open new
opportunities in terms of boardroom discussions. GSK has played a smart move
by offloading its oncology division to Novartis in exchange of Novartis vaccine
division by entering into a joint venture. This deal has led to the worlds biggest
consumer healthcare business. Novartis has also agreed to sell its animal
health business in a $5.4bn (3.2bn) deal to pharmaceutical peer Eli Lilly.

This deal is a special deal where two companys special divisions are being
exchanged to make them stronger. The ability to execute this deal is even rarer.
There have been difficulties in asset swapping earlier when Novartis tried
swapping its animal health and vaccine units with Mercks OTC products
division. The swapping could have held both companies in good stead but
ultimately things did not materialize. The OTC medicines are on the blocks
and the fight is between Reckitt Benckiser and Bayer. Other companies were
already trying to replicate this model before the deal could be materialized.

At the outset GSKs move to sell its oncology unit seemed to take many by
surprise sine this division posted hefty profits over the last couple of years of
more than twenty percent and GSK also expressed that it wanted to enter into
the top five oncology players list in terms of revenue. However the experts
claimed that it would have been difficult to scale up to such heights within
such a small time frame. Hence the company decided to go for an innovative
asset swap deal to protect the shareholders and generate value for them at the
same time. Due to the stringent measures in the pharmaceutical domain
companies are looking for innovative deal structures. This asset swap model is
a low risk concept due to the royalty payment agreements along the way.

TAKE AWAY FROM MERGER AND ACQUISITION:Merger control procedure:The commission has assessed merger and acquisition for the companies with a
turnover exceeding certain threshold as per article 1 of merger regulation. It also aids
in preventing concentrations that would impede competition in the EEA. The
committee has a total of 25 working days to decide whether to grant approval.

Impact of the Deal

The deal will leave GSK focused on four main businesses respiratory conditions, HIV,
vaccines and consumer healthcare and reduce the companys dependence on highrisk drug development.
GSK said it would receive net proceeds of $7.8bn from the transactions and return
4bn to investors through a share buyback.
Investors welcomed the shake-up, with shares in GSK up more than 5% and Novartis
more than 2% on next date of announcement, as analysts hailed a win-win deal that
strengthens both companies in core areas.
However, Sir Andrew stressed that GSKs agreement with Novartis was different to the
usual pharma megadeals, which often lumber companies with unwanted baggage.
M&A is a strategy to be used sparingly, he told the Financial Times. But it has an
extremely valuable role to play if you can find targeted transactions that allow you to
strengthen in areas where you have long-term competitive advantages.

Opportunities to build greater scale and combine high quality assets in vaccines
and consumer healthcare are scarce. With this transaction we will substantially
strengthen two of our core businesses and create significant new options to increase
value for shareholders - Andrew Witty, GSK chief executive

The consumer healthcare joint venture involves businesses with combined annual
revenues of about 6.5bn, including strong positions in nutrition, skincare and oral
health. GSK will have majority control with an equity interest of 63.5%.
GSK said the deals would increase its annual revenues by 1.3bn to 26.9bn, with
almost two-thirds coming from pharmaceuticals, a quarter from consumer
healthcare and 14% from vaccines.

WHAT IS INTERESTING ABOUT THE DEAL

The two giants of the pharmaceutical industry underwent a merger last year
after completing a series of swaps that was worth upwards of 20 billion US dollars.
Both European heavyweights were in the global top 10 in terms of revenue. GSK is an
English company that merged with its Swiss counterpart.
What makes this deal primarily interesting is the fact that it is a 3-way deal,
that is, it has three very evident components and it is the first of its kind in the
pharmaceutical industry. The triumvirate is of the following nature:

It is interesting to note that the reason for this merger was to bolster their best
businesses and exit weaker ones as the drugs industry was grappling with healthcare
spending cuts and increased generic competition.

Now, it is imperative to see the valuations of the respective deals as cut out by
the three companies. Novartis bought the Swiss companys vaccines business for $7.1
billion. GSK sold its cancer drug portfolio to Novartis for $16 billion although the
British company had hung on to the cancer medicines in its early stage pipeline.
GSK had given out B shares to its existing shareholders as proceeds from the
deal worth $6.6 billion. Also, Novratis sold its animal healthcare arm to US major Eli
Lilly for a separate $5.4 billion. This huge a deal was also marked with bumper merger
and acquisitions across the pharmaceutical industry.
It must be noted that the merger for the consumer healthcare arms of both
corporations were merging in order for them to create a state-of-the-art business
over the globe. It is a business that traditionally has an extremely high investment and
much of it goes under R&D. With generic drugs making there mark in the market
than ever before, it was sensible of them to combine forces to fight it with the weapon
of economies of scale.
The merger has been termed as legendary for both companies as it shelled out
extra value out of businesses, which were subscale in their current enterprises at
that time. The deal ameliorated the EPS for GSK investors from the first year itself and
also added long-term value.

WHAT'S THE MOTIVATION BEHIND NOVARTIS AND GSK'S BIG TIE-UP?

The key motivational factor that seems is to give Novartis a stronger position in the
consumer healthcare sector, while GSK cements a stronger position in the vaccines
business as in a world where ageing Western populations require more healthcare,
but governments are trying to restrain spending, pharma firms are eager to establish
a dominant position in key sectors.

Both companies' shares have jumped in early trading. Shares in GSK rose 5% to 16.40
and Switzerland's Novartis rose 2.75% to 76.75 Swiss francs in early trading. GSK
shareholders will benefit from a 4bn capital return funded by net proceeds of $7.8bn
from the deal, in which the Brentford-based firm is selling its oncology business to
Novartis for $16bn and purchasing its new partner's vaccine business for an initial
$5.25bn. A further $1.8bn is promised if the division performs well.
The agreement is based around an asset swap -- Novartis pays up to $16bn for Glaxo's
oncology business, and sells its own vaccine business to GSK for up of $7.1bn.
Both companies are then forming a new Consumer Healthcare business.
Glaxo's CEO, Andrew Witty, also suggested that the deal with Novartis could lead to
more jobs being created in the UK. And This deal will make GSK company "big in
vaccines, consumer" and some areas of pharma.

REFERENCES
1. GSK Annual report 2014
2. http://www.theguardian.com/business/2014/apr/22/pharma-deal-frenzyexcites-stockmarkets-business-live.
3. http://www.theguardian.com/business/2014/apr/22/novartisglaxosmithkline-deal-pharmaceutical-shares.
4. http://www.novartis.com/newsroom/media-releases/en/2015/1898451.shtml
5. http://finance.yahoo.com/news/novartis-acquires-oncology-drugs-glaxo201908140.html
6. GlaxoSMithKline PLC; Circular to shareholders and Notice of General
Meeting.