Roche Case

Group 49

13107690 - 13210211 - 13331981 - 13164546 - 13046160

Question 1: Why is Roche seeking to acquire the 44% of
Genentech it does not own? What would be the
benefits and risks to Roche from owning 100% of Genentech?

● Create synergy and fuel their growth

● Analysts estimated annual savings between 750 and 850 million over 5 years if the
companies would streamline their operations
● Roche also had significant interest in the R&D operations of Genentech
● Genentech was starting to generate a significant cash flow
● The transaction also carried potential risks for Roche such as analysts set to leave and
legal concerns
Question 2: As of June 2008, what is the value of synergies Roche
anticipates from a merger with Genentech? Assess the value of synergies
per share of Genentech. How sensitive are your estimates to this WACC
value?

Added value of synergies per share = 2442.26/1052=2.303

2.303 USD of value added per share from synergies.

- This value is highly sensitive to the WACC of 9%.

- Using a higher WACC of 12% values the synergies over 200 million USD lower.
- At a WACC of 6% the synergies increase in present value by almost 250 million USD.
 Question 3: What is a reasonable range for the standalone value of
Genentech in June 2008? Base your answer on DCF valuation
techniques, use a 9% WACC, and exclude synergies from your valuation.

Using DCF valuation technique:

Assumptions: Annual revenue growth rate = 7%
(exhibit 11, under the Long-Range plan)
WACC = 9%
Long rate growth = 2%
FCF in 2009 given in exhibit 10 = $3,113 million
PV = (3113/(0.09-0.07)) * (1-(1.07/1.09)^10) = $26,313
million
FCF 2019 = 3113*1.07^10*1.02 = $6,123.74 million
PV in 2018 = 6123.74/ (0.09-0.02) = $87,482 million
Hence, PV in 2008 = 87,482/ 1.09^10 = $36,953 million

Standalone value = 26,313 + 36,953 = $63,266 million (approx.)

 Question 4: Use exhibits 3, 7, and 16 to calculate your
own appropriate WACC. How does it compare to 9%?

Assumptions:
Equity = 11,905
Debt = 3001
Return on Equity = 0.233
Corporate Tax Rate = 37%
Return on Debt (assuming its a BBB bond) = 8.88%
Question 5: What does the analysis of comparable
companies indicate about Genentech’s value within
the range established in 3?

Using the comparables valuation approach:

Mean multiple of enterprise value/ revenue in 2008 = 6.7x (seen in exhibit 13)
To find the enterprise value, we do
revenue = $13,418 million (exhibit 3)
13,418 * 6.7 = $89,900.6 million
$89,900.6 million

Compared to comparables approach, the DCF

approach (according to figures projected) gives us
around $63,266 million. Hence, we can conclude
that compared to the DFC method, the enterprise
is overvalued by the market.
 Question 6: How much cash does Roche need
for its bid?
This can be determined through calculating the bid offer price and multiplying it with the
remaining shares that have to be purchased:
The bid offer price = Current share price + value of synergies per share (refer to answer from q2)
= $81.82 + $2.303 = $84.123.

Genentech shares outstanding: 1053 (Exhibit 4, 2008 Genentech Balance sheet data )
Remaining shares: 44% of 1053 = 463.32
Cash needed = Bid offer price x remaining shares = $84.123 x 463.32 shares = $38975.868
Question 7: What should Franz Humer do?

Humer has three different options he can choose from:

1) Conceding to a higher offer price per share

2) Tender Offer
3) Wait for the launch of Avastin

None of the three options are ideal, but a case can be made for the Tender offer

A Tender Offer would be seen as a hostile takeover, however, it is arguably Humer’s best shot at
acquiring Genetech at/similar to the price he wants

Furthermore, by doing so, Humer is bypassing both the board of directors and the special
committee and approaching the shareholders directly.

This is significant as Humer and the board were at disagreements during the negotiation phase