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ROCHE + GENENTECH

M&A Analysis
Dutta-Roy & Team
HUMER‟S CHOICES
1. Concede but negotiate – Raise the offer price

2. Tender Offer – Go after Genentech‟s
shareholders directly.

3. Wait – If breakthrough cancer drug, Avastin, is
unsuccessful Genentech‟s performance will
waver. The price will be driven down. Or, if
successful, the acquisition will be more
expensive.
TWO VALUATIONS
Greenhill & Co. – LRP Goldman Sachs - NFM
• DCF-WACC

• 9% WACC

• 2% Long-term Growth Rate (post 2018)

• 7.1% Market Risk Premium

• Deduct debt, add cash and
marketable securities

• Does not include a control premium

• EBITDA and Earnings multiples confirm a
similar value

• Higher Revenue - $14.118B vs. $13.535B

• Extended Forecast – 2018 vs. 2024

• 6.9% Cumulative Average Growth Rate

• Similar Costs/Revenue ratios

• Lower taxes, depreciation, working
capital, and capital expenditures

• $11.4B deduction for equity-based
compensation

• $8.2B addition for „opt-in‟ rights 2015
expiration
HIGH LEVEL GENENTECH
VALUATION
Genentech
Cashflow
+ 7B Free Cash
+ % License
Revenue
+ X-Factor for
return on cash
or debt savings
A-TEAM‟S DCF VALUATION ANALYSIS
• Starting Revenue $14 billion

• 10 years of 7% high growth




• 35% tax rate

• Add portion of cash ($7B)

• Equity Compensation (1.3%
of Annual Revenue)
A-TEAM‟S DCF VALUATION ANALYSIS
MARKET MULTIPLES 2008
4.8
12
19.7
1.2
7
16.5
26.1
1.4
6.7
16.7
24.1
1.2
0
5
10
15
20
25
30
35
xRevenue 2008 xEBITDA 2008 xPrice/Earnings 2008 xPEG 2008
Market Multiples vs Genentech LRP Offer
(2008) Median
Genentech
Mean
4.3
11.3
16.5
0.9
6.5
15.5
23.1
1.2
5.6
14
18.8
1
0
5
10
15
20
25
30
xRevenue 2009 xEBITDA 2009 xPrice/Earnings 2009 xPEG 2009
Market Multiples vs Genentech LRP Offer
(2009)
Median
Genentech
Mean
Equity Value
Enterprise
Value
Debt
Amgen $57,222 $59,752 $11,177
Gilead
Sciences
$48,988 $48,194 $1,300
Celgene $33,163 $31,137 $223
Genezyme $21,570 $21,416 $810
Biogen Idec $18,942 $19,169 $1,563
Cephalon $6,831 $5,982 $1,241

Genentech $87,833 $84,570 $3,001
90
78.62
73.94
112
98
84.08
81.54
115
70
80
90
100
110
120
130
Our Valuation (DCF) Average Multiples LRP (DCF) NFM (DCF)
Price of Share (Min)
Price of Share (Max)
FINAL COMPARISON
CHOICES, CHOICES, CHOICES
Option 2: Tender
• Uncertain whether Roche can
amicably continue to make tender
offers.

• Requires a two-step “squeeze out”

• Roche maintains a minority on the
board, and needs 50.1% of the 44%
remaining share to close. If it raises
the cash, but doesn‟t close, Roche
will be stuck with interest payments.

Option 3: Wait
• Depends on the success of a new
cancer drug, Avastin.

• Genentech‟s value may continue
to fluctuate

• The acquisition may be more costly
if the drug is successful



THE FINANCIAL CRISIS AND THE
AVAILABILITY OF DEBT
“Roche did not have firm commitments for funds
to finance the acquisition, and in January 2009,
global markets were still extremely fragile.”


Roche will ensure financing with the help of the
newly acquired “right to spend” Genentech‟s
$7B in cash. Roche can pay down new debt
quickly, if needed.
AFTERMATH – HOSTILE TO FRIENDLY
January
•1/29/09 – Roche tenders at $86.50
•1/30/09 – Special Committee recommends no action and reiterates its 8/13/08 rejection of $89

February
•2/23/09 – Special Committee recommends rejection of $86.50 tender offer
•2/25/09 – 3/4/09 - Roche raises $16.5B cash from bond sales; raises an additional €11.5B and
£1.25B totaling $32B cash

March
•3/6/09 – Roche raises existing tender to $93, extends expiration by 10 days
•3/6/09 – Special Committee recommends no action on $93 offer
•3/12/09 – Roche raises to $95, Special Committee endorses
•3/26/09 – Deal closes

April
Avastin fails clinical trials. Analysts suggest this would have driven Genentech‟s pre-deal value
down to $70 per share.