Category winner:
Roche’s Acquisition of Genentech

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This case won the Finance, Accounting and Control category at The Case Centre Awards and Competitions 2015.
 
The case

Who – the protagonist

Franz Humer – Chairman of Roche.

What

Roche, a global pharmaceutical company, was founded in 1896 by Fritz Hoffman-La Roche, who realised that the industrial manufacture of standardized medicines would be a major advance in the fight against disease. Roche owned a majority stake in Genentech, a successful pioneer in biotechnology. Although majority owned by Roche, Genentech had a fiercely independent culture and operated with a great deal of independence.

Why

Genentech had become an important part of Roche’s business, representing 24% of its pharmaceutical product sales in 2008. As it grew, Genentech was increasingly coming into direct competition with Roche in several US markets. Roche’s managers were questioning the structure of the Roche-Genentech relationship and believed it was showing signs of wear.

When

In late 2007, Roche approached Genentech’s directors about the possibility of increasing its ownership stake in the company, but the directors were reluctant and Roche did not press the issue. In May 2008, Roche retained Greenhill & Co. to advise on a potential acquisition of the outstanding Genentech shares. In July of the same year, Roche publicly announced an offer for the shares.

WhereRoche building

Roche is based in Basel, Switzerland, and has pharmaceutical and diagnostic sites throughout the world.

Key quote

‘I’m not sure what was more surprising: the $112 (per share) counter-offer, or the assertion that there was not much room for negotiation. We were deeply disappointed.’ – Franz Humer

What next?

Roche’s offer to acquire the remaining 44% of Genentech’s stock that Roche did not own had been open for six months, with little progress towards a deal. Did it make sense to make a tender offer for the shares? If so, at what price and how to fund it? And should any conditions be attached to the offer? Alternatively, Roche could just wait for the results of an important set of clinical trials being carried out on Genentech’s cancer drug, Avastin. However, the results could either lower or raise Genentech’s stock price. What should Roche do next to bring the acquisition to a successful conclusion?

 
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Roche’s Acquisition of Genentech
Ref 9-210-040
Teaching note
Ref 5-211-039

Related item:
M&A Legal Context: Basic Framework for Corporate Governance (Note)
Ref 9-803-200

The authors

Bo Becker, Carliss Y. Baldwin and Vincent Dessain

Bo and Carliss discuss the complexities of successful mergers, and also share their advice on how to write an effective case.

Governance and deal-making tactics

The merger was a large transaction, with very substantial financing requirements; it took place at a difficult time in capital markets; and the deal was part of a convergence of biotech and pharma that had been ongoing for some time.

The case offers instructors an opportunity to delve into issues of governance (Roche was a majority shareholder of Genentech at the time it made its offer) as well as deal-making tactics and negotiations.  

Wider relevance

Making sure mergers create value is complex, and success has many ingredients: the acquirer must select targets where there are real synergies; execute deals quickly and with discipline (especially resisting the temptation to overpay); and, of course, ensure the integration is well organised.

The Roche-Genentech case highlights the first two ingredients. It also highlights the role of obtaining financing at reasonable cost (which is important to any acquirer not paying entirely in stock). The intricate governance situation when a large shareholder makes a bid is also well covered here, and applicable to similar situations in pharma and elsewhere. 

Teaching the case

The case can stand on its own as an introduction to and overview of mergers and is a great way to introduce financing and governance in the middle of a 3-5 case sequence on M&A. By emphasising the crisis, the role of advisors or the negotiation process, the case can fit into many shorter courses or programmes. We also teach the case over two days when we want to allow time for detailed valuations; the differences that emerge often lead to great learning points.

Case writing advice

A managerial decision of great importance is often key to making the case of interest to students. Of course, you also need sufficient material of interest, and a match between what the case is about and teaching topics. Finding it all in one situation certainly involves luck. And considering many potential cases can help, of course.

About the authors

Carliss Y. Baldwin is the William L. White Professor of Business Administration at Harvard Business School.
e cbaldwin@hbs.edu
tw @carlissbaldwin

Bo Becker is a Professor in the Department of Finance at Stockholm School of Economics.
e Bo.Becker@hhs.se

Vincent Dessain is Executive Director at Harvard Business School Europe Research Center.
e vdessain@hbs.edu

 

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