ROCHE HOLDING AG: FUNDING THE GENENTECH ACQUISITION Case Solution
What is going on at Roche?
Roche is a Swiss based company, which operates in the biotech and pharma industry successfully. The economic crisis has affected the global financial market and Roche’s financial performance as well. The decrease in sales and operating margin indicate that Roche is facing significant financial challenges.
The US government has been taking certain measures to stabilize the situation of the financial market and equity market, which has helped the global firms to some extent by improving their financial performances.
In such a situation of global crisis, the management of the company is considering acuiring, Genetech which is considered as a biotechnological leader in the US market. However, Roche’s management reduced the bid price from $89 per share to $86.5 per Genetech share as the economic downturn affected the equity market and the stock prices of Genetech as well.
In order to finance the deal, the company is considering issuing bonds along with other debt options and for that purpose, the treasury department of the company is planning to issue a mix of bonds with different maturities and in different currencies such as Dollar, Euro and GBP. Moreover, the issuance of the bonds in different currencies could also help to reduce the exchange rate risk.
However, issuing the bonds is not an easy process as these bonds will be publically traded therefore, there are certainlegal requirements associated with the bonds along with complex pricing issues as the price is a factor, which is driven by investors in equity market.
In addition to this, there are certain issues related to this strategic move of Roche as change in market conditions increased the risk of bankruptcy therefore, global banks increased the interest rates, which has created a serious concern for the management with respect to the issuance of the bonds. Hence, the current situation of Roche is critical and the management of the company is passing through a challenging phase as there is a need to respond against market conditions through strategic measures and executing the bond mix strategy is not an easy task.
Is this an easy time to be going to the public bond market with a massive offering?
In order to acquire Genetech, the management of the company is considering issuing$32 billion with the help of the issuance of bonds and these bonds will be publically traded. It is expected that this was the largest bond offered by any Pharmaceutical firm in the US. In addition to this, the uncertain market conditions have created certain issues related to the pricing of the bond offering, along with the increase in the interest rate by the banks and the coupon rate, which Roche will offer for the bond mix.
As the bond will be publically traded therefore, selecting the appropriate price of the bonds is also a challenging task because the equity market is uncertain and mostly investors had invested in the government T-Bills. In addition to this, for the public offering of the bonds, there is a need to meet the legal and documentation procedures, which are considered as a complex and time consuming procedure.
Moreover, by looking at the complexity associated with this bond offering, there is a need to hire investment banks in order to provide assistance with respect to the issuance of the bonds. It is expected that hiring the investment banks involves significant amount of cost, which can be substantial in this situation where there are financial concerns regarding the issuance of the bonds. Therefore, by considering the legal factors, complex documentation procedures, increased interest rates and commission fee of investment banks, this is not the right time to be going to public bond market with a massive offering.......................
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