Miss
Advantages and risks of acquiring the other 44%
Roche is seeking to acquire 44% of Genentech in addition to 56% that it has already owned. Owning 100% of Genentech can help Roche to strengthen itself and exploit Genentech’s resources. First, the old model that allowed Roche to develop and commercialize Genentech’s products outside the U.S is not valid anymore; if Roche and Genentech merge, Roche can share in Genentech’s intellectual property. Second, if Roche’s and Genentech’s operations are combined, the two companies can create value by cutting costs and streamlining operations. Furthermore, under the present ownership structure, Roche could not get Genentech’s cash directly; if two companies are merged, Roche can access to Genentech’s cash. Finally, the two companies would not be competitive anymore and become stronger in the market.
However, risk comes along with Roche’s acquisition. As Genentech has become famous for its strong culture and most of the minority shareholders are Genentech employees, there is potential risk that the squeezing out would result in destroying Genentech’s culture; therefore the merger might lose human capital through employees changing their jobs. Second, the valuation of Genentech might be mispriced and that Roche have to pay high premium. Third, of great concern is the financing risk. For the acquisition, Roche has to get the availability of credit to finance a $44 billion, which could be more expensive due to financial crisis and make Roche harder to cover the finance.
Estimated stock price
Step 1: To calculate WACC
1) Calculate cost of debt
Abstract from Exhibit 16 Treasury and Corporate Interest Rates, January 2007-January 2009
Treasury yields
Bonds
Comm. Paper
Date
10 year
AAA
8-Jul
4.01
5.67
2.08
Year 2008
percentage cost Commercial paper
500
0.176740898
2.08%
Long-term debt
2329
0.823259102
5.67%
Total debt
2829
0.152918919
5.04%
2) Calculate cost of equity
By using
Roche is seeking to acquire 44% of Genentech in addition to 56% that it has already owned. Owning 100% of Genentech can help Roche to strengthen itself and exploit Genentech’s resources. First, the old model that allowed Roche to develop and commercialize Genentech’s products outside the U.S is not valid anymore; if Roche and Genentech merge, Roche can share in Genentech’s intellectual property. Second, if Roche’s and Genentech’s operations are combined, the two companies can create value by cutting costs and streamlining operations. Furthermore, under the present ownership structure, Roche could not get Genentech’s cash directly; if two companies are merged, Roche can access to Genentech’s cash. Finally, the two companies would not be competitive anymore and become stronger in the market.
However, risk comes along with Roche’s acquisition. As Genentech has become famous for its strong culture and most of the minority shareholders are Genentech employees, there is potential risk that the squeezing out would result in destroying Genentech’s culture; therefore the merger might lose human capital through employees changing their jobs. Second, the valuation of Genentech might be mispriced and that Roche have to pay high premium. Third, of great concern is the financing risk. For the acquisition, Roche has to get the availability of credit to finance a $44 billion, which could be more expensive due to financial crisis and make Roche harder to cover the finance.
Estimated stock price
Step 1: To calculate WACC
1) Calculate cost of debt
Abstract from Exhibit 16 Treasury and Corporate Interest Rates, January 2007-January 2009
Treasury yields
Bonds
Comm. Paper
Date
10 year
AAA
8-Jul
4.01
5.67
2.08
Year 2008
percentage cost Commercial paper
500
0.176740898
2.08%
Long-term debt
2329
0.823259102
5.67%
Total debt
2829
0.152918919
5.04%
2) Calculate cost of equity
By using