Background
You are the Financial Director of a biotechnology company, fully integrated from
discovery to market, with global presence and products in four main therapeutic
areas: neurology, reproductive health, growth and metabolism, and dermatology. In
2000 your company, with headquarters in Switzerland and listed in both the Swiss
and New York stock exchanges, was valued at US billion, but recent events in
both the stock market and product markets have severely depressed its value and
there are no signs that the downward pressure on the share price is easing. The
company is facing increasing competition on its main markets, with decreasing profit
margins, a contentious political atmosphere, and a maze of new regulatory
demands. These challenges are compounded by the fact that, in the next three
years, the company will lose patent protection on several of its best-selling products.
Although it is currently experiencing some short-term liquidity problems, the
company is considered by the Board of Directors to be financially sound with a good
mix of debt/equity in its capital structure and certainly within its target ratio. However,
the solid financial performance in the last financial year, with new highs in revenues,
earnings and dividends, has done little to offset a drop in investor’s confidence.
During the last Board’s meeting the CEO informed the Board that: “There is now
considerable pressure from the main shareholders to take measures to improve the
value of our company, otherwise the slide in our stock market value could make us a
potential takeover target.” Therefore, the Board asked the CEO to find a suitable
acquisition target company.
The CEO believes that it is strategically important for the company to diversify its
activities and reach into important and growing therapeutic categories, such as
oncology and immunology. It is also essential for the company to turn the corner on
the R&D productivity issue that has affected the industry since the late 1990s. After
considerable research, data gathering and analysis, the CEO has focussed her
attention on UCB S.A., a Belgian pharmaceutical company with subsidiaries and
affiliates worldwide and a global geographic reach. Although UCB’s share price has
somewhat recovered from its downturn in 2002-03, the CEO believes that UCB is
still good value for money and a good match for the company.
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Corporate Finance
Full Time 2005 MBA
The CEO asks you to produce a detailed report to be presented to the next meeting
of the Board of Directors advising whether your company should formally consider
bidding for UCB. She also indicates to you that, given the prevailing stock market
sentiments, this year your company may consider not paying dividends, if necessary,
and use the money saved in that way to finance the bid. This would be the first
occasion in 10 years that your company alters its dividend policy. She reminds you
that two of the non-executive directors are top professors of finance from Easy Study
University and are always very critical of decisions not reflecting the latest academic
thinking! None of the members of the Board has any experience with mergers and
acquisitions and thus your report should be informative about alternatives.
Requirement
You are required to write a report for consideration at the next meeting of the Board
of Directors. The aim of your report is the make a clear and well-argued
recommendation supported by relevant academic literature. Your report should
be structured into the following sections:
1.
Motives – This section should include a detailed discussion of the main motives
for the proposed acquisition supported by the latest academic thinking, with an
emphasis on the arguments that the company should use to present such bid to
its shareholders. [25 marks]
2.
Valuation -You need to advise the company about UCB’s valuation and whether
it offers the company value for money. As part of your answer, you need to draw
the Board’s attention to any risks or problems associated with your chosen
methods of valuation. [35 marks]
3.
Financing – This section should include a critical evaluation of: (a) various
alternatives of financing this bid; (b) the impact of these alternatives on the
company’s capital structure and distribution policy; and (c) the implications of any
changes in capital structure or distribution policy. [30 marks]
4.
Recommendations – This should include a clear and concise list of
recommendations based on the previous analysis in the report, and could also
include any other relevant information that you deem to be useful for the Board to
consider. [10 marks]
N.B.:
(i) All calculations must be fully explained.
(ii) The use of literature must be fully referenced and a reference list must be
provided at the end of the assignment. Please refer to your Programme
Handbook for guidance on referencing.
Your report should not exceed 4000 words in length, excluding diagrams, tables,
bibliography and appendices.
MARKING GUIDELINES
Performance in the summative assessment for this module is judged against the following
criteria:
· Relevance to question
· Structure/presentation & clarity of writing
· Scope & relevance of literature review
· Rigour of argument
· Evidence of understanding
· Conclusions/Recommendations
Credit:ivythesis.typepad.com
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