Roche's Acquisition of Genetech

Roche’s Acquisition of Genentech

Question 1.

Roche, a global pharmaceutical company headquartered in Switzerland, currently owns a 56 percent majority stake in Genentech, a successful pioneer in biotechnology. Roche is now considering to acquire the remaining 44 percent of Genentech. Therefore Roche must consider the benefits and risks from owning 100 percent of Genentech.

Acquiring the remaining 44 percent of Genentech’s shares can be a positive-NPV investment for Roche if the price paid by Roche for the acquisition is not to high. On the other hand if Roche pays to much it can turn out to be a negative-NPV investment. Roche will of course only be prepared to pay a price for Genentech’s shares if it thinks this will lead to a positive-NPV investment. For this to happen it is needful that the merger of the two companies will add economic value. There are several reasons for Roche to think that economic value, as a result of the acquisition, will be added.

Genentech was increasingly coming into direct competition with Roche in several markets. As a rule increasing competition leads to lower benefits for the competing companies. With collaborating this competition will cancel out and thereby increase profits. Furthermore the larger company can enjoy economies of scale, or saving from producing goods in high volume, that are not available to a small company. Larger firms can also benefit from economies of scope, which are saving that come from combining the marketing and distribution of different types of related products. However there may also be costs associated with size. For example larger firms are more difficult to manage.

Another justification for paying a premium for a target firm is efficiency gains, which are often achieved through an elimination of duplication. For example when Roche en Genentech are doing research for the development of the same medicine, they can probably heavily cut on R&D expenses when collaborating. Besides of R&D Roche’s...