Transcript Novartis: An Analysis of the Ciba-Geigy and Sandoz Merger Team 10:

Novartis: An Analysis of the
Ciba-Geigy and Sandoz Merger
Team 10:
Minjal Dharia - Stefanie Duda - Jennie Ma
Andrew Schwartz - Siddharth Sekhri
AGENDA

History

Ciba Sandoz Background

Motivations and benefits of the merger

Merger process

Obstacles

The new company: Novartis AG

Challenges

Strategies

Opportunities

Financial performance to date
THE HISTORY OF NOVARTIS
Geigy f. 1758
Ciba f. 1859
Sandoz f. 1886
Ciba-Geigy f. 1970
Novartis f. 1996
A MERGER OF TWO EQUALS
Sandoz Limited
Ciba-Geigy

Founded 1758 - Basel,
Switzerland

American Subsidiary

•

Founded 1866 - Basel,
Switzerland

American Subsidiary

Ciba-Geigy Corp –
Tarrytown, NY
Total Revenues = $17.5 billion

Sandoz Corporation – NYC,
NY
Total Revenues = $13.0 billion
STRATEGIC SIGNIFICANCE OF MERGER

Background of rapid structural change in pharmaceutical/ biotech
market

Price pressures meant decreasing growth and margins of industry

Cost-containment efforts due to high development costs

Consolidation of suppliers gave them higher pricing power

Reach an optimum mix of business segments for synergy
MOTIVATION AND BENEFITS
Motivations

Shared commonalities in crop protection, seeds, agribusiness and
animal health products

Jump to new business opportunities

Distance themselves from the unsure chemical markets
Benefits

Higher critical mass for key investments such as research &
development

More efficient & broader marketing & distribution of products

Lower cost of financing, increased liquidity

Leaner organizational structure
THE MERGER PROCESS
 March-April
1996: Ciba and Sandoz announce merger
plans and validate with shareholders.

July 1996: The European Union approved the merger
August 1996: U.S. Federal Trade Commission agreed to
the formation of the new company in the fall of the same
year.

The
merger is worth $27 billion- one of the largest in
international business
THE MERGER PROCESS
Stock
swap in which Ciba shareholders are paid a premium

Receive 1 1/15 for 1 share

Sandoz shareholders get 1 for 1 share
Sandoz
shareholders obtained 55%, Ciba Geigy 45%.
Benefits
of the deal:

Tax-free because both companies are Swiss

Cash outlay not required

Transaction structured as a share issue
OBSTACLES
The
EU and the US FTC had concerns regarding the monopolistic
nature of the mergers.

Required the demerger of the Specialty Chemicals Division
of Ciba and the Construction Chemicals and animal health
businesses of Sandoz
Ciba
and Sandoz each had three classes of stock with varying
voting rights at the start of the 1990s.

Novartis had to transform the tangled equity structure into a
single class of shares last year.
REGULATORY CONFLICTS/TRANSLATION EXPOSURE

Reconciling according to International Accounting Standards (IAS):

IAS rules allowed companies to write off goodwill rather than
depreciating it

Allowed applying pooling-of-interest accounting rules to the $27
billion Ciba-Sandoz merger, which avoided charges for goodwillthe difference between the purchase price and book value of an
asset.
REGULATORY CONFLICTS/TRANSLATION EXPOSURE

But, the U.S. accounting principles (GAAP) challenged both IAS
rules:

The merger should include a restructuring charge for
annual depreciation of 700 million Swiss Francs

Novartis had to follow US rules to list its shares in the US

Novartis would prepare its official accounts under IAS rules
and offer U.S. investors a bridging statement with adjustments
according to U.S. accounting principles in a footnotes

Cash flow and cash earnings per share would remain the same
under both IAS and US GAAP.
NOVARTIS AG

Novartis = “re-birth” toward life sciences
Market

Value > $60 billion
Standing
segments of Healthcare (59%), Agrobusiness (27%), and Nutrition
(27%)

Largest
worldwide marketer of crop protection chemicals

Second largest seed & animal health company

Second largest pharmaceuticals company in the world


Sales = $13 billion
4.5% share of global market sales
CHALLENGES

Novartis promised annual savings of 1.8 billion Swiss Francs

Needed to get rid of 10,000 jobs or 10% of the payroll

Needed to cut drug development time from 11 to 7 years

Needed three strong selling drugs annually
To
match No. 1 Glaxo PLC
Soaring
Shares
costs of biotech and genetic research tools
are underrepresented in the US
Listed
as ADRs on the NYSE
CULTURAL CLASH
Sandoz
Was
autocratic and hierarchical
Operated
Measured
most functions at the business segment level
performance by EBIT and return on sales
Ciba
Was
collegial and informal
Matrix
Used
organization
direct costing
Measured
performance by division contribution
Novartis
Used
Sandoz’s organizational system
Measured
performance by EBIT and return on net assets
STRATEGIES

Sold off non-core business units

Boosted R&D spending

Sharpened marketing in the US
Increased
US
sales force and advertising
sales jumped to 43% of revenues
Made
strategic acquisitions such as Pfizer’s drug Enablex,
beating out GlaxoSmithKline
CEO Daniel L. Vasella
WILL NOVARTIS BUY ROCHE?

Bought a 20% share in May 2001
Now
owns 32.7%

Would mean $45 billion in sales and 7% market share

Roche is opposed to any such merger
Remains
to be seen how aggressive Novartis CEO
Daniel L. Vasella will be.
NOVARTIS ADR FINANCIAL PERFORMANCE
Last
38.45
Chg
Prev
Cls
High
Low
Vol
+0.75
37.70
38.50
38.19
458,300
% Chg
YTD % Change
52 Wk Range
+1.99%
4.68%
33.85 to 42.07
Source: Bank of New York
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