investment banks assisting companies involved in m & a with respect to pharmaceuticals sector

Investment Banks Assisting Companies involved in M & A with respect to Pharmaceuticals Sector


Submitted by:

Abhinay Gupta

Enrolment Number: 125764195

BSE - MBA in Financial Markets

2012– 2014

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Contents

Introduction:..........................................................................................................................

Rationale of the Study:..........................................................................................................

Literature Review:.................................................................................................................

Objectives of the study:.........................................................................................................

Hypothesis:............................................................................................................................

Research Methodology:.........................................................................................................

Population and Sample Size:.................................................................................................

Tools and Techniques:...........................................................................................................

Research Tools:.....................................................................................................................

Procedure for Data Collection:..............................................................................................

Data Analysis:........................................................................................................................

Suggestions/Conclusions:......................................................................................................

Bibliography:.........................................................................................................................

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Introduction

Investment banking is a specific division of banking related to the creation of capital for other companies. Investment banks underwrite new debt and equity securities for all types of corporations. Investment banks also provide guidance to issuers regarding the issue and placement of stock. In addition to the services listed above, investment banks also aid in the sale of securities in some instances. They also help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. They can also trade securities for their own accounts.

A financial intermediary that performs a variety of services. Investment banks specialize in large and complex financial transactions such as underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial adviser for institutional clients. Major investment banks include Barclays, BofA Merrill Lynch, Warburg’s, Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, Salomon Brothers, UBS, Credit Suisse, Citibank and Lazard. Some investment banks specialize in particular industry sectors. Many investment banks also have retail operations that serve small, individual customers.

The advisory divisions of investment banks are paid a fee for their services, while the trading divisions experience profit or loss based on their market performance. Professionals who work for investment banks may have careers as financial advisers, traders or salespeople. An investment banker career can be very lucrative, but it typically comes with long hours and significant stress.

Because investment banks have external clients but also trade their own accounts, a conflict of interest can occur if the advisory and trading divisions don’t maintain their independence (called the “Chinese Wall”). Investment banks’ clients include corporations, pension funds, other financial institutions, governments and hedge funds. Size is an asset for investment banks. The more connections the bank has within the market, the more likely it is to profit by matching buyers and sellers, especially for unique transactions. The largest investment banks have clients around the globe.

Investment banks play an important role from the moment companies contemplate an acquisition to the final steps. When a buyer or seller contemplates an acquisition, the respective board of directors may choose to form a special committee to evaluate the merger proposal, and typically retains an investment bank to advise and evaluate the transaction’s terms and price as well as help the acquiring company arrange financing for the deal.

To provide meaningful advisory, investment banks create different valuation models to determine valuation ranges for a company. They may also conduct accretion/dilution analysis to assess affordability to the acquirer and the effect of the consideration paid on

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http://www.wallstreetprep.com/blog/how-an-investment-banker-builds-an-accretion-dilution-model/

http://www.wallstreetprep.com/blog/how-an-investment-banker-builds-an-accretion-dilution-model/

http://www.wallstreetprep.com/programs/self_study/premium_package.php


projected earnings per share. Banks also help clients assess synergistic opportunities from acquiring other companies and how those synergies can create value and reduce costs in the future.A buy side M&A advisor represents the acquirer and determines how much the client should pay to buy the target.A sell side M&A advisor represents the seller and determines how much the client should receive from the sale of the target.

Rationale of the study:

The Pharmaceutical companies involved in mergers and acquisition with the assistance of investment banks expects the transaction to create substantial synergies in the long term. Through which the companies’ gets benefit from their strikingly complementary businesses,

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which they believe would bring considerable cost savings in their diversification initiatives, which will be aimed at establishing a strong presence in all pharmaceutical therapeutic areas.

Additionally, companies having a wide global reach, is expected to further expand after the merger. Companies can boost their position in the world market by market capitalization in the global pharmaceutical market.

Through which the companies and their investment bank sees this step as critical to the achievement of its objectives outlined in its Mid-term Management Plan.

We will with the help of some major mergers and acquisitions will try to come on a conclusion whether the step taken through the assistance and financial advice of investment banks is a success or a failure and will see how they go about through mergers and acquisitions.

Literature Review:

Determinants of Mergers and Acquisitions in Indian Pharmaceutical Industry

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Vidhisha VYAS*, Krishnan NARAYANAN**, A. RAMANATHAN ***

Abstract:

M&A turned out to be significant form of corporate restructuring in post globalization period in Indian industries. The phenomenon is considered to be the most important strategy for gaining competitive advantage for firms. This study attempts to find out the determinants of M&A in Indian pharmaceutical industry.

We use the PROWESS database provided by the Center for Monitoring Indian Economy for the period of 2001-2010. The results of the Logit analysis suggests that large and multinational affiliated firms are investing more in M&A activities.

Similarly, firms reporting excess capacity and high R&D investments are relying heavily on M&A to restructure and consolidate their position in the industry.

Keywords: Mergers and Acquisitions; Pharmaceutical Industry; Logit Analysis

Motives for Mergers and Acquisitions in Pharmaceutical Sector

Critical Success Factors in Merger & Acquisition Projects, A study from the perspectives of advisory firms

Umeå, January 2008.

Abstract:

Mergers and acquisitions (M&A) in the corporate world are achieving increasing importance and attention especially in the advent of intense globalization. This is evident from the magnitude and growth of deal values and resultant ‘mega-mergers’ transacted in recent times. As expert advisory are sought in M&A activities to facilitate the undertaking and maximise the value of the transaction, advisory firms begin to play a more significant and at the same time lucrative role in M&A activities, to the extent of determining the outcome of such projects. Being an area of limited research, it is thus valuable to investigate what M&A advisory firms view as critical success factors to the projects they undertake. Consequently, the research question of “What are the critical success factors for merger & acquisition projects in the view of merger & acquisition advisory firms” has been raised. A list of ten critical success factors for M&A projects is firstly identified from an extensive literature review.

These factors are (1) Complete and Clear objectives, goals and scope of the project, (2) Client consultation and acceptance, (3) Project manager’s competence and commitment, (4) Project team member’s competence and commitment, (5) Communication and information sharing

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and exchange, (6) Project plan development, (7) M&A advisory firm’s resource planning, (8) Time management and tight secrecy, (9) Price evaluation and financing scheme, and (10) Risk management.

In an attempt to explore the importance of each factor in the practical context, data have been collected through three research methods. Primarily, the authors conduct a semi-structured interview with six interviewees currently working in three organizations which provide professional services related to M&A projects.

Meanwhile, a self-completion questionnaire method is employed, following which a sample of 325 M&A advisory firms based in the U.S. is selected to participate in an online survey. In addition, the authors follow a case study approach based on the three organizations of the six interviewees in order to establish comprehensive knowledge about issues relating to M&A projects.

In response to the research question, the findings strongly indicate that seven out of ten factors in the original list have a positive impact, being the factors listed above as (1), (2), (3), (4), (5), (8), and (9). On the other hand, it revealed the lesser importance of the other three. In addition, three new factors have been discovered from analyzing the data collected, being (i) Having a number of key potential buyers with suitable profile (ii) Right, correct and complete information and data in the data room, and (iii) The quality of the selling company. While as another outcome of this research, further practical insights have been provided regarding the role of M&A advisory firms, the M&A process, common issues faced by M&A projects and the success criteria for M&A projects.

The findings from this research contribute valuable new knowledge to both researchers and practitioners in both project management and M&A fields, while facilitating the achievement of successful M&A projects.

Key words: mergers and acquisitions, M&A, advisory firms, merger & acquisition process, project management, critical success factors, project success criteria.

Review of Literature:

Mergers and acquisitions, also known as M&A, involve the process of acquiring, selling, and combining of both the pharmaceutical firms. The theories with respect to mergers and acquisitions can majorly be categorized into two groups of neoclassical theories and behavioural theories. Neoclassical theory is based on the assumption that managers are rational and make rational choices to maximize the wealth for the shareholders whereas

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behavioural theory focuses on the assumption that managers are not rational and they do not represent the interests of the shareholders. These theories can be further categorized into external and internal motives. Internal factors, for instance, agency costs or synergy can be directly influenced by the management whereas the external motives such as globalization or technology cannot be influenced by the management. Cost cutting, revenue enhancement and risk reduction are the possible factors that explain successful acquisitions with cost cutting being the most important factor for the banks Worldwide. Mukherjreem et al. (2004)2 stated that primary motivation for Mergers and Acquisitions are to achieve operating synergies. Their results depicted that most of the firms believe that diversification is a justified motive for acquisitions as a means of reduction in losses when there are economic downturns.

Banks also work on cross-border expansion to gain access to a large client base and also to diversify their income sources. Such type of expansion does not provide benefits from economies of scale because it does not include the overlapping of financial services. However, author stated that it might create cost efficiency as well as revenue efficiency by exploiting the information from the target to the acquirer. Deregulation is also one of the important factors for the increase in the number of mergers and acquisitions. Opportunities for firms are perceived as deals, which were initially prevented but they are made achievable through the process of deregulation.

Neoclassical Theories

One of the factors that fall under the neoclassical theories is the synergy factors which assume that managers will only be involved in Mergers and Acquisitions if the returns are positive for the target as well as the acquiring shareholders therefore creating a synergy with positively correlated gains for both groups of the shareholders3. Synergy factor exists if the two combined firms have a greater return than the two individual firms owing to reasons such as improvements in efficiency and increase in market power for the merged or acquired firms.One of the most frequently stated synergies with respect to Mergers and Acquisitions motives is the operating synergies in terms of economies of scope and economies of scale, for instance, ability to offer a wide range of products. Other kinds of synergies are financial synergies

Selection and Valuation of Cross-BorderMergers and Acquisition – Literature Review(c) copyright 2009

Abstract: The longstanding debate over the efficacy of M&A as a mode of business growth continues to separate practitioners and academics. While M&A global volume looks likely to return to US$2 trillion levels following a rebound from year 2000 lows, the largely economics-oriented research literature overwhelmingly concludes that M&A at best achieves zero real

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gains for the average acquiring firm, with effectively all value creation being transferred to the shareholders of the acquired entity. Dispersion of results about the mean is significant, representing considerable investment risk. The literature shows that most acquisitions fail to achieve their stated or implied financial objectives, with up to two-thirds being described as failures. Either these analyses are flawed, or else hidden causal factors are at work. Researchers are divided on the issue, providing only limited guidance to the practitioner evaluating M&A opportunities.

Objectives of the Study:

1. To analyze the trends, concerns, and issues involved in mergers & acquisitions with special reference to India.

2. To work out the impact of mergers & acquisitions as well as causes of failure of mergers & acquisitions in pharmaceutical industry.

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3. The purpose of this thesis is to examine the critical success factors for M&A projects in the view of Investment Bank. Additionally, we see the need to explore some specific questions related to M&A projects before conducting a thorough investigation of our principal research question. They are: a) What are the main roles of Investment Banking firms associated with merger &

acquisition projects? b) What is the process of conducting a merger & acquisition project? c) What are project success criteria for merger & acquisition projects from the

perspective of Investment Banking firms? Once these questions have been addressed, it will provide a concrete and comprehensive knowledge background for us to investigate and elaborate our understanding about the critical success factors for M&A projects in the view of Investment Banks. We aim to provide fruitful insights that will assist the advising team in better achieving success in their M&A projects.

Hypothesis:

The objectives are meant to arrive at some prediction. As we expect that our study will have some conclusion so we will have hypothesis testing for the objectives we stated so that they are tested at some significance level –

1. Null Hypothesis (H0): Their no success in the mergers and acquisition of the pharmaceutical industry

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Alternate Hypothesis (H1): Their is success in the mergers and acquisition of the pharmaceutical industry

2. Null hypothesis (H0): Failure criteria for merger & acquisition projects in pharmaceuticals industry from the perspective of Investment Banking firms

Alternate Hypothesis (H1): Success criteria for merger & acquisition projects in pharmaceuticals industry from the perspective of Investment Banking firms

Research Methodology

After the background for the research topic is established through the literature review with the knowledge gap identified, the next logical step is to draw a route map for answering the research questions including the identified research proposition.

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More specifically, a semi-structured interview method relating to qualitative research is conducted to develop deep understandings about issues on M&A projects (i.e., M&A services, processes, project team, etc.) as well as to make initial and also key assessments on the list of critical success factors (i.e., the research proposition).

The research methodology to be used in this research will be:-

1) Descriptive Research: Descriptive research is done with a specific research question in mind. It gives a set view of the subject, population, market segment or problem. An example of descriptive research would be a report that provides an age and gender breakdown of the users of a particular online service. Descriptive research provides research questions, populations or methods of analysis before the research is started. In marketing, it often consists of longitudinal studies, which study the behavior of individuals over time, and cross-sectional studies, which examine many populations at one specific time.

2) Exploratory research: Researchers employ exploratory research when little is known about the topic and previous theories or ideas do not apply. For example, if you wanted to study how to get students to use the computer lab in a college environment, you might first have to do exploratory research to figure out which students might need the lab and what appeals to this demographic. Exploratory research clarifies problems, gathers data and creates initial hypothesis and theories about subjects. The primary point of exploratory research is to give researchers pertinent information and help them to form initial hypotheses about the subject.

Population and Sample Size

Sampling

Since the difficulties in approaching potential interviewees are foreseen, it is decided hat the sample for interview would be as large as possible within three constraints:

1. Interviewees are currently involved in M&A projects,

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2. (Part of) their organization’s operations must be related to external Investment banking advisory activities, and

3. Different interviewees hold different roles in an M&A project.

a) Theory

b) Hypothesis/ Hypotheses

c) Data collection

d) Findings

e) Hypothesis confirmed or rejected

f) Revision of theory

In adopting the adjacent model to our research, the process begins with the review of critical success factors highlighted from numerous literatures. As a result from the literature review, the proposition of ten critical success factors for M&A projects in the view of M&A advisory firms is formed, basing on which we then specify the suitable data collection methods. Later, based on our findings from the collected data, each of the ten critical factors will be evaluated and subsequently accepted or rejected. This would lead to a revision of the theory, from which a new list of critical success factors is

to be derived from the analysis of our findings.

The reason for the first constraint is to ensure interviewees have relevant experience to understand and contribute to the research topic. With regards to the second constraint, the primary focus of our research is the view of M&A advisory firms

Tools and Techniques

In our research ‘Spearman’s Rank Correlation’, ‘Z- test’ and ‘Chi-square test’ will play an important role to play.

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Spearman’s Rank Correlation Coefficient In statistics, Spearman's rank correlation coefficient or Spearman's rho, named after Charles Spearman and often denoted by the Greek letter (rho) or as , is a nonparametric measure of statistical dependence between two variables. It assesses how well the relationship between two variables can be described using a monotonic function. If there are no repeated data values, a perfect Spearman correlation of +1 or −1 occurs when each of the variables is a perfect monotone function of the other.Spearman’s co-efficient, like any correlation calculation, is appropriate for both continuous and discrete variables, including ordinal variables.

Z- Test: A Z-test is any statistical test for which the distribution of the test statistic under the null hypothesis can be approximated by a normal distribution. Because of the central limit theorem, many test statistics are approximately normally distributed for large samples. For each significance level, the Z-test has a single critical value (for example, 1.96 for 5% two tailed) which makes it more convenient than the Student's t-test which has separate critical values for each sample size. Therefore, many statistical tests can be conveniently performed as approximate Z-tests if the sample size is large or the population variance known.

Chi square Test:In probability theory and statistics, the chi-squared distribution (also chi-square or χ²-distribution) with k degrees of freedom is the distribution of a sum of the squares of k independent standard normal random variables. It is one of the most widely used probability distributions in inferential statistics, e.g., in hypothesis testing or in construction of confidence intervals. When there is a need to contrast it with the non-central chi-squared distribution, this distribution is sometimes called the central chi-squared distribution.The chi-squared distribution is used in the common chi-squared tests for goodness of fit of an observed distribution to a theoretical one, the independence of two criteria of classification of qualitative data, and in confidence interval estimation for a population standard deviation of a normal distribution from a sample standard deviation. Many other statistical tests also use this distribution, like Friedman's analysis of variance by ranks.

Research Tools: Since we are trying to reach conclusions that extend beyond immediate data alone. So we have to use inferential statistical tools for it. We may use f-test, t-test, Analysis of variance, Chi-square Test and Regression etc.

Procedure for Data Collection:

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http://en.wikipedia.org/wiki/Student's_t-test

http://en.wikipedia.org/wiki/Central_limit_theorem

http://en.wikipedia.org/wiki/Central_limit_theorem

http://en.wikipedia.org/wiki/Normal_distribution

http://en.wikipedia.org/wiki/Null_hypothesis

http://en.wikipedia.org/wiki/Null_hypothesis

http://en.wikipedia.org/wiki/Test_statistic

http://en.wikipedia.org/wiki/Probability_distribution

http://en.wikipedia.org/wiki/Statistical_hypothesis_testing

http://en.wikipedia.org/wiki/Statistics

http://en.wikipedia.org/wiki/Rho_(letter)


Our main source of data collection will be the site of RBI’s master circular from which data for mergers and acquisition and its process by the investment banks will be taken. Also other website like mergersandacquisition.com can be seen for various information regarding how do the investment banks go about in the proess of mergers and acquisition.

Data Analysis: The analysis of data may include due diligence and valuations but since have not done research till date we can’t provide any analysis now.

Suggestions/Conclusions: The research has not been done till now so conclusions will be drawn after the research is completed.

Bibliography

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from http://www.studymode.com/essays/Sucess-Factors-In-Merger-And-Acquisition-

600209.html

Allen, L., Jagtiani, J., Peristiani, S., and Saunders, A., 2004. The Role of Bank

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Advisors in Mergers and Acquisitions. Journal of Money, Credit & Banking, 36(2), 197-224.

(2011, 02). Merger and Acquisition Process. StudyMode.com. Retrieved 02,

2011, from http://www.studymode.com/essays/Merger-And-Acquisition-Process-

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http://www.mergersandacquisitions.in/process-of-merger-and-acquisition.htm

Angwin, D., 2001. Mergers and Acquisitions across European Borders: NationalPerspectives on Preacquisition Due Diligence and the Use of ProfessionalAdvisors. Journal of World Business, 36 (1), 32-57.

Bao, J., and Edmans, A., 2007. How Should Acquirers Select Advisors? Persistencein Investment Bank Performance [online]. EFA 2007 Ljubljana Meetings Paper.Available at SSRN: http://ssrn.com/abstract=952935 [Accessed 02 February2014].

Chunlai Chen, Z., and Findlay, C., 2003. A Review of Cross-border Mergers andAcquisitions in APEC. Asian-Pacific Economic Literature, 17 (2), 14-38.

Cogut, C. and Rodgers, S., 2006. A review of recent global merger & acquisitionactivity. Getting the Deal Through – MERGERS & ACQUISITIONS 2006[online]. Available athttp://www.gettingthedealthrough.com/narrative_pdf.php?id=12 [Accessed 02February 2014].

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investment banks assisting companies involved in m & a with respect to pharmaceuticals sector

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