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CASE-11THE UPJOHN COMPANY:
THE UPJOHN –PHARMACIA MERGER
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Group-05
MEMBERS OF GROUP-05
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Name ID
Arifur Rahman 11-048
Ashifur Rahman 11- 067
Abu Yousuf Muhammad Solaiman 11-127
Md. Abul Ehsan 11-180
Enam- ul- Kabir 11-273
ANALYSIS OF ECONOMY
Current prediction of U.S economy is encouraging
Population had been aging Increasing no. of health insurance
plans covered prescription drugs Increasing no. of countries were
attempting to improve their health care systems
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ANALYSIS OF INDUSTRY
Porter’s Five Factor Model
Threat of New Entrants: Moderate High development cost Opened for generic drugs Large capital
Bargaining power of Customer: HighLow switching costCustomers are very much price
sensitive
ANALYSIS OF INDUSTRY
Bargaining power of suppliers: Low One of the largest company High volume of purchase
Threat of substitute: Low Less availability of substitute products
Rivalry among Competitors: High Competitors compete for dominance in
the market Companies are consolidating
ANALYSIS OF COMPANY
SWOT analysisStrength:
One of the largest companyOperated in several market segmentSales were divided into different
areasWeakness:
A number of its patents had expired on key products
Weak in foreign salesWeak product development pipeline
ANALYSIS OF COMPANY(CONT’D)
Opportunity: Selling generic drugs Different initiatives are taken to
improve performance Merger with Pharmacia will make
Upjohn a top tier firm
Threat: Cost synergies may not be
obtainable by merger Loss of patent can affect the
company significantly
LIQUIDITY RATIO
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PROFITABILITY RATIO
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ACTIVITY RATIO
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LEVERAGE RATIO
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BUSINESS RISK
Revenue Volatility
Upjohn Pharmacia combined
Mean 2931847.75 2785341.25 5717189
SD 48383.952 417538.727 454258.097
CV 1.65% 15.0% 7.95%
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Operating Expense Volatility
Upjohn Pharmacia combined
Mean 2413481.752428057.7
5 4841539.5
SD 150260.94 307214.09 437585.73
CV 6.23% 12.65% 9.04%
BUSINESS RISK
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EBIT Volatility
Upjohn Pharmacia combined
Mean 618805.25 606963.25 1225768.5
SD 103673.86 125003.65 177601.40
CV 17% 21% 14%
Net Income Volatility
Upjohn Pharmacia combined
Mean 419981.5 219394.25 639375.75
SD 67199.11 100580.08 136484.33
CV 16% 46% 21%
Comment: Business Risk will increase because of merger.
BANKRUPTCY RISK
Altman’s Z score
Upjohn Pharmacia combined
2.16097 1.762239 1.917043
Comment:Bankruptcy risk will not increase.
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FINANCIAL RISK
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Pharmacia Upjohn combined
Debt to Equity 0.722788 1.095440379 0.889451697
debt ratio 0.419546 0.522773346 0.47074593
times interest Earned 12.92032 33.08451129 18.74978252
Comment: Financial Risk will slightly decrease.
PROBLEM STATEMENT
Evaluating strategic reasoning and effectiveness of Upjohn-Pharmacia merger.
Interpreting the market reaction and whether the magnitude of performance improvements the market is expecting from the merger are realistic.
Alternative restructuring strategy- risk and benefit.
MERGER BRIEF Tax-free exchange of shares. Name of the new company: Pharmacia & Upjohn
Inc. Exchange of Shares:
For Upjohn: 1.45 for 1 For Pharmacia: 1 for 1
Outstanding Shares: Total- 504 million Upjohn- 248 million Pharmacia- 255 million
STRATEGIC REASONING BEHIND THE MERGER Industry Specific:
Downward pressure of pharmaceutical companies’ margin.
Firm Specific:Competition from lower priced generic productsFewer products in product development
pipeline.Weak in foreign salesStagnant stock price over the six months
WILL THE MERGER ADDRESS THE PROBLEM? Market Presence
will become the ninth largest pharmaceutical company. Sales would have been $7 million in 1994
Research and Development: Increasing cost of developing new product were making it more
difficult for the smaller company. Upjohn was going over the industry average but still was
significantly fell short. Merging with Pharmacia would help to overcome this problem
Geographic Reach: As the cost developing product rose it became increasingly
important to capture the world market. Upjohn was weakest in Europe- the second largest market
where Pharmacia was the strongest at that market.
WILL THE MERGER ADDRESS THE PROBLEM?
Product Portfolio: Pharmacia’s product will be added to Upjohn’s pipeline. Combined company would have sales over $500 million
in each of six areas. Cost Synergies:
The merger will give $500 million as cost synergies. One-half of the selling would come from selling.
Growth: Both the firm were growing under the industry average. After merger it is expected to grow even faster than the
industry average. Moreover financial position and Management
experience will be the added advantages.
What is the interpretation of the stock market reaction to the
announcement of deal?
VALUATION (UPJOHN)
Assumption:Sales growth 3.5%Terminal growth 1%Tax rate 35 %Operating cost expense 84 %
VALUATION (UPJOHN)
VALUATION (COMBINED)
Sales growth 4 % Terminal growth 1% Cost goods sold 82 %
VALUATION(COMBINED)
DECISION CRITERIA
investors will approve the merger because the value they will get after the merger will be more
than Upjohn's intrinsic value
WHAT IS THE ALTERNATIVE RESTRUCTURING STRATEGY FOR UPJOHN COMPANY?
ALTERNATIVE RESTRUCTURING STRATEGY
Debt issuance Equity issuance
Common Equity Preferred Equity
Divesture of non-core business
ALTERNATIVE RESTRUCTURING STRATEGY
Using low debt Recession has no impact Improving health care system Growing presence in central & eastern Europe Thirty (30) high potential upcoming projects Introduction of medicine for cancer, stroke and AIDS
ALTERNATIVE RESTRUCTURING STRATEGY
Debt/Equity Ratio 20.58% 50% 70% 80%
Long Term Debt 515,005 1,251,190 1,751,6652,001,90
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Shareholders Equity 2,502,379 2,502,379 2,502,3792,502,37
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VALUTION (ALTERNATIVE RESTRUCTURING)
VALUTION (ALTERNATIVE RESTRUCTURING)
Risk: Bankruptcy risk will increase New line of product may not be profitable Geographical expansion is difficult without merging
foreign companies
ALTERNATIVE RESTRUCTURING STRATEGY
RECOMMENDATION
Merger of two companies add more value than other restructurings
The merger create synergy effect. So Upjohn will go through merger with
Pharmacia.
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