Merger and Acquisition of Companies - Essay Example

Merger and Acquisition SHIRE/NPS Table of Contents Merger and Acquisition SHIRE/NPS Table of Contents 2 Introduction 3 Merger and Acquisition of Shire Plc and NPS 3 Situation 3 Strategy 6 Valuation 7 Valuation Using Multiples 9 Ratio Analysis of NPS Pharma for the Year 2014 11 Downside of the Deal 12 Conclusion 13 References 14 Bibliography 18 Introduction In recent decades, merger and acquisition has become a significant facet of the corporate world that has further allowed capable business establishments to survive in this increasing economic competition (Allen & Overy, 2015; Evans, 2000). With due emphasis on the above stated notions related to merger and acquisition, the following discussion will consider evaluating the pros as well as the cons of a similar deal undertaken by Shire/NPS to analyse whether such a decision will serve beneficial for the shareholders of both companies. Merger and Acquisition of Shire Plc and NPS Situation In order to expand its business operations and strengthen its financial position, Shire plc has recently decided to acquire the shares of NPS pharma (Shire, 2015b). Following a lengthy process of amalgamation, it was finally on February 2015 that Shire was successful in acquiring all the shares of NPS Pharma for $5.2 billion in cash, hence leading to the acquisition of the latter by the former (Bloomberg, 2015). It is forecasted that the decision will help the company to operate successfully in the long run, besides earning a considerable amount of profit (Hot Corp. News, 2015). Focusing on the strategies undertaken for the acquisition by Shire, the company can be observed as initially focused on acquiring outstanding shares of NPS at the rate of $46 per share that may be referred as an increase of about 51 percent from its previously recorded share price (EYGM Limited, 2014b). Growing Demand for Rare Disease Drugs Source: (EYGM Limited, 2014a) NPS Pharma manufactures certain drugs and provides therapies that are targeted to curing various rare diseases. This acquiring NPS would allow Shire in providing medicinal treatment and therapies in the name of Shire Plc. Hence, the acquisition of NPS will help Shire in becoming one of the leading biotechnology companies in the United States, beating competition within the industry (EDGAR, 2015). Therefore, acquisition of NPS was likely to further allow Shire to use the innovative portfolio of NPS focused on the treatment of gastrointestinal disorders along with the treatment of rare chronic diseases among the patients (DD News, 2015; EYGM Limited, 2014b). Profitability Growth of Pharmaceutical Industries Due To M & A Source: (EYGM Limited, 2014a) When concerning the marketability of the two companies, each of them possesses certain strengths, which could benefit the stakeholders of both the entities, post its acquisition. For instance, ‘Gattex’, which is a medication for the treatment of short bowel syndromes, was first introduced by NPS (IBS, 2015). The company also provides medicines for the treatment of hypoparathyroidism and ‘Autosomal dominanthypocalcemia’ those are rarely found among people (NPS Pharma, 2015). Therefore, after merging with NPS, Shire can use all these medicines for the treatment of rare diseases in its name and manufacture new medicines with the help of innovative techniques (The New York Times Company, 2015). Strategy In the recent era, the pharmaceutical industry has emerged as one of the most profitable sectors of businesses for which, majority of the entrepreneurs have been planning to invest in the particular sector (MarketLine, 2015c). Competition among the existing companies has also been increasing with the gradual augmentation in its demand for pharmaceutical products and services (Financial Times, 2015; EYGM Limited, 2014a). Increasing Rate of M & A in the Pharmaceutical Sector Source: (Allen & Overy, 2015) An example of amalgamation of Sun Pharmaceutical Industries Ltd and Ranbaxy Laboratories Ltd. may be considered in this ground, wherein Sun Pharmaceuticals acquired the shares of Ranbaxy in April 2015. Both the companies are multinational based operating in the pharmaceutical industry. The deal served beneficial for Sun Pharmaceuticals, as the acquisition helped the company to become the fifth largest pharmaceutical companies of the world in terms of revenue. Both the companies have been involved in the manufacturing of multipurpose medicinal drugs as well as medicinal equipments. Therefore, acquiring Ranbaxy provided a major competitive advantage to Sun Pharmaceuticals, which helped it to operate as a market leader in the operating country. Moreover, Ranbaxy possessed highly skilled employees and staff along with an efficient research and development team, which will serve beneficial for Sun Pharmaceuticals to manufacture medicines with innovative techniques (MarketLine, 2015c). Valuation Shire acquired the shares of NPS at $5.2 billion, which rewarded Shire with complete authority on the net worth and the resources of NPS. The deal was finalized on February 2015 with the consent of both the companies (CNBC, 2015; Hirschler, 2015). The value per share of NPS was $30.47 before its acquisition by Shire, which was much lower, in comparison to other companies in the industry, as the company was suffering from lower profit margins (Bloomberg, 2015). Shire decided to acquire the shares of NPS at the rate of $46.00 per share in cash, which is considered as a premium of 51 percent on the total share price of NPS. As per the deal, Shire acquired 88,869,118 common shares of NPS Pharma along with 7,599,694 common shares that was transferred within the next three trading days from the commencement of deal (Bloomberg, 2015). The overall quoted price of the deal was $5.2 billion, which was a good a profitable deal for Shire. The unaffected share price of NPS Pharma on December 2014 was $30.47 per share that was acquired by shire at $46.00 per share. This represented a 51% premium to the unaffected share price of NPS Pharma (CNBC, 2015). In subsequence to the acquisition, Shire has been expecting to enhance the level of total revenue earned by the company from the year 2015 onwards (Shire, 2015a). Moreover, the company has also been planning to improve its financial system by increasing its earnings per share, which will serve profitable for the shareholders of the company (Shire Plc, 2015). Even though NPS was suffering from financial loss, the company was the founder of Gattex, which is a rare disease drug and it had high demand in the market. Shire PLC acquired the patent of Gattex at $295,000, which was one of the most costly drugs manufactured for the treatment of rare disease (Hirschler, 2015). Therefore, acquiring NPS can be stated as a profitable long run decision for Shire. Moreover, the deal has been beneficial for the board of directors of NPS too; as they could maximize their profit earning capacity as it gets merged with Shire Plc. It must be noted in this context that the newly merged company will be operating under Shire, as its wholly owned subsidiary (MarketLine, 2015c). Revenue and Gross Profit of NPS Source: (Ornskov & Nader, 2015) Valuation Using Multiples Calculation of EV/ Sales From the above EV/Sales figure of NPS and its three main competitorsit can be observed that the E/V sales of NPS is higher as compared to other competiting firms in the same industry. Higher the value of EV/ Sales, more attractive is the particular company and thus the acquisition of NPS by shire was a wise decision (MarketLine, 2015c). Calculation of P/E P/E refers to profit earnings ratio, which is generally a valuation ratio of the current price of share of a company as compared to its earnings per share (Bloomberg, 2015). The P/E of any company is calculated by dividing market value per share with earnings per share. In this regard, from the above chart it can be seen that P/E of NPS was higher in the year 2014 that depicts its favorable financial position. Thus, the decision of Shire Plc to acquire NPS Pharma served beneficial for the company as the P/E in the year 2014 was much higher as compared to others. Calculation of EV/EBITDA EBITDA refers to ‘Earnings before Interest, Taxes, Depreciation and Amortization’ and it is generally calculated by deducting various expenses excluding interest, amortization and depreciation from total revenue earned by the company. EBITDA helps in the evaluation of profitability of a company. Thus, from the above chart it can be observed that the EBITDA of NPS is higher as compared to the competitors which represents that the acquisition was benificial for Shire (Bloomberg, 2015). Calculation of price/share The value per share price of any company determines its profit earning capacity as well as the profitability of the shareholders. If the share price of any company is higher, it represents that the company is in a good financial position and it is operating successfully in the market. In this context it can be observed from the above chart that in the year 2014 the price per share of NPS was 35.77 which were comparatively lower than the competing firms. Thus, acquiring NPS at a lower share price served benificial for Shire Plc as it has to pay lesser amount to the existing shareholders through which it can save a major portion of its revenue (Bloomberg, 2015). Ratio Analysis of NPS Pharma for the Year 2014 From the perspective of ratio analysis it can be observed that the solvency ratio of the company stood at a negative value, which indicates greater probability in becoming default on debt obligations. On the other hand, the current ratio of the company depicted a positive value of 4.6, which indicated that the company is able to pay off its liabilities and likewise invest substantial amounts in future. However, the current profitability ratio of the company after acquisition is higher as compared to before acquisition. Thus, it served beneficial for Shire Plc in acquiring the shares of NPS pharma because the amount of sales and profit has been increasing after acquisition (Bloomberg, 2015). Downside of the Deal Even though the acquisition of NPS by Shire Plc has been a wise decision for the company, there are certain downsides of the deal that may be considered. The patent of Gattex, which is one of the most profitable products of NPS, is valid till 2020. Thus, Shire had to renew the patent on or before 2020, which will incur huge costs. Moreover, Shire acquired the shares of NPS at 51 percent more premium than the value per share possessed by NPS, which is a considerable amount. Thus, acquiring the shares of NPS at a lower price will serve to be beneficial for Shire. Moreover, there were existing shareholders of NPS to whom Shire has to pay them their share amount after the acquisition of NPS. This will lead to a huge outflow of excess capital in addition to the price involved in the acquisition. There are various other factors that are the negative sides of the Shire-NPS merger. The most significant of them was the paying off the liabilities of NPS. Since, NPs was suffering from financial since few years the number of creditors also increased and thus led to the increase in likability that had to be paid to the respective creditors before the merger. After acquisition of NPS, Shire became the parent company and thus it was its responsibility to pay off the existing debts to the creditors. Similarly paying of the debts and liabilities to the creditors also involved the outflow of capital. Thus, it may also be referred to as a major downside of the deal (CNBC, 2015). The major purpose behind the acquisition of NPS by Shire was thus observed as to acquire the technologies and techniques being implemented by the company for better productivity, besides taking it as a leap towards effective turnaround to gain competitive as well as sustainable advantages. According to the findings obtained in the study, the acquisition is quite likely to help the company in acquiring different attributes of NPS that will help it in providing better quality services to the industry stakeholders along with improved technology advantages. Furthermore, the shareholders were also observed to be benefited with a higher amount of shares rewarding them high profit margin benefits. Conclusion From the above discussion it can be concluded that the acquisition of NPS by Shire has served beneficial for both the companies in establishing a leadership position within the US pharmaceutical industry. Both the companies were the leading pharmaceutical companies, and were also identified as the closest competitors to each other. References Allen & Overy, 2015. In Focus ‘Protectionism’ In M&A: A Mixed Picture. M&A Insights, pp. 1-27. Bloomberg, 2015. Shire to Buy NPS for $5.2 Billion for Rare-Disease Drugs. Bloomberg Business. [Online] Available at: http://www.bloomberg.com/news/articles/2015-01-11/shire-to-buy-nps-for-5-2-billion-to-add-rare-disease-medicines [Accessed June 29, 2015]. Bieri, C., 2015. Global M&A Report Pharma / Biotech 2015. An IMAP Industry Report, pp. 1-17. CNBC, 2015. Shire, NPS Pharma to Merge in $5.2 Billion Deal. Mergers and Acquisitions. [Online] Available at: http://www.cnbc.com/id/102327621 [Accessed June 29, 2015]. DD News, 2015. Shire to Snap Up NPS Pharma for $5.2B. Pharma, Biotech & Life Science. [Online] Available at: https://www.dropbox.com/sh/8vp9qgefxagzhkt/AADceUOYd6t_fTeMtDI0ud-ja/!DDNEWS_0215.pdf?dl=0 [Accessed June 29, 2015]. EDGAR, 2015. NPS Pharmaceuticals Inc. Biotechnology & Drugs, pp. 1-44. Evans, M. H., 2000. Mergers & Acquisitions. Excellence in Financial Management, pp. 1-23. EYGM Limited, 2014a. Firepower Fire Works Focus, Scale and Growth Drive Explosive M&A. Firepower Index and Growth Gap Report 2015, pp. 1-15. EYGM Limited, 2014b. The Shifting Balance Of Fire Power: Big Pharma’s Challenges in a Competitive M&A Environment. Firepower Index and Growth Gap Report 2014, pp. 1-11. Financial Times, 2015. Shire in $5.2bn deal for US biotech NPS. Financial Times. [Online] Available at: https://www.dropbox.com/sh/8vp9qgefxagzhkt/AAAmoDOLx3KgNmqh78LY0UBqa/!Shire%20in%20%245.2bn%20deal%20for%20US%20biotech%20NPS%20-%20FT.com.pdf?dl=0 [Accessed June 29, 2015]. Hirschler, B., 2015. Shire to Buy NPS for $5.2 Billion to Boost Rare Disease Drugs. Reuters. [Online] Available at: http://www.reuters.com/article/2015/01/12/us-nps-m-a-shire-idUSKBN0KK0QE20150112 [Accessed June 29, 2015]. Hot Corp. News, 2015. Shire plc (SHPG) to Acquire NPS Pharma (NPSP) in ~$5.2B Deal. Article. [Online] Available at: https://www.dropbox.com/sh/8vp9qgefxagzhkt/AACLEoHY30jhBGw1IPeFXOiya/Shire%20plc%20(SHPG)%20to%20Acquire%20NPS%20Pharma%20(NPSP)%20in%20~%245.2B%20Deal.pdf?dl=0 [Accessed June 29, 2015]. IBS, 2015. Key Merger & Acquisitions. Monthly Newsletter, 1-5. MarketLine, 2015a. Company Profile. Shire Plc, pp. 1-28. MarketLine, 2015b. Company Profile. NPS Pharmaceuticals Inc., pp. 1-17. MarketLine, 2015c. Biotechnology in Europe. MarketLine Industry Profile, pp. 1-33. NPS Pharma, 2013. Annual Report Pursuant To Section 13 or 15(D) Of the Securities Exchange Act of 1934. Annual Report, pp. 1-502. NPS Pharma, 2015. PLShire to Acquire NPS Pharma as Further Step in Building a Leading Biotech. General Releases, pp. 1-8. Ornskov, F. & Nader, F., 2015. Further Step In Building A Leading Biotech Transaction Valued At $5.2 Billion Enhances Growth Profile. Shire to acquire NPS Pharmaceuticals, pp. 1-17. PR Newswire Association LLC, 2015. Shire Completes Acquisition of NPS Pharma. Acquisitions, Mergers and Takeovers. [Online] Available at: http://www.prnewswire.com/news-releases/shire-completes-acquisition-of-nps-pharma-293215141.html [Accessed June 29, 2015]. PWC, 2015. Pharmaceutical and Life Sciences Deals Insights Quarterly Q1 2015. Market Update, pp. 1-18. Rockoff, J. D. et. al., 2015. Shire to Buy NPS Pharmaceuticals for$5.2 Billion. The Wall Street Journal, pp. 1-3. Shire Plc, 2015. Shire Gets Merger Boost with US Drug Approval. Proactive Investors, pp. 1-2. Shire, 2015a. Shire Completes Acquisition of NPS Pharma. Press Release, pp. 1-3. Shire, 2015b. Shire to Acquire NPS Pharma as Further Step in Building a Leading Biotech. Press Release, pp. 1-11. Shire, 2015c. Shire Comments on Press Release from NPS Pharma Regarding FDA Approval of NATPARA (Parathyroid Hormone). Press Release, pp. 1-5. The New York Times Company, 2015. Shire to Buy NPS Pharmaceuticals for $5.2 Billion. Mergers & Acquisitions. [Online] Available at: http://dealbook.nytimes.com/2015/01/11/shire-to-buy-nps-pharmaceuticals-for-5-2-billion/?_r=1 [Accessed June 29, 2015]. Bibliography Lee, K. & Pennings, J. M., 1996. Mergers and Acquisitions: Strategic - Organizational Fit and Outcomes. University of Pennsylvania, pp. 1-41. Pamphilis, D. D., 2011. Mergers and Acquisitions Basics. Elsevier, pp. 1-279. Roberts, A. et. al., 2010. Mergers and Acquisitions. Edinburgh Business School, pp. 1-46. Read More