Novartis:%20An%20Analysis%20of%20the%20Ciba-Geigy%20and%20Sandoz%20Merger

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Novartis An Analysis of the Ciba-Geigy and
Sandoz Merger

• Team 10
• Minjal Dharia - Stefanie Duda - Jennie Ma
• Andrew Schwartz - Siddharth Sekhri

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• 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

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Geigy f. 1758
Sandoz f. 1886
Ciba f. 1859
Ciba-Geigy f. 1970
Novartis f. 1996
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• Sandoz Limited
• Founded 1866 - Basel, Switzerland
• American Subsidiary
• Sandoz Corporation NYC, NY
• Total Revenues 13.0 billion

• Ciba-Geigy
• Founded 1758 - Basel, Switzerland
• American Subsidiary
• Ciba-Geigy Corp Tarrytown, NY
• Total Revenues 17.5 billion

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• 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

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• 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

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• 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

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• 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

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• 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.

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• 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 goodwill- the
  difference between the purchase price and book
  value of an asset.

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• 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.

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• Novartis re-birth toward life sciences
• Market Value gt 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

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• 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 costs of biotech and genetic research
  tools
• Shares are underrepresented in the US
• Listed as ADRs on the NYSE

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• Sandoz
• Was autocratic and hierarchical
• Operated most functions at the business segment
  level
• Measured performance by EBIT and return on sales
• Ciba
• Was collegial and informal
• Matrix organization
• Used direct costing
• Measured performance by division contribution
• Novartis
• Used Sandozs organizational system
• Measured performance by EBIT and return on net
  assets

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• Sold off non-core business units
• Boosted RD spending
• Sharpened marketing in the US
• Increased sales force and advertising
• US sales jumped to 43 of revenues
• Made strategic acquisitions such as Pfizers drug
  Enablex, beating out GlaxoSmithKline

CEO Daniel L. Vasella
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• 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.

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Last Chg Prev Cls High Low Vol
38.45 0.75 37.70 38.50 38.19 458,300
38.45 Chg YTD Change YTD Change 52 Wk Range 52 Wk Range
38.45 1.99 4.68 4.68 33.85 to 42.07 33.85 to 42.07

  
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