Case 11, Group 5

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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


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


Mean 618805.25 606963.25 1225768.5

SD 103673.86 125003.65 177601.40

CV 17% 21% 14%

Net Income Volatility


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


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


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


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


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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Case 11, Group 5