Merger of Sanofi-Synthélabo and Aventis

Dossier / Travail , 2006 , 32 Pages , Note: 80

Gestion d'entreprise - Investissement et Financement

In the first part, this academic assignment provides general information about motives for international acquisitions. Moreover, it discusses whether foreign exchange markets and stock markets can be said to be efficient.

The second part critically analyses the Merger of Sanofi-Synthélabo and Aventis by examining the following aspects:

- market position of each company prior to the merger
- motives for the proposed merger
- attack and defence tactics applied by Sanofi-Synthélabo and Aventis
- methods used to finance the merger
- share price movements immediately before during and after the proposed take-over (commenting on the benefits to shareholders of each company)
- company performance in the period following the take-over (reflecting on the initial take-over motives)

Table of contents

1. Motives for international acquisitions
Strategic motives
Market motives
Economic motives
Personal motives
Particularities in international acquisitions

2. Efficiency of foreign exchange and stock markets
Efficiency of foreign exchange markets
Efficiency of foreign stock markets

3. Market position of Sanofi-Synthélabo and Aventis prior to the acquisition
Sanofi-Synthélabo
Aventis

4. Motives for the acquisition of Aventis by Sanofi
Increased market share in the United States
More power in the whole pharmaceutical market
Fear of generic drugs
Cancellation of shares
Undervaluation of Aventis shares
Cutting costs

5. Attack and defence tactics applied by Sanofi-Synthélabo and Aventis
First hostile takeover bid of Sanofi-Synthélabo
Defence tactics of Aventis and agreement to merge
Second friendly offer

6. Methods used to finance the merger or acquisition (15 marks)
Cash alternative
Paper offer

7. Share price movements immediately before during and after the proposed take-over
Reactions to rumours of a forthcoming merger
Responses to the first official offer
Effects on the acceptance of the second friendly bid
After the definite finish of the merger

8. Company performance in the period following the merger

Effects on the main shareholders

Reference list

1. Motives for international acquisitions

According to Buckley and Ghauri (2002, p.90) there are four basic motives for an acquisition: strategic, market, economic and personal motives.

Strategic motives

Acquisitions serve to reach strategic targets like the development of synergy effects. For example Philipp Morris successfully applied its strengths in marketing cigarettes to the acquired Miller Beer company in such an efficient way that Miller could improve its market position from number seven to number two.

An acquisition can also support the strategy to extend a company’s core competences to other branches. By doing this, firms try to gain competitive advantage in other business sectors. For example Honda’s core competence is the construction of internal combustion engines as a power source. They transferred this core competence to various businesses, including cars, motorcycles, outdoor power equipment, generators and lawnmowers.

With every acquisition the market share of a company can be improved significantly. By acquiring new products and brands a company becomes a bigger and more important supplier. It will become able to enhance its reputation and as a result, the market power can be boosted.

Another strategic motive can be to add value to the company by winning new complimentary products, resources or strengths. In 1970, the record label EMI planned to expand on the medical market as they had developed a CT scanner which enabled doctors to see three-dimensional X-rays. They entered the biggest medical market, the USA even if they had no resources, sales network and experience values. As long as they were the only company selling this product they were successful. But soon after that other companies which were used to sell medical equipment pushed them off the market.

If EMI had acquired another company which was already established in that market they could have had a big chance to enter a new market.

Specifically in international acquisitions certain strengths can be adopted from the acquired company. These strengths are developed due to national differences. People of some countries have extraordinary skills on one field, whereas people of another country are excellent in doing something else. Combining these strengths can result in an overall stronger company.

Another strategic reason is to benefit from another company’s parenting advantage. Often in different markets there exist similar critical success factors. If one company is able to expose and successfully apply these factors it can achieve success by acquiring firms which do not have the knowledge (Buckley and Ghauri, 2002, pp. 90-92).

Market motives

Acquiring already established companies in other countries is a very effective and the fastest way to enter new markets. Especially if a company wants to enter a saturated market it makes sense to acquire a brand and the company behind instead of trying to grow up a new one. So an acquisition can help to expand the current market position of a company in a very easy way, as the acquiring company does not have to start from zero. It will receive support in many ways from the target company. But before deciding for an acquisition the organisation should compare various possibilities to enter a new market like for example franchising, joint ventures or licensing (Buckley and Ghauri, 2002, pp. 92-93).

Economic motives

From the economic point of view an acquisition makes sense if the profits of the merged company exceed the profits of the independent companies. So after the acquisition the new built company should have a stronger market power than the former independent companies. Sometimes merged firms are even able to form an international oligopoly or monopoly (Buckley and Ghauri, 2002, p.165).

Another very important economic reason for an acquisition is the creation of economies of scale or other cost saving possibilities which are created when two companies are operating in the same industry due to redundant resources. For example when Daimler acquired Chrysler there was forecasted a $1.3 million cost saving possibility due to combined purchasing.

A third motive from the economic point of view is that sometimes the stock of a specific country is underestimated. So during 1981 and 1990 US companies were more often acquired by firms of other countries than the other way around. A reason for this might be found mostly in the differences in valuation.

Furthermore macroeconomic differences between several countries can be an economic reason for an acquisition. This refers to different economic conditions of two countries like for example distinct growth rates. Due to this, acquiring companies are very often situated in a slower growth country than the target firms (Buckley and Ghauri, 2002, pp. 93-94).

Personal motives

Managers and stakeholders usually have different views concerning the targets for the organisation. Managers are interested in possibilities that give them more power. Stakeholders in turn want to achieve increases in stock prices. As a result managers are rather interested in acquisitions than the owners of the organisation (Buckley and Ghauri, 2002, p.94).

Particularities in international acquisitions

International acquisitions can provide the opportunity to a company to displace operations to the lowest cost country, to manage with governmental policy shifting, and to learn from the distinct ways of organising and managing of the different countries.

According to Johnson (1999, p.129) there are some special benefits that can only come up with an international acquisition. Companies can profit from the acquired firm of the other country by capitalise on a better sales potential. They can for example raise their price and sales levels if they are operating within a country that has a faster growing economy. Another motive for an international acquisition can be the existence of raw materials which are not available in the national market. Furthermore companies of other countries sometimes may be able to offer more favourable production options like for example lower labour costs (Johnson, 1999, p.129).

2. Efficiency of foreign exchange and stock markets

According to Pilbeam (2005, p.248) the market efficiency hypothesis was formulated by Eugene Fama in 1970. This hypothesis says that a market is efficient if ‘prices always fully reflect available information’ (Pilbeam, 2005, p.248).

Efficiency of foreign exchange markets

By applying this hypothesis to the exchange market it can be found that speculators who make exchange-rate forecasts according to an identical information set cannot make uncommon gaining. Two major questions can be derived from this fact. First of all if the new information is mirrored in the exchange rate and second of all if the information is important or not important.

Many tests were developed to forecast the efficiency of foreign exchange markets. The most common one is to look at the forward exchange rate and evaluate if it over- or under-predicts the future spot exchange rate. If speculators are able to predict the forward exchange rate with these kinds of tests it would argue for foreign exchange market inefficiency. For instance if a forward exchange rate was always under-predicted in the past a speculator could possibly gain huge profits by buying the currency that day and selling it in the future at a higher price. Granted that in three months the rate of the pound against the dollar is forecasted to be £0.60/$1 but all speculators would know from their experience that this forecast usually under-predicts the future rate by at least 5%. So they could buy dollars today for a lower price in order to make profit by selling them to a 5% higher than expected price of £0.63 in the future.

According to the efficient market hypothesis this example can not be realised in the real life market. All speculators would be aware of this chance to make high profits. Thus everybody would buy dollars forward that day. As a result this process would enhance the forward rate and all irregular profits could not be realised.

The basic problem of exchange market efficiency tests is that even if it is possible to find out whether the forward rate normally under- or over-predicts the future spot rate it is not definitively the evidence for an inefficient foreign exchange market. It can be a sign for a risk premium in the foreign exchange market. In the example the risk premium is the discrepancy between the forward rate of £0.60/$1 and the anticipated spot rate of £0.63/$1. In this case the risk premium on the dollar is £0.03. Speculators expect to make a profit of £0.03 by selling one dollar. They gain this profit as they buy dollars forward which are estimated more risky than the pound. If in turn the forward exchange rate is normally overvalued in comparison to the future spot exchange rate this can argue for a negative risk premium attached to the foreign currency (Pilbeam, 1998, pp. 214-215).

Efficiency of foreign stock markets

According to the hypothesis of Fama, stock market participants strive to get all important information to make sure a return on a stock price. In order to do so they have to consider whether the current information is fully showed in the price of a share. Further they must decide whether the information is important or insignificant. Fama differentiated between three forms of efficiency.

1. Weak-form efficiency

Weak-form efficiency exists if all past prices of a share are mirrored in the current stock price. Thus, usually used methods to evaluate securities cannot be used to forecast the market.

2. Semi-strong-form efficiency

A semi-strong-form efficiency exists if all public information is additionally fully mirrored in the current stock price. So not only the past prices of a share are given but also information on revenues, publications of the company and any other kind of public information a company has launched.

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• Université: Northumbria University (Newcastle Northumbria University)
• Note: 80
• Auteur: Juliane Kuballa (Auteur)
• Année de publication: 2006
• Pages: 32
• N° de catalogue: V66931
• ISBN (ebook): 9783638592963
• ISBN (Livre): 9783638727211
• Langue: anglais
• mots-clé: Merger, Sanofi-Synthélabo, Aventis