Case 11 Report Instructions
CASE 11: Roche Holding AG: Funding the Genentech Acquisition
Case Introduction/Overview
This case examines the decision by the Swiss pharmaceutical Roche Holding AG (Roche) to offer a record $42 billion bond in February 2009. In light of a pending acquisition of U.S. biotechnology leader, Genentech, Roche management planned to sell $32 billion in bonds at various maturities from 1 year to 30 years and in three different currencies (U.S. dollar, euro, and British pound). In a context of substantial uncertainty in both world financial markets and the value of the Genentech deal, students are introduced to the pricing of corporate bonds by being invited to price Roche’s bold global offering.
The case is designed to introduce the concept of a risk premium and to accomplish the following potential additional learning objectives:
· Motivate the concept of a risk premium and the notion of a cost of debt by exposing students to estimating default risk, credit ratings, and credit spreads
· Review yield curve principles and mechanics
· Practice bond math and credit market terminology
· Establish institutional detail for the public security offering process
· Introduce the risk-return paradigm in finance
Case Report Instructions
This is a “Directly answer a set of questions” case report. For this case study, answer each of the following questions (as per the guidelines in “Learning with Cases and Writing Case Reports”).
1. What is going on at Roche?
2. What are the business and financing risks associated with the acquisition of Genentech? Is this a good time to do the deal? Why or why not?
3. Do you believe the bond issuance will have an impact on Roche’s bond rating? Why or why not?
4. How do we assess the impact of the bond offering on Roche’s credit rating and default risk?
5. How do we estimate the risk premium associated with the estimated default risk?
6. What are the prevailing spreads for non-Roche bonds? Do you think these spreads are similar to investor’s required yield for the Roche bonds?
7. What is your specific recommendation for the coupon rate for the Roche 5-year, 10-year, and 30-year U.S. dollar bonds?
8. What would your coupon rate recommendation be for the 7-year bond in euro?
NOTE: You can access a student spreadsheet file that you might find helpful for this case on the textbook website found at the following link:
This directory contains Excel spreadsheet files with the primary exhibits for this case. Some of the Excel tables exercisable models which will allow you to test ideas with minimum setup time.
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Roche Holding AG Funding the Genetech Acquisition
