Improving the odds for acquisitions and joint ventures. Part I.

Part I

Acquisitions, joint ventures and strategic alliances have become the norm across industry and the life science and technology sectors are no exception. A recent Deloitte Life Sciences report highlighted that firms can no longer rely on internal resources for growth, but need to seek out acquisitions, mergers, alliances and exploratory relationships. It added that 92% of life science executives expect further consolidation, mainly through acquisition. Yet with the odds on an acquisition adding value for shareholders standing at just one in three, CEOs need to improve their chances of success.

A brief look at the figures is reason enough to see why. In the first 6 months of 2005, there were around 5,000 acquisitions across Europe, 24% involving companies. The total value of these transactions was over $400 billion, up 53% on the previous year. That’s about the same as the annual GDP of Switzerland in just 6 months.

The life science and technology sectors accounted for about 5% of the total. Small on the face of it but still adding up to about $20 billion, or $40 billion in a full year. That’s equivalent to the GDP of oil rich , and with the average deal coming to $86 million, it’s a big gamble for individual acquirers. Especially in light of a KPMG report on worldwide acquisitions in 2003 which shows that only a third of acquisitions increased shareholder value, a further third being neutral and the remaining third seeing shareholder value fall.

The good news is that the success rate was double that of four years before. The bad news is that acquisition premiums are becoming higher as more and better funded corporates are in the market and the private equity firms and hedge funds push up valuations.

The consequence of not increasing shareholder value can be terminal for the business – as well as the originating CEO – but that doesn’t stop both established and emerging companies playing the game.

Raising the acquisition stakes

With a turnover of $47 billion, Johnson & Johnson has been seeking EU approval to complete its takeover of the pacemaker specialist, Guidant. Senior management attention to overcome regulatory hurdles is huge and there is well publicised concern over the $26 billion price tag after the recall of 100,000 Guidant units. If the deal completes, J&J must be ready from day one to lead Guidant’s people and retain and build on its sales of $4 billion. J&J is an experienced acquirer having at least one substantial bioscience deal a year since 1999 under its belt. Yet it now admits to difficulties in combining its twin policies of independence but central control and Guidant is stretching its resources and its skills.

Another experienced acquirer, Pfizer, has just taken over Bioren Inc which provides technology for optimising antibodies. With worldwide revenues of $52 billion, Pfizer is a good example of a business shaped by the integration of bold acquisitions. In 2000, Pfizer acquired Warner Lambert. Meanwhile, its rival Pharmacia, formed by the 1995 merger of Pharmacia and Upjohn, completed a further merger of interests with Monsanto and Searle. In 2003 Pharmacia was in turn acquired by Pfizer. It is clear to those who work with the group the extent to which there are differences in management approach and the actions of Pfizer to provide a framework for a cohesive style and to handle diversity. Success will be measured by the financial performance over the coming few years.

Meanwhile, the Japanese biopharmaceutical company, Sosei, is actively growing by acquisition. Its recent takeover of Cambridge-based Arakis for £106 million has made it a $500 million turnover bioscience business and is part of its plan to be in the top ten worldwide. The integration strategy is for Arakis to remain autonomous and be responsible for worldwide R&D outside . The Arakis CEO and CFO have left, but the original company founders have stayed on as MD and Commercial Director. The retention and motivation of key staff and evolution of customer and supplier relationships will be central to the success of this acquisition.

Acquisition is also a keystone of growth for emerging firms. Amphion Innovations has a declared goal of using funds raised from its Aim listing for one deal a year, as well as investment in its current portfolio of seven technology businesses. This is a group with a strong philosophy on value-creation in bioscience companies and the challenges will include ensuring the new business stakeholders buy into the overall strategy as the group grows.

In all of these cases, the acquisition integration team must protect the value they have bought and deliver the higher growth and synergies that are the rationale of the deal. Only time will tell whether they succeed but as we have seen, the odds are stacked against them.

Written by Peter Wolfe and Carolyn Douthwaite

Peter Wolfe is a consultant and interim manager with over 25 years’ experience of business development and acquisition/JV management, as a consultant, CEO and Director.

Carolyn Douthwaite is co-founder and Managing Director of the PiR Group, which specialises in search, selection and interim management for established and emerging Life Science businesses.

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