This article is written by Soumi Ghose, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
In a hostile takeover, the French pharmaceutical company Sanofi-Synthelabo wanted to acquire the Franco-German drug-maker Aventis in the initial months of 2004. In the pharmaceutical industry, this was the first hostile takeover and was completed by the end of the year. Both of these firms are based in France. Aventis’s management had earlier made it clear that their preferred option was to maintain their independence, but this notion proved to be unsuccessful when they looked out for a suitable “white knight”. Further, Aventis itself repeatedly referred Novartis as a welcome “white knight”, so as to fend off the takeover attempt by Sanofi.
This hostile takeover of Aventis by Sanofi-Synthelabo was at the backdrop of highly dynamic competition and consolidation. Being quite smaller than Aventis and with half of Aventis sales size as well as half of Aventis’s employee number, this takeover was structured by Sanofi-Synthelabo in the following chronology:
- From the attack by Sanofi-Synthelabo, which the management of Aventis initially considered as hostile;
- Via the battle for Aventis;
- To the ultimate amicable unification of the two companies;
- Integration of Sanofi-Aventis.
History of Sanofi-Synthelabo and Aventis – as distinct entities
Sanofi is one of the largest pharmaceutical companies in today’s world. It has a rich history of innovation including certain major scientific advances of the nineteenth and twentieth centuries, as well as a good reputation in the development areas of chemistry, pharmacy and medicine.
Sanofi Synthelabo was established as a consequence of the pharmaceutical division of L’Oreal and Sanofi-Elf in 1999, being driven by the pursuit of several small, medium as well as large acquisitions to lead towards a major international brand name recognition across the globe. The shareholding structure of Sanofi is diverse yet having certain large stakeholders without major holding stake each. The total group was attributed as the largest shareholder for Sanofi (pre-merger 24.4% stake) whereas L’Oreal held 20% stake in the company. Aventis had essentially been formed as a consequence of the merger between French Chemical & Pharma group Rhone-Poulenc with the German leader in the industry, Hoechst, in 1999. Aventis has enjoyed a fairly diverse shareholding structure, with the single largest shareholder being Kuwait Petroleum KPC, owning roughly around 13.5% of the firm.
Why did the takeover of Aventis happen
At the outset, it is essential to mention that Aventis had principally adopted a very minimal precautionary defence. Aventis majorly adopted a reactive defence strategy in its attempt to do away with the hostile attack by Sanofi.
The pharmaceutical industry is a highly competitive industry and innovation is a critical factor to survive for any company in this sector. Further, in this industry is getting concentrated with the advent of time and there continuously prevails a constant threat of concentration of the generic drugs. The situation of Aventis weakened due to their inability to launch any highly successful drug in the global market, resulting in a significant fall of their stock price, even below that of Sanofi’s stock price, which is half of the size of Aventis. This context acted as the key factor for the takeover of Aventis by Sanofi.
The offer by Sanofi-Synthelabo to Aventis
Sanofi-Synthelabo submitted a share exchange offer (81%) and a cash offer (19%) worth 60.43 Euro per share to the Aventis shareholders. This exchange offer in turn valued the company at 47.8 billion EUR in total. Aventis had initially rejected this bid considering that the bid offered inferior value based on the company’s share value, and the Board of Aventis went so far as to enact poison pill provisions and to invite Novartis to enter merger negotiations. However, the approval of French regulatory authority as well as consent from Securities & Exchange Commission (SEC) US, helped Sanofi-Synthelabo to further strengthen its base for the prospective takeover.
This takeover battle concluded at the end of three months when Sanofi-Synthelabo launched a friendly bid of € 54.5 billion in place of the previously rejected hostile bid. And Aventis finally agreed to the new modified offer proposed by Sanofi. Under the new offer, the premium offered increased from the initial 3.6% to a significant 16%, whereas the deal structure was modified to increase the cash component to 29% from the previous offer of 20%. The settlement, or rather the agreement of merger between these two firms Sanofi-Synthelabo and Aventis resulted in the formation of one of the largest pharmaceutical firms at the global level.
Simultaneously, a strong role was played by the French government, desiring what it called a “local solution”, and had put heavy pressure on Sanofi-Synthélabo to raise its bid for Aventis and for Aventis to accept the offer and by rejecting Aventis’ poison pill proposal.
One of the largest risks in the deal for both sides was the fate of the patents protecting Clopidogrel (Plavix) which was one of the top-selling drugs in the world at the time and the major source of Sanofi’s revenue.
Sanofi said after restructuring costs estimated at around €2 billion, the company expected €1.6 billion euros in annual pretax savings as a result of the merger. The combined group would have projected consolidated pre-tax sales of €25 billion euros.
Strategies
In late April 2004 shareholders of Aventis gave the final nod to the offer set forth by Sanofi and thus for the merger. Subsequent to the announcement of this merger, the market’s reaction was a negative one, wherein both Sanofi & Aventis’ shares suffered a price decline to the tune of 7% and 5% respectively. It is worth mentioning that the market consensus regarding the difficulties in creating the merged syndicate as well as the market also questioned the amount of premium paid (considering it to be too high) in comparison to the potential gains from this merger. Therefore, it is worthy to note how the market quickly adjusts the price based on new information (market efficiency). After the merger, Sanofi-Aventis had representation from directors of both the merged firms to form the management board. In the normal course of any takeover, it is observed that the acquirer tends to gain & keep control and is thus the dominating entity in the combined firm, thereby validating the inequality in a merger wherein the party that pays the premium is essential to control the entity.
It is evident that these defence strategies worked in favour of Aventis shareholders to the extent that they helped improve & thus obtained the best possible offer for them and bought them time to reconsider their decisions (delaying the process of merger). Implementing reactive defense mechanisms, thus proves to be not very successful for the target. Therefore, preventive defense measures seemed to be less effective as compared to reactive defense measures.
Both Sanofi-Synthelabo and Aventis were situated in different cities of France, Paris and Strasbourg with the same legal framework and structure of mergers and amalgamation. Sanofi-Synthelabo focused to integrate the two companies i.e Sanofi-Synthelabo and Aventis for creating an entity with sufficient “critical mass” to take on its rivals, especially those based in the USA. Further, despite the size of Sanofi-Synthélabo, the company found itself compelled to partner with larger pharmaceutical companies in order to successfully introduce new products specially in the major markets of the United States.
Sanofi-Synthelabo and Aventis worked in disparate therapeutic areas, with several common core areas like: Cardiology, Central Nervous System (CNS) and oncology. Both these companies had the bestseller drugs threatened by patent expiration and anticipated developments of generic drugs, especially for Plavix in the case of Sanofi-Synthelabo and Lovenox on behalf of Aventis. In 2006, Plavix was met by a competing generic drug developed by Apotex and Lovenox lost its exclusivity rights in June, 2005.
Conclusion
It seemed that even in a globally fragmented pharmaceutical industry, national politics continue to play a critical role in corporate restructuring. The reason for such huge industrial consolidation observed in this industry is that the increased competition, shrinkage of margins and immensely increasing (huge) R&D investments in the pharma industry could potentially drive major players out of business. This has led to a sceptical industry outlook wherein the players were becoming more prone to adopting strategies that incline towards providing an economy of scale, scope and there synergies (cost and revenues synergies). This merger proved to be beneficial for both the companies as it helped them to gain leverage in the market in the two following manners:
- Cost-cutting;
- Enhancing development.
Subsequent to the merger, this newly merged company formed a subsidiary company under the name Sanofi Pasteur, and at present this subsidiary company is world’s largest producers of vaccinations for several conditions including but not limited to tetanus, hepatitis A, hepatitis, B, MMR, polio and influenza.
Sanofi-Aventis has also partnered with and acquired many different companies over years. On May 6, 2011 Sanofi-Aventis simplified its name as “Sanofi”. Sanofi continues to be a global life sciences company working towards the improvement of people’s access to healthcare as well as supporting people from prevention to treatment, with transformed scientific innovation towards healthcare solutions.
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