|Type of paper:||Case study|
|Categories:||Financial analysis Financial management|
An organization's financial history can be assessed from the organization financial statements which indicate the organization revenues, debt and net profit within a particular financial period. In 2013, Biogen Inc. sales stood at 5.86 billion and in 2014, Biogen was doing very well financially because the organization reported a 46.45% increase in revenue compared to the 2013 revenues (Biogen Financials. n.d.). In 2014, Biogen Inc. sales were $8.58 billion which was due to the growth of the organization sales in Tecfidera product. In 2015, the organization sales grew only by 8.60% and recorded $9.32 billion. In 2016, the sales grew by 9.37% to record a $10.19 billion in sales and in 2017 the organization sales growth margin declined to 7.81% to record $10.99 billion in sales which was slightly higher compared to the 2016 sales. Biogen Inc. cost of goods and depreciation has been on the rise from 2013 to 2017 which signifies an increase in the cost of production (BIIB Annual Income Statement - Biogen Inc. Annual Financials. n.d.). From the 5-year financial history analysis, it is evident that Biogen Inc. has been performing well financially based on its revenue postings (Serafini, 2017). Liquidity analysis of Biogen Inc. as at 2018 indicates that the organization current ratio is 2.34, quick ration 2.07 and cash ration of 1.10 while the organization earning per share is 11.92 (Biogen. n.d.).
Bring Firm Value
Biogen Inc. will significantly increase the value of Allergan in different aspects. The merger of Allergan and Biogen Inc. will increase Allergan economies of scale which will increase Allergan revenues and overall net worth. From the financial analysis, it can be noted that Biogen Inc. sales are on an increasing trend which will increase Allergan market diversification which is good for the organization economies of scale. Allergan does not enjoy a significant presence in the United States of America market, and through Biogen Inc., the organization will have unprecedented access to the American market which will make it easy for Allergan to sell its products in the American market and other external markets that Biogen Inc. operates in.
The merger between Allergan and Biogen Inc. will have both a positive and negative impact towards Allergan ability to reduce costs. From the financial analysis, it is evident that Biogen Inc. cost of goods and operating expenses have been on the rise and Allergan will have to inherit Biogen Inc. rising cost of goods. Costs play a significant role in determining the strategic impact of a merger between two countries (Jeziorski, 2014). However, Biogen Inc. merger with Allergan will reduce Allergan cost of moving goods from its production centers in Europe to the American market which has a significant role in increasing the organization products in the American market. By merging with Biogen Inc. Allergan will be able to use Biogen Inc. facilities to produce pharmaceutical products for the American market locally and also can move goods to the American market in bulk which will significantly reduce costs that Allergan was previously incurring. Reducing the cost can substantially help Allergan to increase its market share in the US market by lowering the price of its pharmaceutical products in the market which will improve overall sales for the organization in the market. The merger will, therefore, have a significant impact on Allergan revenues in the US market. Previously, Allergan encountered logistical problems moving its products but through Biogen Inc. resources the organization will easily move products to the market and can avoid third parties who increase the cost of Allergan products reducing the overall organization revenues. The merger will positively influence the organization revenue through increased market access by Biogen Inc. The United States of America is known for its high corporate taxes which have previously reduced Biogen Inc. overall profits. Through the merger, Allergan can be able to increase former Biogen Inc. operations productivity through corporate inversion in which Biogen Inc. tax home will be moved to Ireland which is a lower tax jurisdiction to reduce taxes which will increase the organization net profitability under Allergan.
Negative Financial Impact
The merger and acquisition can pose negative financial impacts to Allergan especially due to translation exposure due to the changing foreign exchange rate. In the case of a merger with Biogen Inc., the organization depreciation has been noted to be high and negative trend. As a result, translation exposure will negatively affect Allergan balance sheet because the depreciation of the foreign currency will adversely affect Allergan gains (Gupta & Banerjee, 2017). The high the depreciation of Biogen Inc. former assets the higher the translation exposure facing Allergan as a result of converting Biogen Inc. assets value to Allergan reporting currency. Another financial risk of the merger between Biogen and Allergan is the overpayment risk which will negatively affect Allergan financials. As such, the cost of acquiring Biogen Inc. should be reasonable because an overpayment could devastate Allergan financial resources. For an all-cash deal, Allergan which is the acquirer will significantly deplete its financial resources. Financial resources that will be used to acquire Biogen will reduce Allergan liquidity in the long term and can delay the future organization projects (Yang, Guariglia, & Guo, 2017). Fluctuating stock price will be a significant challenge if Allergan opts to use stocks financing approach to acquire Biogen. In this approach, if Allergan prices shift upwards, the organization will have paid more for the acquisition which will negatively affect the organization. Debt acquisition will increase Allergan liabilities which will adversely affect the organization due to the high-interest rates that will accompany the loan because such an investment is a high-risk venture for the financial organization.
Financing the Acquisition Deal
Purchasing another company or business is known as an acquisition which can be funded through debt, cash or the company's stock. Cash acquisition is the best approach through which Allergan can purchase Biogen shares and assets. Cash acquisition will involve giving a specific quotation after negotiations with Biogen to own the organization assets and buy out the shareholders shares to take control of the organization which will increase Allergan influence and presence in the American pharmaceutical market and industry where Biogen is a major player (Borghgraef, 2014). In acquisition using cash the acquiring company, in this case, Allergan is obliged to offer Biogen a premium market price to entice the shareholders to sell their shares.
The cash purchase is the ideal financing deal for the acquisition of Biogen despite the financial impacts identified above. In a cash purchase, Allergan will be sure of the purchase price and both the companies will be protected from the potential fluctuations which are inherent in stock acquisition which fluctuates over time and requires expensive reevaluations. For instance, if the acquisition is done using stock when Allergan share price increases the organization will have paid more to acquire Biogen compared to the use of cash. Therefore, buying in cash will protect Allergan from fluctuating stock price because the purchasing price is guaranteed. Another significant benefit of using cash to finance the acquisition deal is that it will prevent the dilution of the organization control which limits the organizational decision making and influence in the organization (Borghgraef, 2014). Using debt or stock acquisition means that the ownership of Biogen will be diluted which will significantly reduce Allergan influence and strategic decision making in the American market.
Additional Risks to Allergan Due to Cash Financing
Cash financing to acquire Biogen will negatively affect Allergan cash reserves, and a decline in the cash flow can adversely affect the organization operations. Liquid assets loss to acquire Biogen reduces Allergan liquidity which will make it difficult for the organization to settle short-term debts. In this case, if Allergan decides to resell the acquired organization it will have to resell at a low price compared to the acquisition price (Yang, Guariglia, & Guo, 2017). Therefore, cash acquisition should be used only if Allergan has a consistent cash flow and does not have many short-term liabilities. In terms of translation exposure, the changes in the foreign exchange will affect the cost of the purchase because the purchasing price will be converted to the US $ and Allergan uses Euros as its reporting currency. Therefore, if the dollar gains against the Euro Allergan will have to incur a higher price to acquire Biogen Inc. The human resources management and Biogen operations after the acquisition face significant risk due to the differences in culture between Biogen and Allergan. Merging organizations with different cultures can influence how the organization proceed. If the cultural gap is significant between the organizations, it would be difficult to consolidate the two companies operations (Petsa-Papanicolaou, 2007). The time that will be wasted to reconcile the two organizations culture will lead to loss of revenue for the newly acquired organization.
BIIB Annual Income Statement - Biogen Inc. Annual Financials. (n.d.). Retrieved from https://www.marketwatch.com/investing/stock/biib/financials
Biogen Financials. (n.d.). Retrieved from https://quotes.wsj.com/BIIB/financials
Biogen. (n.d.). Retrieved from http://fortune.com/fortune500/biogen/
Borghgraef, T. (2014). Acquisition motives and methods of financing (Doctoral dissertation, GHENT UNIVERSITY).
Calistri, M, & Caouette, D, (2018). Biogen Q2 2018 Revenues Increase 9% To $3.4 Billion. Retrieved August 20, 2018, from http://investors.biogen.com/static-files/44a04b54-7322-4009-8dfb-08cf7a79b80a
Gupta, B., & Banerjee, P. (2017). Impact of merger and acquisitions on financial performance: Evidence from selected companies in India. International Journal of Commerce and Management Research.
Jeziorski, P. (2014). Estimation of cost efficiencies from mergers: Application to US radio. The RAND Journal of Economics, 45(4), 816-846.
Petsa-Papanicolaou, L. (2007). Success factors in mergers and acquisitions: complexity theory and content analysis perspectives.
Serafini, A. (2017). Investment Thesis for Biogen Inc. (NASDAQ: BIIB).
Yang, J., Guariglia, A., & Guo, J. M. (2017). To what extent does corporate liquidity affect M&A decisions, method of payment and performance? Evidence from China. Journal of Corporate Finance.
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