Novartis: An Analysis of the Ciba-Geigy and Sandoz Merger Team 10: Minjal Dharia - Stefanie Duda - Jennie Ma Andrew Schwartz - Siddharth Sekhri

  History   Ciba Sandoz Background   Motivations and benefits of the merger   Merger process   Obstacles   The new company: Novartis AG   Challenges   Strategies   Opportunities   Financial performance to date AGENDA

Geigy f. 1758Sandoz f. 1886Ciba f Novartis f THE HISTORY OF NOVARTIS Ciba-Geigy f. 1970

Ciba-Geigy   Founded Basel, Switzerland   American Subsidiary   Ciba-Geigy Corp – Tarrytown, NY Total Revenues = $17.5 billion Sandoz Limited   Founded Basel, Switzerland   American Subsidiary  Sandoz Corporation – NYC, NY   Total Revenues = $13.0 billion A MERGER OF TWO EQUALS

  Background of rapid structural change in pharmaceutical/ biotech market   Price pressures meant decreasing growth and margins of industry   Cost-containment efforts due to high development costs   Consolidation of suppliers gave them higher pricing power   Reach an optimum mix of business segments for synergy STRATEGIC SIGNIFICANCE OF MERGER

MOTIVATION AND BENEFITS  Motivations  Shared commonalities in crop protection, seeds, agribusiness and animal health products  Jump to new business opportunities  Distance themselves from the unsure chemical markets  Benefits  Higher critical mass for key investments such as research & development  More efficient & broader marketing & distribution of products  Lower cost of financing, increased liquidity  Leaner organizational structure

THE MERGER PROCESS  March-April 1996: Ciba and Sandoz announce merger plans and validate with shareholders.  July 1996: The European Union approved the merger  August 1996: U.S. Federal Trade Commission agreed to the formation of the new company in the fall of the same year.  The merger is worth $27 billion- one of the largest in international business

THE MERGER PROCESS  Stock swap in which Ciba shareholders are paid a premium  Receive 1 1/15 for 1 share  Sandoz shareholders get 1 for 1 share  Sandoz shareholders obtained 55%, Ciba Geigy 45%.  Benefits of the deal:  Tax-free because both companies are Swiss  Cash outlay not required  Transaction structured as a share issue

OBSTACLES  The EU and the US FTC had concerns regarding the monopolistic nature of the mergers.  Required the demerger of the Specialty Chemicals Division of Ciba and the Construction Chemicals and animal health businesses of Sandoz  Ciba and Sandoz each had three classes of stock with varying voting rights at the start of the 1990s.  Novartis had to transform the tangled equity structure into a single class of shares last year.

  Reconciling according to International Accounting Standards (IAS):   IAS rules allowed companies to write off goodwill rather than depreciating it   Allowed applying pooling-of-interest accounting rules to the $27 billion Ciba-Sandoz merger, which avoided charges for goodwill- the difference between the purchase price and book value of an asset. REGULATORY CONFLICTS/TRANSLATION EXPOSURE

  But, the U.S. accounting principles (GAAP) challenged both IAS rules:   The merger should include a restructuring charge for annual depreciation of 700 million Swiss Francs   Novartis had to follow US rules to list its shares in the US   Novartis would prepare its official accounts under IAS rules and offer U.S. investors a bridging statement with adjustments according to U.S. accounting principles in a footnotes   Cash flow and cash earnings per share would remain the same under both IAS and US GAAP. REGULATORY CONFLICTS/TRANSLATION EXPOSURE

 Novartis = “re-birth” toward life sciences  Market Value > $60 billion  Standing  segments of Healthcare (59%), Agrobusiness (27%), and Nutrition (27%)  Largest worldwide marketer of crop protection chemicals  Second largest seed & animal health company  Second largest pharmaceuticals company in the world  Sales = $13 billion  4.5% share of global market sales NOVARTIS AG

 Novartis promised annual savings of 1.8 billion Swiss Francs  Needed to get rid of 10,000 jobs or 10% of the payroll  Needed to cut drug development time from 11 to 7 years  Needed three strong selling drugs annually  To match No. 1 Glaxo PLC  Soaring costs of biotech and genetic research tools  Shares are underrepresented in the US  Listed as ADRs on the NYSE CHALLENGES

 Sandoz  Was autocratic and hierarchical  Operated most functions at the business segment level  Measured performance by EBIT and return on sales  Ciba  Was collegial and informal  Matrix organization  Used direct costing  Measured performance by division contribution  Novartis  Used Sandoz’s organizational system  Measured performance by EBIT and return on net assets CULTURAL CLASH

 Sold off non-core business units  Boosted R&D spending  Sharpened marketing in the US  Increased sales force and advertising  US sales jumped to 43% of revenues  Made strategic acquisitions such as Pfizer’s drug Enablex, beating out GlaxoSmithKline STRATEGIES CEO Daniel L. Vasella

 Bought a 20% share in May 2001  Now owns 32.7%  Would mean $45 billion in sales and 7% market share  Roche is opposed to any such merger  Remains to be seen how aggressive Novartis CEO Daniel L. Vasella will be. WILL NOVARTIS BUY ROCHE?

NOVARTIS ADR FINANCIAL PERFORMANCE LastChg Prev Cls HighLowVol ,300 % ChgYTD % Change52 Wk Range +1.99%4.68%33.85 to Source: Bank of New York Not yet stocks!! DEPOSITARY RECEIPTS: NOT FDIC, STATE OR FEDERAL AGENCY INSURED MAY LOSE VALUE NO BANK, STATE OR FEDERAL AGENCY GUARANTEE

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