2. CASE - Swiss Pharmaceutical Novartis Takes over Alcon In December 2010, Swiss pharmaceutical company Novartis AG completed its effort to acquire, for $12.9 billion, the remaining 23% of U.S.-listed eye care group Alcon Incorporated (Alcon) that it did not already own. This brought the total purchase price for 100% of Alcon to $52.2 billion. Novartis had been trying to purchase Alcon's remaining publicly traded shares since January 2010, but its original offer of 2.8 Novartis shares, valued at $153 per Alcon share, met stiff resistance from Alcon's independent board of directors, which had repeatedly dismissed the Novartis bid as "grossly inadequate." Novartis finally relented, agreeing to pay $168 per share, the average price it had paid for the Alcon shares it already owned, and to guarantee that price by paying cash equal to the difference between $168 and the value of 2.8 Novartis shares immediately prior to closing. If the value of Novartis shares were to appreciate before closing such that the value of 2.8 shares exceeded $168, the number of Novartis shares would be reduced. By acquiring all outstanding Alcon shares, Novartis avoided interference by minority shareholders in making key business decisions, achieved certain operating synergies, and eliminated the expense of having public shareholders. In 2008, with global financial markets in turmoil, Novartis acquired, for cash, a minority position in food giant Nestl's wholly owned subsidiary Alcon. Nestl had acquired 100% of Alcon in 1978 and retained that position until 2002, when it undertook an IPO of 23% of its shares. In April 2008, Novartis acquired 25% of Alcon for $143 per share from Nestl. As part of this transaction, Novartis and Nestl received a call and a put option, respectively, which could be exercised at $181 per Alcon share from January 2010 to July 2011. On January 4, 2010, Novartis exercised its call option to buy Nestl's remaining 52% ownership stake in Alcon that it did not already own. By doing so, Novartis increased its total ownership position in Alcon to about 77%. The total price paid by Novartis for this position amounted to $39.3 billion ($11.2 billion in 2008 plus $28.1 billion in 2010). On the same day, Novartis also offered to acquire the remaining publicly held shares that it did not already own in a share exchange valued at $153 per share in which 2.8 shares of its stock would be exchanged for each Alcon share. While the Nestl deal seemed likely to receive regulatory approval, the offer to the minority shareholders was assailed immediately as too low. At $153 per share, the offer was well below the Alcon closing price on January 4, 2010, of $164.35. The Alcon publicly traded share price may have been elevated by investors' anticipating a higher bid. Novartis argued that without this speculation, the publicly traded Alcon share price would have been $137, and the $153 per share price Novartis offered the minority shareholders would have represented an approximate 12% premium to that price. The minority shareholders, who included several large hedge funds, argued that they were entitled to $181 per share, the amount paid to Nestl. Alcon's publicly traded shares dropped 5% to $156.97 on the news of the Novartis takeover. Novartis' shares also lost 3%, falling to $52.81. On August 9, 2010, Novartis received approval from European Union regulators to buy the stake in Alcon, making it easier for it to take full control of Alcon. With the buyout of Nestl's stake in Alcon completed, Novartis was now faced with acquiring the remaining 23% of the outstanding shares of Alcon stock held by the public. Under Swiss takeover law, Novartis needed a majority of Alcon board members and two-thirds of shareholders to approve the terms for the merger to take effect and for Alcon shares to convert automatically into Novartis shares. Once it owned 77% of Alcon's stock, Novartis only needed to place five of its own nominated directors on the Alcon board to replace the five directors previously named by Nestl to the board. Alcon's independent directors set up an independent director committee (IDC), arguing that the price offered to minority shareholders was too low and that the new directors, having been nominated by Novartis, should abstain from voting on the Novartis takeover because of their conflict of interest. The IDC preferred a negotiated merger to a "cram down" or forced merger in which the minority shares convert to Novartis shares at the 2.8 share-exchange offer. Provisions in the Swiss takeover code require a mandatory offer whenever a bidder purchases more than 33.3% of another firm's stock. In a mandatory offer, Novartis would also be subject to the Swiss code's minimum-bid rule, which would require Novartis to pay $181 per share in cash to Alcon's minority shareholders, the same bid offered to Nestl. By replacing the Nestl-appointed directors with their own slate of candidates and owning more than two- thirds of the Alcon shares, Novartis argued that they were not subject to mandatory-bid requirements. Novartis was betting on the continued appreciation of its shares, valued in Swiss francs, due to an ongoing appreciation of the Swiss currency and its improving operating performance, to eventually win over holders of the publicly traded Alcon shares. However, by late 2010, Novartis' patience appears to have worn thin. While not always the case, the resistance of the independent directors paid off for those investors holding publicly traded shares. d. Discuss how Novartis may have arrived at the estimate of $137 per share as the intrinsic value of Alcon. What are the key underlying assumptions? Do you believe that the minority shareholders should receive the same price as Nestle? 2. CASE - Swiss Pharmaceutical Novartis Takes over Alcon In December 2010, Swiss pharmaceutical company Novartis AG completed its effort to acquire, for $12.9 billion, the remaining 23% of U.S.-listed eye care group Alcon Incorporated (Alcon) that it did not already own. This brought the total purchase price for 100% of Alcon to $52.2 billion. Novartis had been trying to purchase Alcon's remaining publicly traded shares since January 2010, but its original offer of 2.8 Novartis shares, valued at $153 per Alcon share, met stiff resistance from Alcon's independent board of directors, which had repeatedly dismissed the Novartis bid as "grossly inadequate." Novartis finally relented, agreeing to pay $168 per share, the average price it had paid for the Alcon shares it already owned, and to guarantee that price by paying cash equal to the difference between $168 and the value of 2.8 Novartis shares immediately prior to closing. If the value of Novartis shares were to appreciate before closing such that the value of 2.8 shares exceeded $168, the number of Novartis shares would be reduced. By acquiring all outstanding Alcon shares, Novartis avoided interference by minority shareholders in making key business decisions, achieved certain operating synergies, and eliminated the expense of having public shareholders. In 2008, with global financial markets in turmoil, Novartis acquired, for cash, a minority position in food giant Nestl's wholly owned subsidiary Alcon. Nestl had acquired 100% of Alcon in 1978 and retained that position until 2002, when it undertook an IPO of 23% of its shares. In April 2008, Novartis acquired 25% of Alcon for $143 per share from Nestl. As part of this transaction, Novartis and Nestl received a call and a put option, respectively, which could be exercised at $181 per Alcon share from January 2010 to July 2011. On January 4, 2010, Novartis exercised its call option to buy Nestl's remaining 52% ownership stake in Alcon that it did not already own. By doing so, Novartis increased its total ownership position in Alcon to about 77%. The total price paid by Novartis for this position amounted to $39.3 billion ($11.2 billion in 2008 plus $28.1 billion in 2010). On the same day, Novartis also offered to acquire the remaining publicly held shares that it did not already own in a share exchange valued at $153 per share in which 2.8 shares of its stock would be exchanged for each Alcon share. While the Nestl deal seemed likely to receive regulatory approval, the offer to the minority shareholders was assailed immediately as too low. At $153 per share, the offer was well below the Alcon closing price on January 4, 2010, of $164.35. The Alcon publicly traded share price may have been elevated by investors' anticipating a higher bid. Novartis argued that without this speculation, the publicly traded Alcon share price would have been $137, and the $153 per share price Novartis offered the minority shareholders would have represented an approximate 12% premium to that price. The minority shareholders, who included several large hedge funds, argued that they were entitled to $181 per share, the amount paid to Nestl. Alcon's publicly traded shares dropped 5% to $156.97 on the news of the Novartis takeover. Novartis' shares also lost 3%, falling to $52.81. On August 9, 2010, Novartis received approval from European Union regulators to buy the stake in Alcon, making it easier for it to take full control of Alcon. With the buyout of Nestl's stake in Alcon completed, Novartis was now faced with acquiring the remaining 23% of the outstanding shares of Alcon stock held by the public. Under Swiss takeover law, Novartis needed a majority of Alcon board members and two-thirds of shareholders to approve the terms for the merger to take effect and for Alcon shares to convert automatically into Novartis shares. Once it owned 77% of Alcon's stock, Novartis only needed to place five of its own nominated directors on the Alcon board to replace the five directors previously named by Nestl to the board. Alcon's independent directors set up an independent director committee (IDC), arguing that the price offered to minority shareholders was too low and that the new directors, having been nominated by Novartis, should abstain from voting on the Novartis takeover because of their conflict of interest. The IDC preferred a negotiated merger to a "cram down" or forced merger in which the minority shares convert to Novartis shares at the 2.8 share-exchange offer. Provisions in the Swiss takeover code require a mandatory offer whenever a bidder purchases more than 33.3% of another firm's stock. In a mandatory offer, Novartis would also be subject to the Swiss code's minimum-bid rule, which would require Novartis to pay $181 per share in cash to Alcon's minority shareholders, the same bid offered to Nestl. By replacing the Nestl-appointed directors with their own slate of candidates and owning more than two- thirds of the Alcon shares, Novartis argued that they were not subject to mandatory-bid requirements. Novartis was betting on the continued appreciation of its shares, valued in Swiss francs, due to an ongoing appreciation of the Swiss currency and its improving operating performance, to eventually win over holders of the publicly traded Alcon shares. However, by late 2010, Novartis' patience appears to have worn thin. While not always the case, the resistance of the independent directors paid off for those investors holding publicly traded shares. d. Discuss how Novartis may have arrived at the estimate of $137 per share as the intrinsic value of Alcon. What are the key underlying assumptions? Do you believe that the minority shareholders should receive the same price as Nestle