Investors and analysts viewed the takeover of Dublin-based Shire Plc (Shire) by Japan's Takeda Pharmaceutical Company Ltd. (Takeda) with shock and awe! It was shock in that Takeda, Japan's largest pharmaceutical company, was paying a 60% premium to acquire the larger Shire in a deal valued at $80 billion, including assumed debt. And it was awe at the audaciousness of Takeda's management, which in a single stroke catapulted Takeda into the ninth position among the top global drug companies. It was also the first Japanese firm to be counted among that elite group. Potential synergy between the two firms was significant. Shire and Takeda have complementary positions in gastroenterology and neuroscience, with leading positions in treating certain rare diseases and oncology. Acquiring Shire would give Takeda expanded market share in the lucrative US drug market because about two-thirds of Shire's sales are in the US market. Together they will market medicines in about 80 countries. With total annual revenue exceeding $30 billion, the combined firms will be able to better fund research and development in four areas: oncology, gastroenterology, neuroscience, and rare diseases.

The risks to the deal were also clear. The combined firms faced a punishing debt load, huge cultural differences between the two firms (one Japanese and one Irish), and an uphill battle to earn the cost of capital on their investment because of the size of the premium. With a lengthy postmerger integration likely, the tasks ahead for the two firms seemed daunting. Also, Shire's drugs for attention deficit hyperactivity disorder have been a major cash generator for years. They were soon to lose patent protection and be subject to increased price competition from generic drug firms. And pressure to reduce drug prices is intense in many markets such as the United States. Paying off the firm's bone crushing debt level will be a major challenge. Moody's downgraded the firm's credit rating from A2 to Baa2 in December 2018. Investors were concerned Takeda was paying too much and borrowing too much to finance the deal. They were also concerned that the dividend (currently at 3.42%) may be cut if the firm has trouble servicing the debt. Although the synergy potential between the two firms was significant, Takeda's management and board were looking for ways to convert the firm's culture from one that was largely insular to one with a global perspective. To understand this motivation, it is necessary to review Takeda's recent history. Five years ago, the 237-year-old Takeda was facing a domestic market whose population was declining and that contributed about half of its revenue. Patent protection for its best-selling diabetes drug Actos was set to expire in the near future. Despite previous overseas acquisitions, Millennium in the United States in 2008 and Nucomed (with operations in Europe and Latin America) in 2011, the firm's culture and focus continued to be distinctly Japanese. The board reasoned that bold action was necessary to grow sales and earnings. In 2014, Takeda hired the firm's first foreign CEO, Christophe Weber. Because smaller acquisitions had failed to change the firm materially, Weber pushed for a large foreign acquisition. Shire, he and the Takeda board believed, would achieve the goal of fundamentally transforming the firm. How? After the acquisitions, the share of foreign employees would increase from less than 70% to more than 82% of total. And the majority of the firm's revenue would come from outside Japan. Finally, because half of Shire's purchase price would consist of new Takeda shares, foreign ownership of Takeda would grow substantially. Greater and more diverse investor interest in Takeda was expected to make the firm's shares more liquid. After Takeda expressed publicly an interest in the acquiring Shire, the firm had a month to make a formal offer as required by UK law. Shire rejected the initial bid, saying it undervalued the firm. Takeda made five public bids for Shire. In the final bid, Shire agreed to be acquired for $62.2 billion or $66.22 per share, consisting of $30.33 per share in cash and 0.839 shares of Takeda stock or 1.6278 ADSs.88 At closing, Takeda shareholders would own about half of the combined firms and Shire's the remainder. Takeda expected pretax synergies to reach an annualized rate of $1.4 billion by the end of the third year after closing. Investor reaction was swift. Since March 2018, when Takeda first publicly displayed interest in Shire, Takeda's shares dropped 26% as investors fretted about the perceived risks rather than the potential. By the time an agreement was signed, Shire's valuation exceeded Takeda's. Takeda had at that time a $33 billion market capitalization compared with Shire's of $49 billion. But when the deal closed in January 2019, Takeda's shares jumped 7.5%, its biggest gain in 3 years. Investors seemed to be warming up to the deal. 

 

 

1. What are the key assumptions implicit in Takeda's takeover of Shire? Which do you believe are the most critical? Be specific. 

2. What alternatives to acquisition could Takeda have pursued to achieve its strategic objectives? Speculate as to why a takeover was the preferred option. 

3. Which investor reaction do you think was more accurate: the immediate negative reaction when the deal was announced or the more positive one when the deal closed? 

4. Speculate as to why the initial Takeda offer for Shire was all cash and the final offer was a combination of cash and stock. Explain your answer.