Eli Lily Acquisition by Novartis: Valuation, Analysis, and Defense

This report provides a comprehensive analysis of the potential acquisition of Eli Lily by Novartis. It explores three valuation methods: using the adjusted closing share price, calculating the net present value (NPV) of future cash flows, and comparing the Price-Earnings (P/E) ratios of comparable companies. The report details the methodologies, including the use of a 10% growth rate for cash flow projections and the selection of comparable companies like Pfizer, Merck, and GlaxoSmithKline. Furthermore, the report outlines defense strategies that Eli Lily could employ to avoid the takeover, such as staggered boards, super-majority provisions, poison pills, and other financial and structural measures. The fair value of the company's shares is determined to be in the range of $100 to $115, based on the valuation methods used. The report also includes detailed computations in Excel format.

Eli Lily Acquisition by Novartis – Fair Valuation
Introduction
The case deals with valuing Eli Lily based on three valuation models so that Novartis can
acquire the company at fair price. The fair value of the shareholding of Eli Lily has been
determined by the following three methods:
(a) By using the adjusted closing share price of the Eli lily as on 31-12-2018;
(b) By forecasting the cash flows of the company for the next 4 years based on weighted
average growth of cash flow over the past years. The discount rate used is 8.64%;
(c) By comparing the Price Earnings Ratio of key competitors of the company.
Analysis
Method A- Closing Share Price
Under this method, the adjusted closing share price has been considered i.e. $115.1 for
computing the fair valuation of company. Further, the said value has been multiplied with the
outstanding shares to determine the value of Eli Lily. The detailed computation is enclosed in
Excel.
Method B- NPV
Under this method, Cash flow has been computed to grow on an average by 10% over next 4
years. Further, free cash flows have been computed using the difference between the cash
flow from operating assets and expenditure incurred on acquiring plant and assets. The
detailed computation is enclosed in Excel.
Method C- Comparable Model
The comparable used for computing the average Price-Earnings Ratio has been detailed here-
in-below:
(a) Pfizer Inc.
(b) Merck & Co Inc.
(c) Glaxo Smith Kline Plc.
(d) AstraZeneca Plc.
(e) Bristol- Myers Squibb Co.
Under this method, the average PE of comparable companies have been considered for
valuing Eli Lily. The detailed computation is enclosed in Excel.
Conclusion
The fair value of the shares of the company shall be in the range of $100 to $115.
Second Answer
Defence that can be adopted by Eli Lily to avoid the takeover by Novartis shall encompass
the following:
(a) Staggered Board;
(b) Super Majority;

(c) Poison pill;
(d) Fair Price;
(e) Dual Class Recapitalization;
(f) Targeted Repurchase;
(g) Asset Restructuring
(h) Golden parachutes;
(i) Greenmail;
(j) Standstill Agreement