Global Financial Analysis: Johnson & Johnson's Actelion Acquisition

This report offers a comprehensive analysis of Johnson & Johnson's acquisition of Actelion, a significant event in the global financial market. It begins by outlining the reasons behind the acquisition, the chronicle of events, and the strategic rationale driving the deal. The report then evaluates the associated risks and potential returns for the acquiring company, considering factors such as foreign exchange risk and legal frameworks. Furthermore, it conducts a comprehensive valuation of Actelion prior to the acquisition announcement, employing relevant valuation techniques. The analysis extends to an event study to test the Efficient Market Hypothesis (EMH) and derive potential trading profits. Finally, the report proposes a trading strategy designed to capitalize on price inefficiencies during the acquisition process. The report is based on the assignment brief to provide the best possible solution.

Global Financial

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Stating the reasons behind acquisition of target company and reflection of chronicle events....1
TASK 2............................................................................................................................................3
Evaluating the risk and return as well as advantages of international acquisition to the
acquiring company.......................................................................................................................3
TASK 3............................................................................................................................................5
Conducting comprehensive valuation on target company...........................................................5
TASK4.............................................................................................................................................8
Conducting event analysis to test efficient market hypothesis (EMH).......................................8
TASK 5............................................................................................................................................9
Stating trading strategy which in turn helps in exploiting price inefficiency during the
acquisition process.......................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Global financial system is highly concerned with the meeting of investment and trade
financing purpose. In addition to this, global financial aspect lays high level of emphasis on
doing cross country transactions which in turn helps organizations in meeting their goals and
objectives. Moreover, with the motive to maximize productivity and profitability as well as
exploring the business operations firm focuses on undertaking acquisition strategy. Hence,
acquisition strategy is highly significant which in turn provides assistance to the firm in getting
the benefits of high economies of scale. The present report is based on Johnson & Johnson which
is the leading American multinational pharmaceutical and consumer packaged goods
manufacturing company whose headquarter situated in New Jersey. Such business unit has 250
subsidiary companies and products of the firm in over 175 countries. In June, 2017 J&J has
acquired Actelion, Switzerland based company, which is also one of the leading pharmaceutical
and bio-technology company. In this, report will present the chronicle events which are related to
the acquisition done by Johnson & Johnson. Besides this, it will also shed light on the risk,
return, EMH and trading strategy which is associated with the acquisition process.
TASK 1
Stating the reasons behind acquisition of target company and reflection of chronicle events
In the present study, acquisition of Actelion by J&J has been undertaken. Deal in relation
to acquisition has been signed between the two concerned parties such as J&J and Actelion on
June, 2017. From assessment, it has been identified that after getting approval from regulatory
authorities deal has been signed by the concerned individuals. In addition to this, meeting was
organized by Actelion for getting approval from the shareholders. The rationale behind this,
shareholders act as an owner of the firm and they have right to take participate in the decision
making aspect. Without having consensus of shareholders company is not position to finalize the
deal as per the legal and ethical aspects. Hence, by meeting all the aspects Actelion has acquired
by J&J in June, 2017.
In order to acquire Actelion, Johnson & Johnson paid $30 billion which is considered as
one of the main acquisition performed by it (Johnson & Johnson to acquire Actelion for $30
billion with spin-out of new R&D company, 2017). Moreover, for acquiring Actelion huge price
or amount was paid by Johnson & Johnson. There are several reasons due to which Johnson &
1

Johnson laid high level of emphasis on acquiring Actelion. From assessment, it has been
identified that acquisition of Actelion will offer opportunity to J&J to diversify its drug portfolio.
Moreover, after acquiring Actelion, J&J would become able to offer high margin medicines to
the customers related to the rare diseases. Hence, acquisition enables firm to develop portfolio as
the biggest product and helps in reducing the level of competition to the significant level. Hence,
it can be stated that to track new opportunities and for gaining competitive edge over others
Johnson & Johnson acquired Actelion. Enhancement of productivity and profitability is one of
the main motives which in turn encouraged Johnson & Johnson to acquire Actelion. Hence, such
acquisition will assist J&J is gaining competitive edge over others in the pharmaceutical sector.
Detailed discussions have been done between the authorities of J&J and Actelion are as follows:
In the period of November, J&J held preliminary discussion with Actelion regarding the
takeover of firm. During this time, Actelion was valued at approximately $20 billion.
29th November 2016: On this date, Actelion explored a deal with J&J that is considered
as more complex in comparison to outright buyout.
30th November 2016: Counter bidding took place between the two parties such as
Actelion and Sanofi. At the same time of acquisition proposed by J&J, Sanofi, another firm was
also contacted Actelion for such deal.
7th December 2016: At this time, confirmation was given by Actelion that J&J was
withdrawn from talk. However, on the same time discussion was taken place between Swiss
biotech and Sanofi regarding the possible strategic transaction.
13th December 2016: Discussion between the two concerned parties namely J&J and
Actelion ended on December 2016. J&J announced that still there is no agreement between the
two but such deal will create value for the shareholders to a great extent.
16 December 2016: According to the news articles, Sanofi was continuously do
negotiation with Actelion on an offer price of €28billion. During this, share price of Actelion
increased by 10% significantly whether it was not cleared that agreement will take between such
two parties.
29 December 2016: Negotiation was taken place between J&J and Actelion in relation to
the deal of acquisition. At this time, J&J presented its willingness pertaining to acquire Actelion
with a cash offer such $260 per share. Results of negotiation regarding Actelion acquisition by
J&J on proposed offer price turned into disagreement
2

3rh January 2017: During this time, J&J decided to acquire Actelion $260 (€250) per
share. In this, it has been assessed that R&D will be traded publicly but deal in finalized at the
end of month.
12th January 2017: On this date, both the companies such as J&J and Actelion settled on
price @ $260 (€245) per share. Total price of settlement accounts for $28 (€26) billion
respectively and it was decided in the meeting that R&D assets of the firm will become
independent.
June 2017: On June 2017, J&J has made announcement in relation to the acquisition of
Actelion @ $280 per share. All the payments have been made in US dollars which show that
transaction or deal is settled with cash payment. Besides this, on 16th June 2017 all regulatory
approvals which are required to accomplish the transactions have been received.
TASK 2
Evaluating the risk and return as well as advantages of international acquisition to the acquiring
company
In the case of global acquisition, business entity faces several risks which in turn places
direct impact on its success and execution of planning are as follows: Foreign exchange risk: In the recent times, high level of fluctuation takes place in the
foreign exchange market. Thus, it is the major risk which has greater and high level of
impact on the position as well as performance of firm (Cashin, Mohaddes and Raissi,
2017). From assessment, it has been found that foreign exchange risk is high when
foreign subsidiary company records or maintains final accounts in other currency as
compared to acquiring firm. Hence, if adverse movements take place in currency until the
transaction is not completed then it negatively influences the financial strategy and
position of acquiring company.
 Foreign legal system: Laws, legislation and legal framework are highly varied from one
country to another. Thus, for attaining success acquiring company is highly required to
comply with the regulatory aspects (Banerjee, Devereux and Lombardo, 2016). In the
case of failure regarding such aspect brand image of firm is highly affected in a negative
manner.
3

Return or Advantages: In the case of acquisition, acquiring company gets and enjoys
numerous benefits in terms of both financial and non-financial. In the present case or study,
Johnson & Johnson has acquired Actelion with the aim to get several advantages are as follows: Building of highly skilled and talented workforce: By acquiring company with good
management and process system Johnson & Johnson can build highly skilled and
competent workforce. Moreover, talented personnel are the prior requirement for the
attainment of organizational growth and success (Reconsidered and et.al, 2016). From
assessment, it has been identified that management staff of Actelion is highly innovative
and talented. This in turn helps in fulfilling the aims and objectives setting down by
Johnson & Johnson to the significant level. Hence, by developing the pool of skilled
personnel firm can get the desired level of outcome or success. Incline in customer base and market share: Acquisition is one of the most effectual
strategies which in turn enable acquiring company to enhance customer base and thereby
market share (Or and Aranda‐Jan, 2017). Thus, by using the innovative and quality tools
in mobile devices use business entity of Johnson & Johnson can gain competitive
advantage.
 Expansion: Linked-in refers to the sites which provide information to job seekers about
vacant position. On the other side, Johnson & Johnson deals in the manufacturing aspect
of software (Tong, 2016). Hence, by acquiring Actelion, Johnson & Johnson can expand
its business operations and functions to a great extent. Thus, by acquiring the company of
other sectors business entity can explore business activities and functions significantly.
 Reducing cost and overhead: Cost and overhead expenses can also be reduced by
business entity through the means of acquisition. Moreover, when business unit operates
at large level then it may result into high economies of scale (Horowitz, 2014). In this
way, acquisition strategy helps in minimizing the expenses and thereby cost level.
 Extension of geographical and commercial reach of Actelion products:In the recent
times, geographical reach J&J is increased to a great extent. Thus, commercial
capabilities and global presence will provide high level of assistance to assess new
market and thereby capitalize all such opportunities. Further, by acquiring Actelion, J&J
would become able to launch or introduce late stage therapies. Hence, such acquisition
4

will help Actelion in fulfilling its promise and helps in becoming competitive in the
therapeutic areas.
 Compelling all cash transactions for the investors of Actelion: Acquisition strategy
undertaken by J&J will offer more benefits to the shareholders of Actelion. Hence,
shareholders of Actelion will realize substantial value from the acquisition of such R&D
co.
 In addition to this, strategy regarding Actelion acquisition will enable firm to build
competitive position in the pharmaceutical area through innovative medicines. Thus, by
meeting the needs, wants and expectation level of customers via innovative practices J&J
can attain competitive edge over others. Moreover, more innovative medicines sucgh as
Opsurnit, Uptravi, Tracleer are included by Actelion in its portfolio. In this, acquisition
strategy enables J&J to access such attractive portfolio in its cardiovascular and
metabolic therapeutic area. Thus, it can be presented that such strategy will offer high
level of benefit to J&J in terms of leading commercial position.
TASK 3
Conducting comprehensive valuation on target company
There are several methods that can be undertaken for the purpose of comprehensive valuation.
Such tools and techniques include CAPM, price earnings growth, return on stock, dividend
growth and free cash flow model. Moreover, CAPM model is highly effectual which in turn
helps in analyzing the required rate of return which are riskier in nature. By using CAPM model
investors can determine the level of relationship that takes place between required rate of return
and risk of security. Further, to conduct comprehensive evaluation of Target Company such as
Actelion discounted cash flow (DCF) analysis has been performed. Such method of analysis or
valuation is highly effective which in turn helps in evaluating or estimating the attractiveness of
an investment opportunity in the best possible way. Such analysis method lays high level of
emphasis on undertaking future value of free cash flow projections (Valdez and Molyneux,
2015).
In addition to this, Gordon or dividend growth model is highly significant which in turn
helps in assessing the intrinsic value of stock. By using such model investor can determine the
value of stock exclusive of market conditions. This model assists in establishing relationship
5

between present values of stocks and future dividend. Hence, by using such model investors can
make assessment of the return which will be offered by concerned firm. Dividend growth model;
is based on the assumption that constant growth will take in the payment that is offered by firm
to its equity shareholders. Dividend per share, growth rate and required rate of the return are the
main three inputs that provide assistance in assessing the extent to which surplus will increase
from one year to another.
CAPM
 K = Rf + β (RM - Rf)
 K = cost of capital
 Rm = Market return
 Rf = risk free return
Particulars J&J Actelion
Rf 1.18% 2.43%
β .68 .93
RM 42.14% 25.84%
K .29 .27
Dividend growth model
P0 = D1 / k - g
Particulars J&J Actelio
n
D1 54.4 23.8
K .29 .27
g .15 .17
P0 187.44 87.98
Intrinsic value
V0 = D1 + P1 / 1 + k
 V = intrinsic value
 D = dividend payout
6

 P = price
 K = cost of capital
Particulars J&J Actelio
n
Intrinsic
value
209.26 125.48
Price earnings growth
P0 = E1 / k – g
 P = Price
 E = earnings per share
 K = cost of capital
 G = expected growth rate of EPS
Particulars J&J Actelio
n
E0 5.93 6.46
G .29 .17
K .15 .27
E1 6.82 7.56
P0 48.71 75.58
PE ratio 22.22% 41.34%
Free cash flow model
P0 = FCF1 / k – g
Free cash flow = (Profit after tax + (depreciation – capital expenditure)) – (Current assets –
current liability)
 FCF = free cash flow
 P = price
 K = cost of capital
 G = expected growth rate
Particulars J&J Actelion
G .15 .17
7

FCF0 15541 862
K .29 .27
FCF1 17872.15 1008.54
P0 127658.2 10085.4
TASK4
Conducting event analysis to test efficient market hypothesis (EMH)
Efficient market hypothesis entails that it is not possible to beat the market situation or
aspect. Moreover, it states that price of an asset reflects all information in a clear and precise
way. It entails that stock is also traded at fair value which in turn shows that it is not possible for
investors to purchase stock at undervalued price or sell the same at inflated price level. Thus,
investors are not in position to outperform the overall market though selecting expert stock. Deal
in relation to Actelion acquisition by J&J was ended on June 2017 @ $30 billion. It presents that
acquisition was made by J&J by paying 23% premium price in comparison to Wednesday
closing price. Moreover, CEO of J&J announced that it has acquired Actelion shares by $280 per
share.
From event analysis, it also has been identified that shares of Actelion increased by 80%
after the announcement over the closing price of November. On such date, stock of J&J was
down significantly because it has purchased shares on premium basis. Further, it has been found
that Share price of Actelion reached on $267 respectively in the previous years. Thus, it can be
presented that deal of acquisition has placed positive impact on Actelion share price and
negatively affected stock movement of J&J.
TASK 5
Stating trading strategy which in turn helps in exploiting price inefficiency during the acquisition
process
Market or price inefficiency implies for the situation when not enough information is
available regarding demand and supply aspect. In this, it is highly difficult for the business entity
to make proper estimation of regarding the happening of business environment (Moffett,
Stonehill, and Eiteman, 2014). For getting the expected return investors should purchase share at
8

the time of rumours about the concerned deal and sell the same when proposed transaction is
confirmed via news. Besides this, in December 2016, it has been assessed that share prices of
Actelion were started to rise continuously. In June 2017, acquisition of Actelion by J&J has been
done which shows that prior to the announcement of actual deal share prices of Actelion
increased significantly. The below depicted graph shows that after rumour about having
negotiation regarding acquisition of Swiss biotech by J&J, share price of Actelion reached on
172.70 respectively. Thus, at this time, by investing money in the shares of Actelion investors
can generate higher return.
In addition to this, by conducting financial analysis acquiring company such as J&J
investors can get deeper insight about the extent to which specific deal is profitable or not.
Hence, it can be stated that financial analysis or evaluation is the best strategy which in turn
helps acquiring company such as J&J in exploiting price inefficiency to a great extent. In
addition to this, it is suggested to J&J to lay emphasis on doing continuous monitoring of
business performance and aspect. By doing this, J&J would become able to frame suitable
trading strategy. In the case of Actelion investors should employ hold strategy because share
price of such firm are continuously rising. On the other side, J&J is the leading company in the
field of pharmaceuticals. Thus, by holding the shares of such organization firm would become
able to attain high margin in the near future.
(Source: Update: J&J Actelion settled on a price, R&D assets will be spun out, 2017)
CONCLUSION
By summing up this report, it has been concluded that several announcements were made
by the owner of Johnson & Johnson at the time of global acquisition. It can be revealed from the
9

report that business entity who has undertaken decision in relation to acquiring another company
should consider every aspect such as risk and return. Besides this, it can be inferred that parent
company such as Johnson & Johnson should consider foreign exchange, legal risk at the time of
making decision about acquisition. Along with this, it has been articulated that by using suitable
valuation technique Johnson & Johnson can evaluate the attractiveness of potential investment. It
can be summarized from the report that by developing highly suitable trading strategy Johnson &
Johnson would become able to exploit market inefficiency to a great extent.
10

REFERENCES
Books and Journals
Banerjee, R., Devereux, M. B. and Lombardo, G., 2016. Self-oriented monetary policy, global
financial markets and excess volatility of international capital flows. Journal of
International Money and Finance 68. pp.275-297.
Banerjee, R., Devereux, M. B. and Lombardo, G., 2016. Self-oriented monetary policy, global
financial markets and excess volatility of international capital flows. Journal of
International Money and Finance. 68. pp.275-297.
Cashin, P., Mohaddes, K. and Raissi, M., 2017. China's slowdown and global financial market
volatility: Is world growth losing out?. Emerging Markets Review. 31. pp.164-175.
Horowitz, N., 2014. Art of the deal: Contemporary art in a global financial market. Princeton
University Press.
Moffett, M. H., Stonehill, A. I. and Eiteman, D. K., 2014. Fundamentals of multinational
finance. Pearson.
Or, N. H. and Aranda‐Jan, A. C., 2017. The Dynamic Role of State and Nonstate Actors:
Governance after Global Financial Crisis. Policy Studies Journal. 45(S1).
Reconsidered, C. and et.al., 2016. I nternational policy coordination has played a major role in
the global policy response to the Great Recession, with a particular focus in the early
years on the worldwide joint implementation of fiscal stimulus mea-sures, 1 and more
recently on the worldwide implementation of harmo-nized financial market regulations
(for example, Basel III), which have an. Managing Complexity: Economic Policy
Cooperation after the Crisis. p.77.
Tong, E., 2016. Global financial instability: Why US monetary policy matters. University of
Auckland Business Review. 19(1). p.6.
Valdez, S. and Molyneux, P., 2015. An introduction to global financial markets. Palgrave
Macmillan.
Online
Financial statements of Actelion Ltd. 2017 [Online]. Available through:
<http://financials.morningstar.com/ratios/r.html?t=ACT >. [Accessed on10th June 2017].
11

Financial statements of Johnson & Johnson. 2017. [Online]. Available through:
<http://financials.morningstar.com/income-statement/is.html?
t=JNJ&region=usa&culture=en-US >. [Accessed on10th June 2017].
Johnson & Johnson to acquire Actelion for $30 billion with spin-out of new R&D company.
2017. [Online]. Available through: <http://www.cnbc.com/2017/01/26/johnson-johnson-to-
acquire-actelion-for-30-billion-with-spin-out-of-new-rd-company.html>. [Accessed on10th
June 2017].
Update: J&J Actelion settled on a price, R&D assets will be spun out. 2017. [Online]. Available
through: < http://labiotech.eu/actelion-johnson-europe-largest-biotech/>. [Accessed on 10th
June 2017].
12