Behind the Novartis mega-merger
'Believe me, what is a short walk between our two headquarters is a big step for the new company,' said Alex Krauer, future chairman of Novartis, to a gathering of analysts in London on March 8. 'To combine two strong and successful companies as a merger of equals into an even stronger and more successful new entity represents a fascinating vision indeed.'
That 'fascinating vision' had already been given a round of applause by the financial community the previous day, when it was announced that the Basle-based pharmaceutical companies Sandoz and Ciba were merging to form Novartis. The promised cost reductions and strategic fit provoked massive trading in both companies' shares: Sandoz's registered shares finished the day nearly 20 per cent better; and Ciba was up nigh on 30 per cent. The combined market capitalisation jumped by some Sfr18 bn. Clearly the deal was a welcome surprise for investors.
Eight months on and the Novartis vision has still not been realised. Delays and uncertainty are to be expected and the investment community does not seem unduly worried. Indeed, Krauer and his colleagues warned their audience at the London meeting that regulatory approval might take some time. Raymond Breu, Novartis's designated CFO, said in March that it was anticipated 'within the May-August time frame. The earliest will be May; the latest, August of this year.' Evidently that has not been the case.
Shareholders at both companies duly gave their approval in April; the European Union regulatory bodies followed suit in July. But the US Federal Trade Commission has been a sticking point. Approval is now expected before the end of the year.
The investment community is still licking its lips over the deal, not seeing the delay in regulatory approval as a monumental problem. Even with relatively poor nine-month sales growth for both companies announced in October, most investors are looking further ahead and divining beyond the current regulatory problems.
As James Stettler, Swiss analyst at Kleinwort Benson in London, points out, 'Most investors understand the complexity of the deal. We all know that the US market can be difficult in this regard.'
The delay has, however, raised the uncertainty stakes in several areas, leading to a need to manage expectations. For example, much of the Sfr1.8 bn expected cost savings comes from losing some 10 per cent of the combined company's workforce - around 10,000 people. Without the FTC's go-ahead the two companies have to remain as separate entities: redundancies cannot be confirmed; staff morale is affected; the two corporate cultures cannot be finally fused; and the US investment community remains partially locked out of the information loop due to legal concerns. 'The initial announcement was excellent. In between, the information has dried up a bit and there remains some uncertainty,' comments Stettler.
As one might expect, Daniel Vasella, president and head of the Novartis executive committee, remains upbeat in the face of the delayed completion of the deal. 'It would be an illusion to believe that you can do a merger without having a certain degree of uncertainty and anxiety. That is normal, you cannot take it away completely,' he says. 'My guiding principle is to be predictable. I don't want people to be surprised positively or negatively. I don't want them to miss an opportunity or be shocked. Each time a major event has been reached we have proactively informed the investment community.'
Vasella insists that he initially predicted that regulatory approval would come in the fall and that investors' expectations have just had to be massaged slightly to move towards year end.
Breu, meanwhile, says that his expected deadline of August was too optimistic and that regular steps have been taken to communicate the FTC's areas of concern to investors. 'They are not areas which will affect the merger in a material way,' he says. 'We've also been able to inform investors that our original assumptions regarding the cost synergies are proving right.'
Legal and regulatory concerns are obviously paramount in any merger - and particularly in a deal of this size. Mind you, by now, these executives have all become skilled operators on this front even if they were not adept at such dealings beforehand.
The threat of a leak before the deal was publicly announced was at the top of everyone's mind and was very real in a small community like Basle's. That meant that the original team had to be kept to a minimum - some 16 people - with tight controls. Investor relations officers from Sandoz and Ciba were not brought into the loop until ten days before the March 7 announcement.
'There was a very high awareness that discussions needed to be kept very secret,' says Vasella. 'If there was a leak there would be a high danger of the negotiations falling apart. Both parties wanted the negotiations to succeed or else be terminated in secret.' The idea of a merger was broached at the end of last November by Marc Moret, chairman of Sandoz, to Louis von Planta, a friend and former chairman of Ciba Geigy.
That original meeting between the chairmen was held in Basle on the assumption that if they were seen together no-one would think it strange in the context of their businesses in the city. From that point on the merger team met in different sites, in addition to Basle, such as hotels in France or Germany - 'Impersonal, no man's land hotels,' Vasella says. The fact that the companies were on each other's doorsteps made the negotiations both easier and more complicated in different senses.
'When you start such a process you have to be very clear about the strategic vision,' says Vasella. 'If you're not clear then you have to retract or give-up. The decision was to create a worldwide leader in life sciences. There was full agreement on an innovation-driven company focused on the life sciences with the consequent decision to spin off the specialty chemicals.' He emphasises that the cost-savings are a positive side effect but not the driving force. The strategic vision has been the same since day one. And they have taken steps to communicate that fact.
Communication seems to be high up on Vasella's list of priorities and the way the initial announcement was handled certainly confirms that. The wires and faxes were already buzzing at 5am Swiss time on March 7. Aside from the press releases, a detailed Backgrounder was sent out to the investment community. And a Question & Answer briefing for investors was posted on the Internet at the same time.
That gave analysts just over a day to digest the information before the analyst meeting was held in London on March 8. The meeting was linked up by videoconference to Zurich and around the globe by teleconference. A few smaller group presentations followed before the executives flew to New York to tell the story once more.
'We wanted to communicate that the merger was unlocking significant value to shareholders,' says Breu. He says they had done detailed numbers based upon assumptions they had made but did not want to prevent the investment community from doing their own homework. The backgrounder was vital in that regard and gave a boost to the analyst meeting. Alex Krauer was able to note how positively the markets had responded and various analysts congratulated the team on a 'spectacular deal.'
Anthony Horning, designated head of investor relations at Novartis, says that the backgrounder and Q&A document helped explain much of the detail to the investment community at an early stage. The time pressure on executives at the live meetings was reduced as a result and it also gave them a cue in terms of singing from the same hymn sheet. Indeed, that was crucial because after the main presentation in London, executives split into two groups to hold parallel discussions with analysts. Those from the investment community that were not satisfied with the documented answers could then hear it from the horse's mouth.
Of course, the continued split between the two companies has led to a complicated investor relations approach in the aftermath of the announcement. Sandoz and Ciba have maintained their separate IR departments, but with a combined effort for extra releases on Novartis.
'We've kept up a normal information procedure with respect to results,' says Horning, who comes from the Sandoz side of the equation. 'They're timed as they normally would have been and we've added in a line regarding the merger. In addition to that we've had to do all the Novartis releases, some of which are centralised while some are decentralised' from regional offices. Coordination between the two IR departments is key.
'The difficulty in keeping up normal IR procedures is due to the uncertainty of the timing of the actual merger,' says Horning. 'Had we known a fixed date, everything would have been easier. But that's been an unknown date and we have had to manage information in the market accordingly. It was always clear that the timing of the merger decision was unclear and out of our control. The changing time lines are just a sub-set of that uncertainty.'
He points to a danger of giving information to someone who calls immediately after an internal decision has been made on, say, management structure, which has not been made publicly available. The policy to date has been to wait until a number of internal decisions have been made before releasing information into the market. Yet information about regulatory approval and progress is released as and when it is available.
Keeping US investors informed on the progress of the merger is complicated by both the SEC and FTC. For example, an Information to Shareholders booklet which was distributed in late March in the lead up to the shareholder meetings in April could not be sent out to the US. It included a notice to US holders to the effect that neither Sandoz nor Ciba were soliciting their votes, proxy or consent in respect of the general meetings.
'US investors have been given the same information,' says Horning. 'And they tend to be more outreaching than the typical European investor in their willingness to travel. They've not been hesitant to hop on a plane.' Of course, Novartis is not bound to prohibit third parties from passing on information, either. Needless to say the analyst fraternity has been quite willing to oblige in that regard.
Horning is reluctant to give away too many details of what is planned in IR terms when the merger is finally given the go-ahead, preferring a 'wait and see' angle. He does say that the US investors might get some special attention because of their current position. Whatever the approach the commitment of top management to the process seems assured.
'The exposure of top management to analysts and investors - even more so to analysts - is a very healthy process,' says Vasella. 'It allows them to see top management in action. And top management can profit a great deal from their questions.'
Will I Survive?
When Anthony Horning, then head of IR at Sandoz and now designated head of IR at Novartis, was told about the merger ten days before the public announcement his first reaction was: 'Am I going to survive this?' The answer was: 'We don't know.'
'I just had to live with that,' says Horning. 'It was such huge insider knowledge that it was difficult not to share it with anybody. Counterbalancing those feelings was the excitement and feeling of exhilaration to be able to live through the best part of the deal. I knew that the first months would be an extremely positive experience.'
Unfortunately, Horning's opposite number at Ciba was ill at this time so her deputy, Marius Sutter, stepped into the role. The rest of the personnel in the IR departments were not informed until a few hours before the public announcement. Horning and Sutter spent the next few days preparing for the announcement and checking details on the backgrounder which had been compiled by the merger team over the previous few months. 'We looked through it and provided corrections where there were things missing,' says Horning. 'That sometimes meant going back to one of the divisions and saying we need XYZ in two hours,' without, of course, giving anything away as to the reason for the hurry.
The announcement itself was complicated by the release of both companies' results two hours after the merger release. Horning says that the decision as to when to release the results was agonised over by his executive colleagues. They were two weeks early as it was, so to announce them before the merger would have raised eyebrows and difficult questions. 'On the other hand if we did it after the merger announcement they would be totally lost.' And that is what happened - the earnings releases were buried in the excitement of the merger.
Horning discovered that he had survived the merger at the end of June when his appointment as head of IR at Novartis was confirmed. So was there any acrimony between him and his newfound colleague at Ciba? Thankfully, no. Eva Kalias, from Ciba, was made head of IR at the spun off specialty chemicals company around the same time. 'That made it easier from a personal point of view,' he says.