UK: GSK – Novartis Deal: Major Takeaways

Last Updated: 26 July 2018
Article by Madhur Tulsiani

Human beings are full of desires. And an exchange has to be made for something against fulfilment of those desires. This "something" can be highly unique, which gave rise to earlier forms of barter transactions, or it can be something more uniform, more acceptable or more universal like currency. A desire is said to have been met when such exchange in the form of transaction has been successfully accomplished. This transaction in which the party whose desires are fulfilled is said to have been done so by means of acquisition.

Black's law dictionary defines the term, "acquisition" as, "The purchase of one company by another in order to fulfil particular strategic goals related to revenues, market share, product/ service offerings, or competition1." In the contemporary business world, an acquisition may be structured as a stock acquisition, where the acquiring company offers investors in the target company a specific price for their common stock, or an asset acquisition, where the acquiring company offers to buy a portion or majority of the target company2.

In the domain of business acquisition, the acquisition deal goes ahead only when both the parties are satisfied that both have something of value to be acquired of such transaction. Usually, the party selling of or divesting a business or a part of a business does so with an intention to make a quick gain, streamlining core business operations of the enterprise, or to fight the dwindling profit margins or to dispose of the losses incurred. On the other hand, the party acquiring the business operations in exchange of currency or anything that is acceptable to the selling party, does so with two major intentions. First, the acquiring party believes in diversification of its current business portfolio in order to improve its adaptability to sustain market shocks and volatilities. The second major reason is the development of synergy that has a potential to be developed between the existing business operations of the acquiring company and the business operations of the acquired company in order to create a strategic advantage and to boost and consolidate revenue streams in future. This clearly implies that both the parties prima facie gain from an acquisition deal. The acquisition deal can be better understood by taking a recent example in consumer healthcare business of GSK – Novartis deal.

Consumer Healthcare business everything in the domain of pharmaceuticals that can be purchased by the consumers without a prescription. Apart from prescription drugs, the rest constitute as consumer remedies. They can be divided into wellness, nutrition, skin and healthcare, and other related products. According to GSK, the British pharmaceutical giant, Consumer Healthcare business well positioned to deliver sales and earnings growth, driven by category-leading Power Brands, science-based innovation and improved efficiencies. Operating margins to approach 'mid-20's' percentages by 20223.

On this aspect, GSK, that had a consumer health joint venture with Switzerland's Novartis for the last few years has been successful in striking a deal with the valuation of around 13 Billion USD in order to ensure complete control of around a 36.5% stake of Novartis4.The valuation was agreed upon by both the parties and as a result of this deal, four out of eleven directors that used to be appointed by Novartis would now have to step down. However, the deal is still subject to GSK shareholder approval5. This deal will enable GSK to take full control of products including Sensodyne toothpaste, Panadol headache tablets, muscle gel Voltaren, and Nicotinell patches6. GSK believes that the proposed transaction will help to address the key capital allocation priorities of the group, along with improved performance and capital planning. Such transaction is also expected to strengthen generated cash flows7.GSK is even planning to give way its Horlicks product division in order to generate funding for the deal to take place8. On the other hand, Vas Narasimhan, CEO of Novartis, said: "While our consumer healthcare joint venture with GSK is progressing well, the time is right for Novartis to divest a non-core asset at an attractive price. This will strengthen our ability to allocate capital to grow our core businesses, drive shareholder returns, and execute value creating bolt-on acquisitions as we continue to build the leading medicines company, powered by digital and data9." He also believed Novartis's future as a "medicines and data science company, centred on innovation and access.10"

Even the market recently is witnessing such streamlining of operations. A little while ago, even Pfizer's consumer healthcare business was up for sale for which GSK and Reckitt Benkiser and GSK were among the major contenders. Even Merck,a major player in vitamins and dietary supplements market, was also interested to sell its consumer products unit upto 20 times for the respective assets.

Acquisitions can happen for a variety of reasons, but in the end, they help build up strong players in the market that may eventually give rise to oligopoly in that domain. But, as markets become more competitive and efficient, buyouts and acquisitions are bound to occur thereby creating a win – win situation for both the acquiring party and the party being acquired.

Footnotes

[1] https://thelawdictionary.org/acquisition/

[2] (ibid).

[3] https://www.gsk.com/en-gb/media/press-releases/gsk-reaches-agreement-with-novartis-to-acquire-full-ownership-of-consumer-healthcare-business/

[4] http://fortune.com/2018/03/27/gsk-novartis-consumer-health-care/

[5] https://www.novartis.com/news/media-releases/novartis-sell-stake-consumer-healthcare-joint-venture-gsk-usd130-billion-focus-strategic-priorities

[6] https://in.reuters.com/article/novartis-gsk/gsk-buys-out-novartis-in-13-billion-consumer-healthcare-shake-up-idINKBN1H30GX

[7] (ibid).

[8] https://www.telegraph.co.uk/business/2018/04/01/gsks-9bn-novartis-deal-next-emma-walmsleys-strategy/

[9] (ibid).

[10] https://www.ft.com/content/7e25ed88-317f-11e8-b5bf-23cb17fd1498

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