How a bold $60 bln deal went right yet so wrong

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Christophe Weber, Takeda

How a bold $60 bln deal went right yet so wrong

NEW YORK, Dec 6 (Reuters Breakingviews) – Like the quest to discover a new medicine, pulling off a successful mega-deal is a frustrating and elusive experiment. Tokyo-based drugmaker Takeda Pharmaceutical (4502.T) understands the difficulty of both. Although boss Christophe Weber will have plenty to celebrate on the upcoming fifth anniversary of his landmark $62 billion Shire acquisition, the deal has delivered no value to his shareholders.

Confronted with a slowing home market and leveraging his unusual position as a foreigner running one of Japan’s corporate champions, Weber in 2018 embarked on a bold and aggressive attempt to expand internationally. There was no mistaking how important the Europe-based target with a considerable U.S. presence was to his strategy. Takeda increased its cash-and-share offer four times, effectively bidding against itself, to sway Shire’s board. It ultimately overcame multiple obstacles and completed the transaction on Jan. 8, 2019, with the final purchase price representing a 65% premium for Shire shareholders.

Nearly five years later, the biggest cross-border deal in Japan’s history – and one of the pharmaceutical industry’s largest ever – is a prime example of how even on the rare occasion when much goes right, a merger can still go wrong. Weber’s degree of difficulty was exceptionally high. Takeda bloated its balance sheet, traversed faraway operations, and risked cultural upheaval to get its hands on Shire’s labs and pipeline of rare-disease treatments. And while the 242-year-old buyer has achieved many of the aims it outlined at the onset, it has generated absolutely no return for investors since news of the takeover plan first surfaced in March 2018. Small wonder that studies routinely find most M&A is an exercise in futility whose chances of success at best amount to a coin flip.

Despite the long odds, France-born Weber went a long way to accomplishing some of his biggest financial goals. Within a few years, Takeda had offloaded more than $10 billion of product portfolios, including its domestic consumer healthcare arm and a slug of its European over-the-counter and prescription drugs business. The divestitures helped erode the $53 billion mountain of debt the company had accumulated when the deal closed, shrinking it to about $29 billion by September 2023. Takeda’s net debt has fallen from 5 times adjusted EBITDA to 2.6 times over that period, nearly meeting its promise of a multiple closer to 2 times. Moreover, the company cannily lowered its average interest cost to 2% from 2.3% while converting all its debt to fixed rates and dramatically extending the maturities of its borrowing so that more than half the outstanding sum isn’t due until at least 2030.

 

Where synergies are concerned, Weber overdelivered. An initial target of $1.4 billion grew more than 60%, to $2.3 billion. The upwardly revised annual cost savings also came in a year ahead of schedule after Takeda executives swiftly hacked away at Shire’s manufacturing and supply expenses, closed and consolidated more than 100 locations and integrated the two companies’ worldwide processes. This all helped boost the bottom line. The company’s core operating profit margin, which strips out amortization and impairment of intangible assets, among other items, has improved 10 percentage points to 28%. Things have gone so well that Takeda had enough cash to make an upfront $4 billion payment to buy psoriasis drug developer Nimbus Therapeutics in February and forecast its first dividend hike in 15 years.

There were plenty of other benefits, too. Takeda significantly reduced its dependence on Japan, diversifying the location of its workforce while upping the share of revenue from the more lucrative U.S. and European markets. It also bulked up R&D investment, including in promising plasma-derived therapies.

For all that heavy lifting, however, investors would have been better off dumping the stock as soon as they first heard that Takeda wanted to buy Shire. They would have made far more by simply investing in funds that passively track the Topix (.TOPX), S&P 500 (.SPX) or NYSE Arca Pharmaceutical (.DRG) benchmarks. Rivals Novartis (NOVN.S), GSK (GSK.L) and even struggling Pfizer (PFE.N) all generated a total return, including reinvested dividends, higher than the minus 2% recorded by Takeda as it digested the deal, according to LSEG.

With so many variables to consider, including a pandemic and a war, it’s hard to pin down an easy explanation for the discrepancy. It might be taking Takeda longer than anticipated to develop treatments that will persuade fund managers to reconsider investing. As it stands, the company’s annualized revenue growth hasn’t changed much from the five years before it owned Shire, while its stock has missed out on the newfound enthusiasm, including from Warren Buffett’s Berkshire Hathaway (BRKa.N), for Japanese equities.

One reasonable factor to blame for Takeda’s share price underperformance, as is often the case with supersized acquisitions, is the deal’s price tag. Former Chairman Kunio Takeda, the last member of the founding family to run the company, was among those who refused to support the merger, fearful of the cost and the risk involved. Weber’s internationalization of Takeda may have made it easier to dismiss those concerns as part of an antiquated and overly conservative approach associated with many Japanese boardrooms.

The family scion was not alone, however. Soon after Takeda formally disclosed its offer, Breakingviews calculated that it would require about $2.6 billion of synergies simply to cover the hefty premium paid to Shire’s shareholders. Even Weber’s sharp axe wasn’t up to that task.

Of course, it’s possible that not doing the deal would have led to an even worse outcome for Takeda, relegating it to operate largely in a country with a declining population and shrinking government drug reimbursements. Unlike in pharmaceutical research, however, there are no double-blind placebo-controlled trials available to measure the efficacy of big M&A.

Editing by Peter Thal Larsen and Sharon Lam

Source: Reuters