A Retrospective on Boehringer Ingelheim's Acquisition of Merial
Recently I did a project that served as a retrospective analysis of the asset swap Boehringer Ingelheim (BI) was involved in with Sanofi, where the former acquired the latter’s animal healthcare business (Merial) in exchange for BI’s consumer healthcare division. Whilst the final report is confidential, there are certain things I can share publicly that I thought would make for a good discussion, especially around what consultants can bring to a biopharma business when it engages in high-risk activities such as mergers and acquisitions (M&A).
The asset swap was completed in early 2017 and was worth a monumental €21.8 B, making BI, a private family-owned business located in Ingelheim am Rhein (Germany), the world’s second largest animal healthcare company in the world (after Zoetis, which was spun out of Pfizer in 2013). Such a deal is replete with business management and leadership lessons (and challenges) that span a plethora of fields, from organizational theory to finance. A key challenge of course, was to mitigate the fact that 70% of M&A deals fail to return the expected additive revenues, and 1 in 10 M&A deals fail to even close. As such, over 60% of M&A deals actively destroy shareholder value. The major causes of M&A deal failure, either in terms of absolute failure or failure to return value to shareholders and/or expected revenue gains, includes: executives bringing insufficient discipline to the evaluation stage, misunderstanding the synergies that can be garnered between acquirer and acquiree, regulatory concerns, political issues, and a lack of brand and cultural awareness.
Before we delve into the specifics of the challenges BI faced and how they were dealt with, let’s first give consideration to the question: why do companies engage in M&A if they are so risky? There are a number of important key drivers for biopharma M&A deals, which make up the majority of all M&A activity. First and foremost, the major driver of M&A in biopharma is the exorbitant cost of pharmaceutical R&D, with new drugs costing around $2.6 B to develop. This high per-product development price combined with the fact that a new drug can take around ten years to make it onto the market, means that strategic repositioning is often required for a pharma company to remain internationally competitive. By merging or acquiring a business, a pharma company can hit critical size requirements, gaining more market share through a more collaborative approach rather than trying to ‘go it alone’. Further, acquiring companies that have a product portfolio synergistic to the acquirer’s products and services can help rapidly build new platforms to catalyze rapid competitiveness. Consider for example Bayer’s $ 63 B acquisition of Monsanto (one of the largest M&A deals in history); the latter had strong R&D into genetically modified crops and the former’s crop science division has significant strength in crop chemicals. Finally, pharma M&A can help to make efficient use of capital allocation to help drive down the expensive overheads innate to the industry, particularly in relation to R&D and manufacturing.
With that all said, the following questions need to be answered: was the apparent success of BI acquiring Merial an actual success and to what degree (was the expected shareholder value and revenues generated), what existing challenges need to be addressed in order for the deal to remain a success, and how can management be proactive about addressing these challenges? Before comprehensive answers to these questions are divulged, consideration must first be given to the problems and their core causes with respect to what BI faced during the actual acquisition of Merial.
Problems Faced from an Organizational Theory & Leadership Perspective
Organizational theory is the study of the behaviour and nature of organisations and their environments with particular attention given to the relationship of the individual and groups found within an organization. Typical areas covered from an organizational theory perspective includes: problems frequently made by management (i.e. poor mastery of change), team motivation, and leadership styles such as situational leadership. Here we will focus on the challenge BI had in regards to how best to deal with the changes that would occur from their first ever asset swap deal involving the absorption of another external company.
Here the root cause of challenges involving change stems from cultural differences. Cultural differences are one of the biggest challenges and causes of subsequent issues in any M&A deal. This is especially the case for BI, a German company, acquiring Merial from Sanofi, a French company. To help mitigate the challenges, BI hired the illustrious global consulting firm McKinsey to aid in cultural integration management (CIM). When I spoke to the Managing Director of BI, Joachim Hasenmaier (now recently retired), he stated this was important in order for getting ready for day 1 post-acquisition. An example of CIM tools follows a methodology whereby an agenda is set around cultural integration, identification of the key differences that matter (as not all differences will lead to disharmony), defining the culture that the company wants to build, and develop a culture-change plan with subsequent sustainment and measurement of success.
Business Law-Based Problems
With respect to regulators, the problem of how to navigate the international regulatory authorities was a real minefield. Despite the number of legal challenges facing M&A deals being in a period of relative decline, competition law authorities in various countries still have to be satisfied that any post-M&A entity does not create a monopoly or reduce the competitiveness in the market to such as degree as to provide said entity with an unfair advantage. Therefore, from the legal perspective, a challenge that BI faced when the acquisition was announced, was how to satisfy each different regulator since they were an international business. Adding to this complexity was the fact that the deal was not a simple acquisition, but rather an asset swap, which added to regulator scrutiny. Companies that breach these competition laws face steep penalties, including forfeiture of 10% of their annual global revenues.
When I chatted to Joachim Hasenmaier about how the regulatory challenge was addressed, he stated that the importance was to have a centralized team rather than multiple disparate teams. This allowed the coalition of globally-focused legal experts to help carry out the regulatory requirements to allow the asset swap to be approved in each key territory. This has the lowest risk for information getting lost due to teams being so separated from each other and allows for the easy sharing of information pertaining to any problems that may arise which may be common for other teams operating in different legal territories. By sharing such information, one team can help expedite solutions to other teams so as to prevent the same problems occurring time and time again, which would be very inefficient.
There are a variety of financial issues in any M&A deal that must be addressed, with the initial most important being the valuation of the various deal components (i.e. how much the company being acquired is worth. The deal between BI and Sanofi had the added complication of factoring in the asset swap, meaning both parties needed to ensure accurate financial valuation of their respective assets to be acquired (with each side of course trying to fetch the highest possible price). Further, there was an issue that would be tied into shareholder management; what would the financial impact of the completed deal be, or put another way; what were the fiscal forecasts for BI to be once they acquired Merial from Sanofi? Therefore, BI’s executive team was faced with the challenge of ensuring the sums added up to create real value.
To help ensure an unbiased and fair valuation, both BI and Sanofi hired investment bankers to consult on and construct a suitable deal. Joachim Hasenmaier mentioned to me that Sanofi hired Lazard and BI made use of two firms; Rothschild and Bank of America Merrill Lynch. By hiring several investment banking firms, risk could be reduced, and the deal time sped up significantly (plus BI had never done an M&A deal like this before, so it was good to have various sources of input). In terms of financial projections post-acquisition and managing shareholder expectations, Joachim Hasenmaier said that a business plan was quickly developed to show the financial forecasts of the deal if executed optimally. And whilst he stated that more diligence could have been done, time was of the essence, and so risk identification and mitigation plans were included to ease concerns of shareholders. Further, a key performance indicator (KPI) was developed to measure future success of the deal by. This was to have animal healthcare represent 20 – 25% of the company’s business activities including revenue generation.
Marketing Management Issues
The American Association of Marketing defines marketing management as “the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services in order to create, exchange and satisfy individual and organisational objectives”. During the process of an M&A, marketing departments play a vital role, particularly around the development of a unified marketing strategy and rebranding efforts. Whilst the BI name would remain intact after the asset swap, BI faced the problem of how to market the loss of CHC, the consumer healthcare division, which was valued at €6.7 B and had been a part of the company for over 100 years. The central issue here is how BI would be able to market the loss of CHC. The cause of this being a problem stems from the fact that CHC was a well-known and well-integrated business unit of BI. For example, how would shareholders and relevant stakeholders react to this?
I asked Joachim Hasenmaier about this challenge and he stated they had to identify the core stakeholders that had developed a more emotional connection to the consumer healthcare division (given its long history). Further, once identified, they had to have their concerns assuaged through logical and strategic reasoning to show that BI, as a whole, would be more globally competitive by focusing more on animal health rather than consumer healthcare. Once the core stakeholders were able to see the rationale behind this, especially the fact that BI had changed over time and needed to increase their market share in the animal health sector, then they were able to get onboard with this strategic vision.
Many other challenges were faced by BI, such as operational issues (especially regarding maintaining operational harmony during such a disruptive process), however for relative brevity I will end this article here. Given the fact that BI went from being the 16th to the 13th largest pharma companies in the world from 2015 to 2019 (in terms of revenue), one could easily conclude that the acquisition of Merial was a success. However, it is still early days, and the success BI has seen may indeed have come from their human pharma side. This is where assessing core financials and KPI’s is imperative. A new R&D strategic plan for the animal health division is currently in the works, and what should also be expected is to see the R&D side of operations strategically-integrated into one of BI’s strongest areas; global manufacturing. Given the historical strength of BI in development of a strong R&D vision and their commitment to setting up a core strategy for the animal healthcare division that Merial is now an integral part of, one should expect to see a strong and steady growth rate. I am confident that BI and their leadership are capable of delivering this and it will be good to see given the increasing importance of global animal health.
I would like to give enormous thanks to Joachim Hasenmaier for giving me his personal time whilst he was a top executive at BI. He’s of course an incredibly busy man and to give me one-on-one time was greatly appreciated.