Case: Roche Holding AG: Funding the Genentech Acquisition

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QUESTION
 
Recommended Background Materials: Ch 3, of BMA “Valuing Bonds”; Ch 4, of BMA “An
Overview of Corporate Financing”
Learning Goal(s): Examine how to price/value corporate bonds. Practice bond analytics
through computing YTM. Understand bond ratings and credit spreads. Gain insights into the
tradeoff between risk and return and introduce the concept of cost of debt.
The case set in 2008 describes the potential bond issue from Swiss pharmaceutical company
Roche Holding AG. The firm needs to raise $32 billion from bond issuances in order to pay for
its acquisition of the remaining shares of Genentech. Roche management plans to issue bonds at
various maturities (from 1 to 30 years) and in three different currencies (US dollar, Euro, and
British Pound). The financial markets have been in steep decline as the US real estate bubble
burst and a massive worldwide recession begins. Roche wants to issue their bonds at par which
means that the coupon rate needs to equal the yield to maturity (YTM) that investors require.
The critical question is what rate will investors require on their bonds?
The case allows us to introduce the tradeoff between risk and return and examine how to
quantify it with respect to bonds. The case allows for discussion regarding bond ratings, credit
spreads, and bond pricing. The case requires a good understanding of bond analytics (computing
YTM) and the use of comparable bonds to estimate likely yield.
MAIN DISCUSSION QUESTION:
What coupon rate should Roche offer for its bonds so that they can be sold at
par?
Answering the questions below should help you in addressing our main discussion question:
1. Do you agree with the timing of the bond offering? Is it a `good time’ to issue?
2. Do you anticipate that the offering will affect Roche’s bond rating? If so, in what way?
3. How can we estimate the yield investors will require on a bond? What are your estimates of
investors’ required yields for the 5-year, 10-year, and 30-year US dollar bonds?
a. First estimate the yields for the Roche bonds using the information in Exhibit 6.
b. Next estimate yields based on information in Exhibit 11 (you can assume all bonds
have a par value of $100).
c. Which estimate do you trust more? Why? How would you explain to someone
unfamiliar with credit markets why these estimation techniques are valid?
4. What is your estimate of investors’ required yields for the 7-year Euro denominated bond?
Can you just use the same techniques as you did in Question 3?

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