Case: Roche Holding AG: Funding the Genentech Acquisition

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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?

Sample Solution

In the 1793-1830’s the United States had two significant various sorts of states. The one sort of state was the free-state which would be known as the North. Those states included Massachusetts, New Hampshire, Vermont, New York and Rhode Island. The accompanying states were known for being more factorial work place, these states were more industrialized than the South. Rather than utilizing human hands and work the Northern states utilized hardware. Having the North supplant human work with machines implied that bondage was not required. Notwithstanding, in the South the interest for cotton emerge between 1790-1860. This request prompted the increment of subjugation, from 700,000 slaves in the last part of the 1790’s to 4.5 million slaves during the 1860s. To separate the North and South expresses, the United States embraced the Mason-Dixon line in 1779 made by Charles Mason and Jeremiah Dixon. Whenever the Northwestern Ordinance of 1787 which arrange the Ohio valley into five new domains, which could be up for statehood. The contention here would be somewhat or not the states ought to be free or slave states. This mandate would ultimately prompt the Cold War between the South and the North. During this period there was pressure between the North and the South, on the grounds that the country all in all believed there should be an equilibrium. This contention would be addressed by the Missouri Compromises of 1820, or so the country thought. Struggle broke out between the states, the two states needed to be the larger part expresses, this lead to brutality which lead to the Civil War.

The expanded interest of cotton in the Great Britain and in the Northern conditions of the U.S, was the explanation of the estates of cotton and tobacco in the U.S South. These states included to Southern states – Virginia, South and North Carolina, Georgia, Alabama, Mississippi, Louisiana, Florida, Tennessee, Arkansas, Missouri and Texas. The south was incredible to deliver those items as a result of the rich soil. The interest of those items prompted work requests too. So they began bringing more slaves and involving them as a work. In 1793 there was 700,000 slaves and it grew up to 4.5 million out of 1860. Cotton creation per y

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