Bayer Ag: Bidding To Win Merck’s Otc Business Harvard Case Solution & Analysis

Bayer Ag: Bidding To Win Merck’s Otc Business Case Study Solution

Moreover, the acquisition would allow the company to increase the scope of its OTC business which ultimately would reduce the overall cost and helps the company to build strong relationships with retailers and get potential shelf space for its products. It would also allow the company to extend its portfolio with entrance in the sun care products. Moreover, the joint venture involving the cardiovascular drugs would enable the company to get the two world’s top ten brands in the cardiovascular drug category i.e. Zetia and Vytor in. Overall, the acquisition would enable the company to move towards the achievement of its strategic goals that is the strategic logic behind the acquisition. (Brigham, 2016)

Assessment of Valuation of Potential Synergies

Synergies valuation estimates are based upon the data from the Merck’s data room and the fact that how Merck was performing and how it is expected to perform under the Bayer’s supervision. Before estimating any synergy, various variables have been reconciled due to the complexity of the business and low amount of available data at the Merck’s data room. The revenue synergies based upon the incremental sales of Bayer’s products in the United States and the Mayer’s products outside the United States are quite reasonable, as the acquisition would allow the access to new markets for both of the companies. However, the estimated value of $400 per year could differ in real sense, and could lead to the overvaluation of Merck, but it could be used to value the potential synergies as an estimated value as the value is based upon Merck’s data room and it is also reconciled.(Bousquet, 2017)

Along with it, the cost reduction synergies provided on the basis of decrease in the advertising, distribution and other related costs due to the increase in the OTC market is also reasonable as increase in the scope of the OTC would distribute the fixed costs on the larger business level and reduce the overall per unit cost. However, the increase in EBIT margin from 25% to 60% seems to be very high and it may overvalue the synergies. In order to evaluate the true value of the potential synergies the company should adopt a conservative approach and apply its actual EBIT margin over the revenue synergies rather than a 60% margin to adjust the sensitivity and risk factors.

For better understanding, a sensitivity analysis for the synergy valuation is conducted to analyze the impact of various factors over total value of synergies. In this regards, various sensitivity analysis including; reduction in revenue synergies by 20%, reduction in cost synergies by 20%, reduction in both revenue and cost synergies by 20%, change in EBIT Margin i.e. from 60% to 25%, are conducted. It could be seen form the Exhibit 1 that the reduction in revenue and cost synergies do not put a huge impact on the EBIAT from the potential synergies. However, the change in EBIT margin from 60% to 25% has a potential impact on the EBIAT from synergies. However, still the EBIAT from synergies is of significant amount and could be considered while deciding the offer price for Merck.

Note: All the calculations related to sensitivity analysis are provided in the attached excel spreadsheet.

Conclusion

Overall, the acquisition of Merck consumer care division could be proved as a game changer for the company with its potential synergies and the strategic benefits. The deal could provide an opportunity for Bayer to enter in the market segments that are still not targeted by the company. The acquisition would provide certain opportunities along with the quantitative benefits to the company, including; increase in revenues, brand image etc. However, the revision of the offered price must be critically evaluated on the basis of valuation conducted. The offered price must not exceed the estimated value of Merck’s consumer care division.

Exhibits

Exhibit-1: Sensitivity Analysis of Potential Synergies

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