Problem Diagnosis
Quintiles Inc. standing at the end of the year 2012; the private equity firms of the company wanted to cash out their shareholding and also monetize their respective positions in the company. In order to do that, the private equity firms of the company were considering a range of strategic alternatives which would help the company to pay all the outstanding obligations and also provide the company with enough funds to fuel the future growth of the company. Three strategic alternatives chosen by the private equity firms were either to go for an acquisition of merger with one of the strategic buyer or financial buyer, the second alternative was to go for an Initial Public Offering and the third alternative was to go for the restructuring of the capital of the company through special dividends. As the associate of the leading investment bank, the best alternative needs to be recommended to the private equity firms of Quintiles Inc.
Analysis
Firstly, the WACC needs to be calculated for the company. In order to calculate the equity beta for Quintiles Inc, the comparable companies’ data has been used. However, one issue which emerged here was to estimate the target capital structure for the company as the case does not provide that information. Moreover, the free cash flows have been calculated. Based on the WACC of 7.76% and terminal growth rate of 2%, the value of the company has been calculated to be around $ 14013 million.
Alternative options
The three strategic alternatives available to the management of the company through which the private equity partners and the founder of the company could monetize their positions are evaluated and analyzed below with their respective pros and cons.
Alternative 1: Merger or Acquisition
The first alternative available to the management of the company is to merge or acquire another financial or strategic buyer. One suitable competitor for the company to acquire or merge with is the Parexel Company. The company has an average growth rate of 23% which is the highest of all in the CRO industry. If we estimate the size of the company, then on the basis of the number of the total employees and the total number of the countries served, it could be seen from the comparable analysis sheet that the size of Parexel Company is half to the size of Quintiles Inc.
Pros: Both the companies are able to achieve network economies for instance all the duplicate operations of the company would be removed. Secondly, the merger is one of the best option for funding the research and development of new products in the pharmaceutical industry therefore, this would be a significant advantage for the company. Furthermore, in the case of a horizontal merger, all the fixed costs are spread on a larger area and the company also gains the monopoly power,
Cons: The merger might cause job losses of the employees of the company that is smaller in size in a merger transaction. The company also starts to charge higher prices for its customers due to monopoly power and many customers get dissatisfied. There is also a risk of dis economies of scale faced by the companies because of the huge size of the merged companies. The desirability of the merger is influenced by the competition and the economies of the scale the company would achieve.
Alternative 2: Initial Public Offering
The second alternative available to the management of the company is to take the company public by issuing shares on the stock market. The company has estimated that about 13.1 million of new shares along with 10.6 million shares from the selling shareholders of the company will have to be issued. The IPO prices have been calculated in spreadsheet. If we exclude the best case scenario, then it could be seen that the best IPO price for the company would be around $ 139 per share.
Pros: The first significant advantage for the company is that the company would get an immediate source of funds. In order to go for an IPO, the company will have to submit its audited books of accounts with the SEC and the company will have to meet many regulatory requirements. Therefore, this is ultimately going to increase the confidence of the public in the operations of the company and support the growth of the company..................
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