Business论文模板 – To What Extent Does The GSK and Novartis Deal Help To Explain The Motives For And The Expected And/or Actual Outcomes Of This Deal?

Uncertainty is the greatest challenge in the pharmaceutical industry. Year 2010 experienced a drastic decline in the growth of global pharmaceuticals as well as biotech prescription drugs from double digits in 2000 to about 6%. Expirations in the year 2014 put approximately 46% of the top ten pharmaceutical companies’ revenues at risk. The industry seems encircled on all sides with relentless downward pricing pressure, expiring exclusive rights of runaway success, and declining R&D forcing companies to relook at the bottom line.  Against this backdrop pharmaceutical companies are turning to mergers and acquisitions as a way of improving their pipelines and efficiencies (Curtin 2014). The current pharmaceutical industry has experienced an upsurge in mergers and acquisitions aimed at cutting costs, increasing geographical expansion, and expanding their research pipelines. A good example of mergers and acquisition is the $21 billion deal between GlaxoSmithKline and Novartis signed early this year. The deal indicated that GSK will be out of the cancer business while Novartis will be out of the vaccines and animal health. The two companies will jointly run a customer health joint venture with combined $11 billion or more in sales (Butler 2014 and Cha & Lorriman 2014). The swop of assets by these GSK and Novartis is championed as a game changer that has created a new road in the mergers and acquisition landscape.

Deal Terms and Financials

DealFinancials
Acquisition of GSK Oncology ProductsNovartis acquired GSK oncology products for $14.5 billion
Divestment of Vaccines to GSKGSK acquired vaccine business (excluding flu) for $7.1 billion plus loyalties. $5.25 billion upfront and $1.8 billion in milestones
Merger of GSK Consumer Healthcare with Novartis OTC in a Joint VentureNovartis will own 36.5% of the joint venture.,

There are various motives and expected outcomes for mergers and acquisitions, which can be explained in the case of GSK and Novartis. According to Vaara, Sarala, Stahl and Björkman (2012), companies engage in mergers and acquisitions due to various reasons or motives such as synergy,diversification/ sharpening business focus, growth and expansion (gaining a competitive advantage or a larger market share), eliminate competition (surviving), cutting costs, and increase supply chain pricing power, among others. Fridolfsson and Stennek (2005) classified M&A motives into shareholder gains and economic gains. On the other hand, the expected outcomes or results of M&A include; increasing performance, reducing costs, achieving increased profitability, achieving greater market share, and increased growth among others (Zou, Wei & Zhang 2011).

One of the motives for mergers and acquisitions is increasing capabilities or synergies. This may come from combining the assets and resources of both companies in order to expand research and development opportunities hence ensuring a more robust manufacturing and distribution operations. The GSK and Novartis deal explains the M&A synergy motive. The deal indicates that Novartis would the rights to GSK’s current and future oncology R&D pipeline while GSK would have the right to Novartis’ vaccine business currently and in future. The deal increases the capabilities of both companies as each one acquires what it did not own and collectively they create a consumer healthcare business which would be the world leading in the provision of consumer healthcare (Curtin 2014). By combining the two businesses through the formation of the consumer healthcare business, there would be an increase in performance. The expected outcomes or results of the merger are to become a world leading consumer healthcare business which could be easily achieved because the two companies will share resources such as R&D, human resource, marketing research, and finances to ensure that the business achieves its goal and objective of leading in the market (Fridolfsson & Stennek 2005). This helps in explaining the expected result of achieving increased growth in the pharmaceutical industry. By the two companies swopping assets, they aim at increasing their performance and achieving greater growth in the market by offering what they did not offer initially (Risberg 2013). For instance, Novartis would start offering cancer and oncology products for $14.5 billion to strengthen its leading oncology business with high quality therapies. On the other hand, GSK would acquire divest vaccines for $7.1 billion, making it a global leader in vaccines.

Diversification (sharpening business focus) is another motive for mergers and acquisitions in any business. This motive indicates that mergers and acquisitions are intended to diversifying a company’s business. The GSK and Novartis deal was aimed at strengthening the consumer healthcare business in the pharmaceutical industry by bringing together the consumer healthcare of both businesses together. This indicates that the merger does not explain the motive of diversification because each company conducted consumer healthcare on its own before the merger (McCarthy & Dolfsma 2012). However, the merger helped in sharpening business focus by bringing the synergies of both businesses together. According to Makhlouk and Shevchuk (2008), mergers and acquisitions are aimed at strengthening what a business does by combining two or more businesses. In this case, the resources such as human labor, finances, and R&D are shared in order to achieve this motive. The expected outcomes of reducing cost and achieving increased profitability can be explained by the GSK and Novartis M&A. Any M&A is expected to increase profitability by combining the synergies of both companies (Birkinshaw, Bresman & Hakanson 2000). In this case, both GSK and Novartis contributed to the achievement of profitability by the M&A by contributing their resources of consumer healthcare.

In addition, each company achieved sharpening business focus by gaining from each other and in the process increased profitability. GSK sharpened its business focus by acquiring divest vaccines (excluding flu) thus creating a global leader in vaccines while Novartis acquired oncology products thus strengthening its leading oncology business (Ulijn, Duysters & Meijer 2010). The acquisitions helped in cost reduction as each company could use the resources acquired from the other company. Moeller and Brady (2011) argue that, cost reduction is the main expected outcome of any business in mergers and acquisitions and it has contributed largely to the increased mergers in the pharmaceutical industry. As a result of the motives and expected outcomes of the GSK- Novartis deal (Armstrong 2014), the pharmaceutical industry has learned something new about mergers and acquisition. The deal is viewed as the most profitable signed in the recent time with both companies benefiting individually and collectively.    

Achieving growth and expansion by increasing competitive advantage and market share is one of the motives of mergers and acquisitions (Coffey & Garrow 2012). As indicated in the introductory paragraph in this essay, achieving growth and expansion is one of the reasons pharmaceutical companies are seeking mergers and acquisitions. The expected outcome here includes achieving greater growth and increasing market share. The deal between GSK and Novartis can best explain these motives and expected results. The GSK- Novartis merger and acquisition has demonstrated that despite unavoidable disruption caused by cultural differences between the two companies, they end up better off. The pharmaceutical industry will continue to consolidate in order to survive. The two companies acquired each others’ assets in order to achieve expansion and increase market share. They expected to increase growth and market share in the areas they acquired by strengthening their provisions (Finkelstein 2010). For instance, GSK would achieve growth and increased market share by acquiring divests vaccines in order to create a global leader in the vaccines. This would result in increased growth and market share as the company would acquire Novartis customers and royalties in the global market (Jian 2010). By adding its existing customers and those customers who purchased from Novartis, GSK would certainly become a global leader in vaccines. On the other hand, Novartis acquired oncology products from GSK in order to strengthen its oncology business with improved therapies. The company would achieve the expected outcomes by becoming the preferred commercialization partner of GSK for its oncology pipelines. However, as indicated by Kaplan (2007), achieving growth in mergers and acquisitions is sometimes challenging in the long run due to cultural differences. Basically, the two companies have different organizational cultures and integrating the two cultures is sometimes challenging. Novartis and GSK individually want its business strategy to be used in the newly created business. This may result in failure of the merger in the long run.  

According to Nourmohammadi (2012), prior to formation of mergers and acquisitions, companies must understand their motives and expected results in order to make sure that the performance of the M&A is measured from the motives and expected outcomes. GSK- Novartis deal clearly explains the eliminating competition and replacing leadership motives as well as increasing profitability outcomes. Vaara, Sarala, Stahl and Björkman (2012) argue that, companies seek mergers and acquisitions in order to combine their resources and capabilities to achieve market leadership and improve their competitiveness in the market. One of the challenges facing the pharmaceutical industry, according to Zou, Wei and Zhang (2011) is lack of adequate R&D. Thus, by merging and creating consumer healthcare business, Novartis and GSK would combine their R&D abilities to clearly and effectively study the market. The market leaders in the industry are those that are able to understand customer needs and requirements and provide them with high quality products that satisfy their needs. Acquiring a company means acquiring even the R&D and human expertise previously working in the acquired department. This implies that GSK would acquire divest vaccines’ experts from Novartis. These experts would be used in achieving increased profitability in GSK and replacing leadership in the market. Makhlouk and Shevchuk (2008) argue that a company with more resources is better positioned to compete with others in the market as it can use its resources to outsmart its rivals. Thus, the created consumer healthcare business between GSK and Novartis is in a better position to compete in the pharmaceutical and healthcare market because both companies have their own customers who will be automatically transferred to the new business.

In order to achieve competitiveness and competitive advantage in the market, a company must reduce cost and improve performance. This is clearly explained in the M&A deal between GSK and Novartis through the creation of consumer healthcare business. Both companies jointly own the new company (Novartis has 35%) hence they share risks and resources hence reducing the costs that could be incurred if the business was owned by one company (Cha & Lorriman 2014). However, there are risks associated with this type of business ownership since each company has shares in the company. For instance, management is a challenge because each company needs to be recognized for the high performance of the merger (Birkinshaw, Bresman & Hakanson 2000).  

In conclusion it can be stated that the GSK- Novartis deal helps in explaining the motives and expected results of the merger and acquisition business. The deal clearly illustrates the benefits or the expected outcomes such as increased profitability, increased growth, reducing costs, and increasing market share. In addition, the deal clearly indicates the motives such as diversification, elimination of competition, achieving growth and increased competitive advantage. The motives and expected results help in identifying and highlighting any challenge that might occur and hinder achievement of the expected results. The pharmaceutical industry has experienced several mergers and acquisitions as they are seen as the best way of achieving competitiveness and survival in the market. Despite that M&A fail in other sectors due to cultural and management factors, they seem to do well in the pharmaceutical industry. This essay reveals that GSK- Novartis deal is clearly indicated and communicated with each company acquiring assets from the other in order to achieve growth and competitiveness in the market. The deal shows that each company will gain from the other and they will both gain together by creating a joint company with their resources. This would see both companies excelling in the pharmaceutical industry and competing against their rivals in the market.

LIST OF REFERENCES

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