Novartis: An Analysis of the Ciba-Geigy and Sandoz Merger

1. Novartis: An Analysis of the Ciba-Geigy and Sandoz Merger Team 10: Minjal Dharia - Stefanie Duda - Jennie Ma Andrew Schwartz - Siddharth Sekhri

2. AGENDA • History • Ciba Sandoz Background • Motivations and benefits of the merger • Merger process • Obstacles • The new company: Novartis AG • Challenges • Strategies • Opportunities • Financial performance to date

3. THE HISTORY OF NOVARTIS Geigy f. 1758 Ciba f. 1859 Sandoz f. 1886 Ciba-Geigy f. 1970 Novartis f. 1996

4. Ciba-Geigy Founded 1758 - Basel, Switzerland American Subsidiary Ciba-Geigy Corp – Tarrytown, NY Total Revenues = $17.5 billion Sandoz Limited Founded 1866 - Basel, Switzerland American Subsidiary Sandoz Corporation – NYC, NY Total Revenues = $13.0 billion A MERGER OF TWO EQUALS

5. STRATEGIC SIGNIFICANCE OF MERGER • Background of rapid structural change in pharmaceutical/ biotech market • Price pressures meant decreasing growth and margins of industry • Cost-containment efforts due to high development costs • Consolidation of suppliers gave them higher pricing power • Reach an optimum mix of business segments for synergy

6. MOTIVATION AND BENEFITS • Motivations • Shared commonalities in crop protection, seeds, agribusiness and animal health products • Jump to new business opportunities • Distance themselves from the unsure chemical markets • Benefits • Higher critical mass for key investments such as research & development • More efficient & broader marketing & distribution of products • Lower cost of financing, increased liquidity • Leaner organizational structure

7. THE MERGER PROCESS • March-April 1996: Ciba and Sandoz announce merger plans and validate with shareholders. • July 1996: The European Union approved the merger • August 1996: U.S. Federal Trade Commission agreed to the formation of the new company in the fall of the same year. • The merger is worth $27 billion- one of the largest in international business

8. THE MERGER PROCESS • Stock swap in which Ciba shareholders are paid a premium • Receive 1 1/15 for 1 share • Sandoz shareholders get 1 for 1 share • Sandoz shareholders obtained 55%, Ciba Geigy 45%. • Benefits of the deal: • Tax-free because both companies are Swiss • Cash outlay not required • Transaction structured as a share issue

9. OBSTACLES • The EU and the US FTC had concerns regarding the monopolistic nature of the mergers. • Required the demerger of the Specialty Chemicals Division of Ciba and the Construction Chemicals and animal health businesses of Sandoz • Ciba and Sandoz each had three classes of stock with varying voting rights at the start of the 1990s. • Novartis had to transform the tangled equity structure into a single class of shares last year.

10. REGULATORY CONFLICTS/TRANSLATION EXPOSURE • Reconciling according to International Accounting Standards (IAS): • IAS rules allowed companies to write off goodwill rather than depreciating it • Allowed applying pooling-of-interest accounting rules to the $27 billion Ciba-Sandoz merger, which avoided charges for goodwill- the difference between the purchase price and book value of an asset.

11. REGULATORY CONFLICTS/TRANSLATION EXPOSURE • But, the U.S. accounting principles (GAAP) challenged both IAS rules: • The merger should include a restructuring charge for annual depreciation of 700 million Swiss Francs • Novartis had to follow US rules to list its shares in the US • Novartis would prepare its official accounts under IAS rules and offer U.S. investors a bridging statement with adjustments according to U.S. accounting principles in a footnotes • Cash flow and cash earnings per share would remain the same under both IAS and US GAAP.

12. NOVARTIS AG • Novartis = “re-birth” toward life sciences • Market Value > $60 billion • Standing • segments of Healthcare (59%), Agrobusiness (27%), and Nutrition (27%) • Largest worldwide marketer of crop protection chemicals • Second largest seed & animal health company • Second largest pharmaceuticals company in the world • Sales = $13 billion • 4.5% share of global market sales

13. CHALLENGES • Novartis promised annual savings of 1.8 billion Swiss Francs • Needed to get rid of 10,000 jobs or 10% of the payroll • Needed to cut drug development time from 11 to 7 years • Needed three strong selling drugs annually • To match No. 1 Glaxo PLC • Soaring costs of biotech and genetic research tools • Shares are underrepresented in the US • Listed as ADRs on the NYSE

14. CULTURAL CLASH • Sandoz • Was autocratic and hierarchical • Operated most functions at the business segment level • Measured performance by EBIT and return on sales • Ciba • Was collegial and informal • Matrix organization • Used direct costing • Measured performance by division contribution • Novartis • Used Sandoz’s organizational system • Measured performance by EBIT and return on net assets

15. STRATEGIES • Sold off non-core business units • Boosted R&D spending • Sharpened marketing in the US • Increased sales force and advertising • US sales jumped to 43% of revenues • Made strategic acquisitions such as Pfizer’s drug Enablex, beating out GlaxoSmithKline CEO Daniel L. Vasella

16. WILL NOVARTIS BUY ROCHE? • Bought a 20% share in May 2001 • Now owns 32.7% • Would mean $45 billion in sales and 7% market share • Roche is opposed to any such merger • Remains to be seen how aggressive Novartis CEO Daniel L. Vasella will be.

17. NOVARTIS ADR FINANCIAL PERFORMANCE Not yet stocks!! DEPOSITARY RECEIPTS: NOT FDIC, STATE OR FEDERAL AGENCY INSURED MAY LOSE VALUENO BANK, STATE OR FEDERAL AGENCY GUARANTEE Source: Bank of New York

18. QUESTIONS