Professional Documents
Culture Documents
Case Analysis
Team Polycom:
Anirvan Das
Girish Navalgundkar
Jakub Cech
Kyle Kaido
Prashanth Kalika
Vivek Durairaj
Kendle’s Corporate Strategy
Kendle is a Contract Research Organization (CRO) that performs clinical research for
pharmaceutical companies looking to outsource their R&D. Its corporate strategy is focused on
growing revenue to keep up with its larger competitors in the CRO industry including Quintiles
and PPD. Kendle sees its best opportunity for revenue growth through the acquisition of a CRO
firm in Europe. Kendle currently only operates in the US, relying on subcontractors to perform
work in international markets. U-Gene and gmi are currently under evaluation as potential
acquisitions to fulfill Kendle’s corporate strategy. Since Kendle’s entire revenue comes from
CRO activity for pharmaceutical companies it has a single business corporate strategy. Acquiring
U-Gene and/or gmi will not change this single business corporate strategy.
Kendle’s strong U.S. presence, broad range of scientific capability, and ability to manage
studies for phases II through IV all provide potential benefits to a competitor through acquisition.
The company is operationally focused, with a high utilization of talented resources that ensures
healthy profit margins. Kendle specializes in a range of therapeutic areas with recent emphasis
on skeletal disease and inflammation drugs. Kendle’s strong relationship with large
Firms in the CRO industry are typically valued at 8-10 times EBITDA which equates to a
sales price of $15M for Kendle. We used relative and DCF valuation methods and found the
average economic value for Kendle to be $25.3M. Since Kendle’s estimated sales price is less
2
Strategic Benefits from Acquisition
Exhibit 1a provides more information on the methods of value creation resulting from
Kendle’s acquisition of gmi and/or U-Gene. Exhibits 1b and 1c outline expected synergies and
Synergies: Synergies resulting from acquisition are reciprocal, benefiting all three firms through
value and cost drivers. Kendle will become the sixth largest player in Europe after acquiring U-
Gene and gmi, meeting its goals of becoming a full service CRO with international presence.
gmi provides a full range of Phase II to IV services, higher margins, and specific expertise in
health economic studies. U-Gene complements Kendle by adding phase I facilities and resources.
U-Gene and gmi will both benefit from Kendle’s ability to decrease time span between phase
trials utilizing “Trial Ware” software and close customer collaboration. U-gene and gmi also gain
Resources: All three companies have abundant “soft resources”, which include highly talented
engineers, scientists and research capabilities. The extent of redundant resources is low since
different geographic offices will continue to utilize existing resources and best practices after an
acquisition.
Market Conditions: The pharmaceutical industry is growing 10% annually while demand for
CRO services is growing 20% annually. Pharmaceutical firms are looking for a single CRO to
fulfill all their needs including data collection, research, and management of various phase trials.
Industry Attractiveness Test: Barriers to entry are favorable due to restrictive government
policies (especially in the US), dependency on highly talented scientists and incumbency
advantages. Although the pharmaceutical industry is highly concentrated with a high influence
3
on pricing, buyer power is favorable since they require a high level of credibility and technical
skill from CRO firms. Rivalry is high in the CRO industry due to fragmentation and
differentiation of services. Low exit barriers exist due to a dependency on soft resources
compared to more expensive fixed capital resources. Overall, this industry creates a very
Cost of Entry Test: We don’t have enough information to determine transaction costs,
integration costs and premium required to entry this industry. We base the cost on entry on the
economic value created by the combined business compared to the individual firms. Based on
our financial analysis, NPV (Kendle, U-Gene, gmi) > NPV(K) + NPV (U) + NPV (gmi).
Better-Off Test: Kendle, U-Gene and gmi are all better off after this acquisition primarily due
to an increase of full service capability (phase I to IV) and end-to-end program management. All
Financial Analysis
We conducted a three stage DCF valuation for Kendle since it is in a high growth phase
and a two stage model for gmi and U-Gene as they are in a stable growth phase. We generated
pro forma income statements for a five year period with a constant growth model after the fifth
year to determine the NPV of free cash flows. See Exhibit 2 for a list of assumptions used in our
financial analysis. Our valuation analysis in Exhibit 3 further assumes all equity and funding of
acquisitions is through an IPO only. We estimated full synergy valuation of the combined
company based on different acquisition options: only gmi, only U-Gene, acquiring both. This
analysis shows that both gmi and U-Gene offer significant synergetic benefits to Kendle. The
overall valuation of this combined business far exceeds the values of the companies before
4
acquisition. Therefore, all three companies are assumed to be better off after the acquisition.
Acquiring both companies also offers a far better economic valuation than acquiring only one
company due to inter-company synergic benefits. It is evident that gmi offers more synergetic
Recommendation: Since acquiring both gmi and U-Gene together offers the highest synergistic
value, we analyzed the following three options: 1) IPO first, then complete acquisitions 2)
acquire before IPO and 3) acquire gmi first, IPO, then acquire U-Gene. Our analysis (refer
Exhibit 4) results in a recommendation of option 3. Kendle should have a more successful IPO
after acquiring gmi because of increased cash flow, resulting in a higher valuation after
acquisition. Since gmi is willing to accept equity of about $2.8M, Kendle requires less funding
through debt. Kendle can also learn from this first acquisition and leverage this experience for
acquisition of U-Gene, potentially decreasing integration costs. This option allows Kendle to
build a considerable cash cushion, enabling future growth (see Exhibit 5).
Scenario Analysis: After choosing option 3, we performed a financial analysis for three
scenarios: no synergy, moderate synergy (base scenario) and full synergy. Moderate synergy is
considered the most likely event, which determines an estimated valuation of the combined
company of $98.8M and synergetic value creation of $41.8M (see Exhibit 6).
Sensitivity Analysis: We used two variables, Weighted Average Cost of Capital (WACC) and
Working Capital/Revenue ratio (WC/Rev), to perform a sensitivity analysis on our base scenario.
This analysis displays possible outcomes of the acquisition values under these variable
conditions (see Exhibit 7). This sensitivity analysis can be used by each firm to determine its
“most likely” NPV. Since WACC is affected by equity value, Kendle can also use this sensitivity
5
Exhibit 1a: Methods of Value Creation
6
yr yr
Maximize utilization of Maximize utilization of Experience in health
labor - utilization rate - 65- labor - utilization rate - 65- economic studies and
70% 70% professional training
programs
Expertise in multiple Expertise in multiple Proprietary software - trial
therapeutic areas therapeutic areas ware for global data
collection
Kendl U-
e gmi Gene
WC/Re 12.49
v 2%* % 2.50%
costs/Re 86.00 79.00
v % % 90%
Dep/PP 17.22 No No
E % info info
PPE/Re 14.16
v % 2.73% 8.50%
* - Based on assumption. This is used
as a variable in sensitivity analysis
All the values are calculated as
historical averages.
Stand alone assumptions
Revenue Growth
Year Kendle gmi & U-Gene
Based on Q1
1997 revenue. Based on Q1 revenue
7
Average from
historical Average from historical
1998-99 performance performance
Industry growth Average from historical
2000-01 performance
<GDP due to market
Terminal < US GDP uncertainty.
cost/rev - Historic average for each company.
Assumptions for option 3: Acquire gmi through debt and U-Gene through IPO
A debt of 9.5 Million is assumed as the gmi is willing to get the rest in share when Kendle
goes IPO. We assumed a current share price estimate of $13 and later did a sensitivity
analysis to see the valuation with a better share price due to increased cash flow from gmi.
WACC was calculated as shown below.
8
Share Ke Kd
price SE Debt WACC
11 $33,000 $9,500 16.48% 4.9% 13.9%
16.48% 4.9% =>used discount
13 $39,000 $9,500 14.2% rate
15 $45,000 $9,500 16.48% 4.9% 14.5%
Scenario Assumptions
Analysis Revenue Growth Costs/R
199 200 200 Termin ev
1998 9 0 1 al
Scenario 1- 47% 47 24 24% 4% 86% Same assumptions as Stand alone.
No synergy % % The numbers shown in the table are
the weighted average growth rate
for the three companies based on
their revenue.
Scenario 2 – 55% 55 27 27% 5% 83% Assumptions same as that for the
Median % % No equity, full synergy except the
Synergy(Base terminal growth is better to market
) diversification and availability of the
cash cushion for future growth.
Scenario 3 - 62% 62 30 30% 6% 79% Median values between No synergy
Full synergy % % and Full synergy. This is most
expected scenario accounting for
integration costs, transportation
costs and possible loss of human
resources due to acquisition.
9
Cost of capital = cost of Cost of capital = cost of debt Cost of capital = weighted avg
equity Cost structure = Debt for 30 Mil of cost of equity and cost of
Cost structure=100% equity debt
Due to the interest expense the Cost structure = Debt +
Going IPO before acquisition net income might be negative in Equity.
might result in a lower initial years.
valuation. An unsuccessful Acquire the company that
IPO might not only affect the With high debt and almost no offers the maximum synergy
acquisitions of the equity IPO might not be first with debt.
two companies but also any successful as expected. This will improve the free cash
future acquisitions. flow.
If the synergies with the acquired
This is not a productive way companies are not achieved in a With better cash flows and
of using the capital with short period, IPO might have to diversification in different
highest be delayed to get a better markets, it will get a better
cost of capital. valuation and there is also a risk valuation. This will increase
of losing the IPO window. the chances of a successful
With two acquisitions at the IPO compared to other
same time, Integration costs This would hamper any future options.
might be higher. growth and any future
acquisitions. This option will also result in a
No cash cushion for future lower cost of capital compared
growth. With two acquisitions at the to option1.
same time, Integration costs
might be higher. With some time difference
between the two acquisitions,
A small cash cushion for growth. Kendle would be able to
handle integration problems
better than the two other
options.
10
NPV of
Kendle $26,178.51 $38,304.77 $67,298.43
11
Kendle
WC/Rev
$ 38,305 1% 2% 3% 4%
13.50% $ 43,844 $ 42,021 $ 40,198 $ 38,375
13.75% $ 42,400 $ 40,631 $ 38,862 $ 37,093
14.00% $ 41,038 $ 39,320 $ 37,602 $ 35,884
WACC
14.25% $ 39,751 $ 38,081 $ 36,412 $ 34,742
14.50% $ 38,533 $ 36,909 $ 35,285 $ 33,662
14.75% $ 37,379 $ 35,799 $ 34,218 $ 32,638
15% $ 36,284 $ 34,745 $ 33,206 $ 31,667
U-Gene
WC/Rev
$ 19,325 1% 2% 3% 4%
13.50% $ 23,104 $ 21,817 $ 20,531 $ 19,244
13.75% $ 22,358 $ 21,108 $ 19,857 $ 18,607
14.00% $ 21,655 $ 20,438 $ 19,222 $ 18,005
WACC
14.25% $ 20,990 $ 19,806 $ 18,622 $ 17,437
14.50% $ 20,361 $ 19,208 $ 18,054 $ 16,900
14.75% $ 19,765 $ 18,640 $ 17,516 $ 16,391
15% $ 19,200 $ 18,102 $ 17,005 $ 15,908
gmi
WC/Rev
$ 19,472 2% 5% 10% 15%
13.50% $ 33,071 $ 30,113 $ 25,184 $ 20,255
13.75% $ 32,026 $ 29,151 $ 24,361 $ 19,570
14.00% $ 31,040 $ 28,244 $ 23,584 $ 18,923
WACC
14.25% $ 30,109 $ 27,387 $ 22,850 $ 18,313
14.50% $ 29,227 $ 26,575 $ 22,155 $ 17,735
14.75% $ 28,392 $ 25,806 $ 21,497 $ 17,188
15% $ 27,599 $ 25,076 $ 20,873 $ 16,669
12