Newsletter – May 2012

The recent announcement of the closure of the Merck Serono headquarters in Geneva has created a shock in the region. Besides the distressing consequences on employment and the diversity of the economic activity in the region, this announcement can hardly be interpreted as anything else than the failure of the acquisition in 2006 of Serono by Merck.

All acquisitions are complex and risky exercises, and when the acquirer and the target are not active in the same business sector, the respective understanding between both parties is even more problematic. Merck, traditional player in industrial chemistry and chemical pharmacology, and Serono, a major in the more recent biotechnology sector, have seemingly been unable of making the new group work together.

While care must be taken not to sermonize by noting only the damages, the elements recently brought forward in the press carry their own lessons.

Above all, these elements bring to light that the analyses which are traditionally realized within the framework of pre-acquisition due diligence work remain too much, and too often, focused on a static view of the company in question. It is purchased on the basis of what it is at a specific point in time, and on whatever forecasts that current picture can justify. In the case of Serono, a very respectable size on the biotechnology market, a turnover and profitability (albeit 80% dependent on a single molecule), and a “pipeline” of new molecules, if very thin, in the case at hand.

However it is now we learn that the fate of the Geneva based site of Merck Serono was apparently sealed in June last year. Back then, the only molecule capable of succeeding Serono’s biggest money maker was found to be unsatisfactory in its test stages leading to a complete halt in its development. From this point of view, the acquisition of Serono at full price seems to have been a very risky bet. And it begs some essential questions: what did Merck know of the challenges inherent to the development of products in the biotechnology sector and to what degree were they aware of the capacities and real potential of the Serono research teams? In view of the price they paid and the pipeline of new molecules upon acquisition, it would appear to us that Merck implicitly made the hypothesis that the research teams they were going to take control of were capable of developing new molecules eventually able to replace the star Serono product.

Therein resides the problem. That capacity, along with all the other dynamic aspects of value generation in any company is in general covered by mere assumptions during acquisitions. The focus is put, understandably so, on the legal, fiscal and financial situation of the target, on getting to know its leadership and if required, on intellectual property issues, etc. What is in general not done is to become knowledgeable of the way the target actually generates value, which means gaining insights into its key operational processes.

The recent announcement of the closure of the Merck Serono headquarters in Geneva has created a shock in the region. Besides the distressing consequences on employment and the diversity of the economic activity in the region, this announcement can hardly be interpreted as anything else than the failure of the acquisition in 2006 of Serono by Merck.

All acquisitions are complex and risky exercises, and when the acquirer and the target are not active in the same business sector, the respective understanding between both parties is even more problematic. Merck, traditional player in industrial chemistry and chemical pharmacology, and Serono, a major in the more recent biotechnology sector, have seemingly been unable of making the new group work together.

While care must be taken not to sermonize by noting only the damages, the elements recently brought forward in the press carry their own lessons.

Above all, these elements bring to light that the analyses which are traditionally realized within the framework of pre-acquisition due diligence work remain too much, and too often, focused on a static view of the company in question. It is purchased on the basis of what it is at a specific point in time, and on whatever forecasts that current picture can justify. In the case of Serono, a very respectable size on the biotechnology market, a turnover and profitability (albeit 80% dependent on a single molecule), and a “pipeline” of new molecules, if very thin, in the case at hand.

However it is now we learn that the fate of the Geneva based site of Merck Serono was apparently sealed in June last year. Back then, the only molecule capable of succeeding Serono’s biggest money maker was found to be unsatisfactory in its test stages leading to a complete halt in its development. From this point of view, the acquisition of Serono at full price seems to have been a very risky bet. And it begs some essential questions: what did Merck know of the challenges inherent to the development of products in the biotechnology sector and to what degree were they aware of the capacities and real potential of the Serono research teams? In view of the price they paid and the pipeline of new molecules upon acquisition, it would appear to us that Merck implicitly made the hypothesis that the research teams they were going to take control of were capable of developing new molecules eventually able to replace the star Serono product.

Therein resides the problem. That capacity, along with all the other dynamic aspects of value generation in any company is in general covered by mere assumptions during acquisitions. The focus is put, understandably so, on the legal, fiscal and financial situation of the target, on getting to know its leadership and if required, on intellectual property issues, etc. What is in general not done is to become knowledgeable of the way the target actually generates value, which means gaining insights into its key operational processes.