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Supporting Mergers and Acquisitions in the Pharmaceutical/Biopharmaceutical Industry

mergers and acquisitions

Supporting Mergers and Acquisitions in the Pharmaceutical/Biopharmaceutical Industry

In recent years, we have seen Pharmaceutical company megadeals that saw Takeda acquiring Shire for a total value of $81.7 billion, Bristol-Myers Squibb’s acquisition of Celgene for $74 billion, AbbVie’s $63 billion acquisition of Allergan and the proposed acquisition of Alexion by AstraZeneca for $39 billion. All of these acquisitions continue to have a lasting impact on the leadership and staff at these companies which collectively employ hundreds of thousands of employees worldwide. In addition, there have been a plethora of product transfers between organizations with larger multi-national companies pruning portfolios, adding gene therapy and biotechnology divisions, and consolidating core assets.

Mergers and acquisitions (M&As) in the Pharmaceutical/Biopharmaceutical industry are critical for organizations to implement strategic changes to their business. Whether it be to (a) future proof an organization’s pipeline by accessing innovation, (b) obtain additional manufacturing capacity or (c) to divest non-core assets (products, facilities, etc.), companies continue to grow, modernize and evolve to meet the targets set out in their strategic plans.

When two or more organizations reach the ‘deal’ and it is announced that ‘A’ will take over ‘B’ or that A and B will share in ‘A-B’, or indeed that ‘A’ will sell part of their organization to ‘B’, it is frequently followed by uncertainty and apprehension among internal stakeholders. This changing landscape tests an organization’s ability to communicate the distinct ‘win-win’ elements of the deal. The Kübler-Ross change curve (see fig.1 below) is always worth having in mind during this transitional period of M&A and never fails in tracking the internal stakeholder mindset, albeit with differing levels of severity.

Figure 1. Kübler-Ross Change Curve

The transition from pre-M&A to the post-M&A reality can be both fast and slow. The physical symbols of such transitions such as the company name, logo, and headed paper can be changed in a matter of minutes but the hearts and minds of management and employees can lag significantly further behind. It can take years before a post-M&A steady state is reached (sometimes never!) where full commitment to the change is obtained and all the anticipated ‘win-wins’ are realized.

Some acquired organizations are left to their own devices (pardon the pun medtech sector!) and they are run as true satellites whose contact with the corporate office is limited to communicating the positive financial results. In this scenario, the management team in-situ at the time of the M&A event are trusted to continue as-is and maintain the upward trajectory. Alternatively, and more commonly where there is a dominant merging partner, a strict cut-over timeline is applied for an acquired entity to morph into a fully incorporated affiliate. Typically, these sites implement corporate structures, policies and systems swiftly and assertively.

Where M&A becomes can be interesting is the cultural piece; everyone who has worked in an organization through a merger or acquisition knows that there can be a seismic shift in the objectives of the new organization… not so much what the objectives are but, how the objectives are expected to be met. Post M&A, organizations frequently change structure with new reporting lines, new titles, merged departments, increased/reduced layers of management with revised spans of control. Systems of work can also change where new policies are cascaded into procedures that are followed with varying degrees of success. Supporting systems, software tools and information flows are further material changes that tend to require extensive training and oversight in the early periods post-M&A.

When cultures collide in merging organizations, it has serious ramifications for business and its stakeholders. The industry is littered with mergers and takeovers that did not meet expectations simply because the cultural differences were too difficult to overcome. Naturally, organizations do not admit to failed mergers or acquisitions too often but some of the more interesting ones are referenced below.1 Very often the differences in personal and collective discipline, personified in the leadership differences in the two organizations, is challenging for the organizations to reconcile. Where rigid, structured and conservative management methods meet innovative and unorthodox management can be a recipe for M&A difficulties.2

At PharmaLex, we believe we have a unique understanding of the cultural challenges experienced during Mergers and  Acquisitions. Having merged ourselves in 2017 into PharmaLex, we have insight in how to overcome the challenges of maintaining agility while benefitting from working in a bigger corporate environment, having economies of scale with an increased resource pool. In addition, we have supported numerous Quality and Regulatory functions through these challenging periods through Gap Assessments, Benchmarking Studies, Cultural Assessments, Staff Augmentation, Organisational Optimisation and Leadership Coaching and Mentoring. If you would like our team to assist you or your organization with some of the challenges of changing culture, please connect with us to discuss on +353 1 846 4742 or



culture quiet

M&A Includes Smart Navigating of Culture Issues When Merging

Mergers and acquisitions are a common part of the corporate life cycle. For example, in the tech industry, many established companies will expand into new markets by buying startups that are innovating in emerging fields. But integrating a tiny startup into a much larger company can be challenging because they may operate in very different ways. Any merger could face similar issues, even with companies that seem similar. However, companies undergoing a merger can mitigate these clashes by recognizing each organization’s cultural distinctives and seeking thoughtful changes that benefit the combined whole.

A number of years ago, Deloitte conducted a survey to investigate issues of culture in mergers and acquisitions. The report defined culture as “the long-standing, largely implicit shared values, beliefs, and assumptions that influence behavior, attitudes, and meaning in a company.” In other words, corporate culture is how employees as a group think and act, and sometimes, cultural differences can become serious enough to derail integration.

As a simple example, a small startup might have Ping-Pong tables in the break room and provide sushi lunches for everyone on Fridays. These niceties may be less likely to persist at a large company with a stricter culture, so a merger between the two corporations could lead to disagreements between “fun” and “serious.” While disagreements over perks might frustrate employees, cultural differences can be much more serious, such as how leaders make decisions or how managers relate to their subordinates.

The first step to reconciling cultural differences is identifying them. As Deloitte notes, “The most insightful cultural observers often are outsiders, because cultural givens are not implicit to them.” Consider engaging key people from both companies to work on the cultural differences and decide how to reconcile them. This cultural integration team should hash out the details of what the key differences are, what needs to be kept, and what needs to be changed.

Early in the integration process, have the team start identifying how each company operates. Management style is an important aspect, but you should also consider how employees interact with each other and with managers within the company. Try to identify the implicit assumptions that both companies have. Once you have identified these assumptions, determine which ones align with the goals and vision of the combined company. Keep what will help.  Change what will not.

Throughout the process, make sure that the integration team communicates clearly what is happening and why. But do not simply dictate what changes will be made. Genuinely ask for input from employees at both companies. Keep them in the loop. Many people are wary of change, but transparency and being willing to listen will help prevent alienating anyone, which will encourage employees to stay.

When cultural integration is handled well, the combined company benefits from the strengths of the original organizations. McKinsey points out that “A merger provides a unique opportunity to transform a newly combined organization, to shape its culture in line with strategic priorities, and to ensure its health and performance for years to come.” Seize the opportunity and build a new corporate culture that benefits everyone involved.


Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley.  Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from the garage to global.


Carve-outs are Attractive for M&A, but Complications can Decrease Value

Before the COVID-19 pandemic brought mergers and acquisitions to a standstill, dealmakers increasingly turned to carve-out deals –the sale or divestiture of a business unit or division from a company. Our research shows carve-outs have increased by 200% since 2016, demonstrating the attractiveness of these deals.Our research shows carve-outs have increased by 200% since 2016, demonstrating the attractiveness of these deals.

But carve-outs are far from straightforward, especially across borders. The more jurisdictions involved, the higher the degree of complexity firms must navigate. (Complexity, in this case, refers to the headaches and distractions that arise when complying with new regulations, language barriers, borders, currencies, and laws.)

The increased complexity of a carve-out creates both opportunity and risk for buyers. On the one hand, not many firms have the expertise or resources to re-incorporate a business from a parent structure, meaning the few companies able to do this have a natural advantage. On the other hand, the execution risk is increased significantly, and value can be quickly lost from carve-outs if not executed correctly.

A recent survey by TMF Group found that 34% of senior executives from private equity firms with buy-side experience and 27% from corporations said their most recent cross-border carve-out failed to deliver on expectations, with 24% and 19%, respectively, saying costly overruns significantly impacted the deals. If a deal is delayed by more than four months as a result of business entanglements across jurisdictions, the average resulting cost overrun comes to about 16%.

Consider how one financial executive in India described an overrun deal: “We hadn’t expected it to be seamless, but we weren’t prepared for the effect on costs, and we had to make some hasty financial decisions to get the deal over the line.”

If a transaction takes place across jurisdictions, the complexity of those deals increases once local regulations come into play. Examples of regulations that, though innocuous, can significantly delay the deal-making process include:

-In some markets, it can take up to 60 days to open a bank account

-In others, business licenses are required before the new entity can register for VAT, while the company may need a local fiscal representative or director

-Some markets, such as the U.S., carry significant differences between states for regulations pertaining to licenses, tax registrations, and employment regulations

If these complexities aren’t accounted for at the start of the deal-making process, the monetary value of the deal can decrease, as evidenced by the 1 in 5 deals that create millions of dollars in extra costs. Take it from a head of finance at a Finnish corporation: “Complying with the domestic requirements, such as legal, accounting, and taxation, were the most difficult aspects for us to manage…rather than solving complex operational issues, we were more concerned with getting the company ready for various compliance items.”

Conversely, having a presence in the country in which a deal is conducted increases the likelihood of a deal going well. Those with a limited or no presence in the target’s country were more likely to have disappointing outcomes, with 38% of respondents who had limited or no presence at all in the carve-outs jurisdiction noting their most recent carveout had been mostly unsuccessful in terms of reaching its strategic goals.

There is, of course, the question of when deal activity will return to a pre-COVID-19 pace. It’s a question of when, not if, because private equity firms are sitting on large cash piles, interest rates are historically low and companies are distressed. Companies facing a cash flow crunch may be more likely to sell off non-core assets than consider an outright sale of the entire business. The environment is ripe for carve-outs in the near future, although valuations may look a lot different than six months ago.


Randy Worzala is Head of Business Development – North America at TMF Group, a multinational professional services firm based in Amsterdam, providing accounting, tax, HR and payroll services to international businesses. The company has around 7,000 employees in 80 countries.

How US tax overhaul has led to increased international investment and M&A activity

The limit on interest deductibility is impacting the way that firms finance domestic mergers and acquisitions which is fueling the existing trend for US companies to pursue foreign M&A.

Why invest in foreign companies?

Growing a business internationally has always been attractive to US companies. Businesses are still structuring for tax purposes, however the main reasons for going abroad are now; the desire to find new markets with more customers, access fresh talent and technology and optimize international supply chains. Foreign markets can be an attractive destination for leading US brands given that if you can succeed in the world’s most competitive consumer market you may find you thrive in less developed economies.


Deduction changes

With the recent tax reforms in the US, there have been some changes in the way deductions can be applied affecting the financing of domestic mergers and acquisitions. Often mergers are at least partially funded with debt which would be paid off in the form of a dividend. The dividend would be deductible making it a tax efficient way of financing the acquisition.

This deduction has been reduced greatly in the 2018 US tax reform. Companies were previously unrestricted in the amount of interest they could deduct before tax, but now there is a cap deduction of 30% of their 12-month earnings before interest, taxes, depreciation, and amortization (EBITDA). After 2021, the limitation becomes even more constraining by switching to 30% of EBIT only – that is, the deductions for depreciation and amortization are removed from the calculation, lowering the cap even further.

The deduction applies only when acquiring domestically, so not when buying a foreign company. You can still get the full deduction on dividends for a foreign owned corporation. Based on the current interpretation of the legislation, if you are looking to finance via debt, buying a foreign company will still allow you to benefit from this type of funding mechanism.

Why foreign M&A is more attractive

For insights and an introduction to M&A and carve-outs, take a look at the “M&A and Carve Outs from A to Z” eBook.

Other elements of the tax reform are also likely to drive further M&A and make it more likely that US firms look abroad for these acquisitions:

  1. The tax reform was structured to incentivise businesses to bring money back to the US if they are holding historic earnings off-shore. This windfall of foreign held monies will enable some companies to invest more, with a portion of this spending likely to fuel M&A.
  2. Related incentives to bring money back to the US have also reduced the tax on repatriation of future foreign earnings. Meaning that the return of investment for these foreign assets is improved.

What we are hearing from our clients is that US companies will continue to look to the global market as a way of leveraging faster growth and diversifying their business.

TMF Group

TMF USA are experts when it comes to M&A and international expansion, supported by a strong global presence in more than 80 countries worldwide. While there are always challenges when it comes to foreign investment the recent tax reform has introduced a whole new set of considerations. Please get in touch to find out how we can support your business achieve its global ambitions.

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