Novartis Buys 20 Percent of Roche

BASEL, Switzerland--Swiss pharmaceutical company Novartis AG (NYSE:NVS) purchased a 20-percent voting stake in Swiss drug rival Roche, parent of Roche Vitamins, from Swiss banking group BZ Gruppe for 151 Swiss francs ($87 USD) per share or a total of $4.8 billion Swiss francs ($2.78 billion USD). The price paid was a 5-percent premium over the May 5 closing price of 143.75 francs. Roche reported that the 32 million shares purchased represent about 3.7 percent of all issued Roche securities, both voting and nonvoting.

According to analysts, the purchase does not buy Novartis very much, although the investment comes with little risk. Speculation is that Novartis wants to expand its U.S. presence, and Roche does not offer much to that end. Catherine Arnold, an analyst with Sanford C Bernstein investment firm, said that this move is most likely not the beginning of a takeover. "[Novartis] doesn't see much of a downside, and if Roche some day goes into play, they'll have a better seat at the table."

Novartis stated that it would not seek any changes to Roche's board of directors, a pursuit undertaken by BZ Gruppe, which announced previously that it would sell off shares of Roche if attempts to gain a seat on Roche's board were unsuccessful. BZ Gruppe head Martin Ebner wanted the seat to affect what he said was poor business behavior by Roche, namely misleading shareholders and others by claiming a stable and financially sound business in financial reports. "We said that if we did not see any improvement in behavior in terms of good corporate governance, we would feel free to sell the rest of our stake in Roche," he said.

The transaction has alarmed a labor union that represents the employees of both companies, as many see job cuts as a possible result of any future merger between the two companies. "Many jobs would fall victim to an alliance or especially a merger of Novartis and Roche," the Gewerkschaft Bau and Industrie union said in a statement. Novartis employs 69,000 people in 142 countries, while Roche has 64,000 in 150 countries.

Both companies downplayed such speculation. "This is a long-term financial investment, which is also strategic in nature," said Novartis chief executive officer Daniel Vasella. He added that Roche has some viable areas of long-term prospects that Novartis is eager to explore. Novartis chief financial officer Raymond Breu noted, "It's a good financial investment, and it opens up strategic possibilities, but there aren't any concrete plans for collaboration."

As of May 7, the price of Roche shares rose 7 francs ($4.05 USD) or 5.3 percent to 139.50 francs ($80.70 USD). Novartis shares on the New York Stock Exchange (NYSE) rose 60 cents to $39.40.

For more information, visit www.novartis.com or www.roche.com.