Swap, don’t sell: Driving value through asset swaps
The Swiss Pharmaceuticals sector produced four USD1 billion+ deals in the first half of 2018. This is not surprising given the efforts by Pharmaceuticals and Life Sciences businesses to push new boundaries and continuously innovate. But when it comes to corporate development, Life Sciences – like many industries – is overly dependent on traditional M&A strategies. There is a growing need to use transactions to improve operations and deliver synergies. Asset swaps can be an attractive alternative transaction model that can help to achieve the objective.
Rising R&D expenses, pricing pressures and the growing cost of regulatory compliance: all result in the need for efficiency. And for Life Sciences in particular, to optimize portfolios in order to achieve category leadership in fewer, selected segments. In this regard, asset swaps can be a cost-effective way of reinforcing focus and strengthening your core business. Also to deliver synergies by exchanging complementary assets that can be swiftly integrated into existing operations.
The multiple benefits of asset swaps
I have seen first-hand the advantages of asset swaps over other forms of M&A:
- Focus: By applying a very specific deal perimeter, they are a targeted way of shedding non-core assets and boosting growth in core businesses. The high level of precision is possible by choosing specific products, assets or business units to be part of the transaction;
- Speed: The simultaneous acquisition and divestment of assets enables a clean, expedited process. This contrasts with asset or share deals that can transfer legacy issues or parts of a business that need subsequent restructuring or disposal;
- Risk mitigation: Put simply, you don’t have to acquire assets you don’t want. This helps you avoid legacy issues such as taxation risks;
- Efficiency: Exchanging assets with comparable values means less need to use company cash or seek additional funding from capital markets. The new assets are also typically easier to integrate, meaning they can start generating value much sooner.
Considerations for a successful asset swap
To be truly effective, an asset swap needs the relevant expertise, of course. In particular, a professional approach to integrating and separating the assets in question. In my experience, there are five key success factors:
- Find the right partner: It is essential that both parties have complementary goals and can build a trusted working relationship. Set aside competitive pressures temporarily to keep your eye on the bigger goal of furthering both businesses;
- Ensure alignment: Parties must be aligned regarding the asset swap’s objectives and transaction scope if value is to be optimized for both sides;
- Be selective: In addition to the right partner, the deal perimeter (what is included or excluded from the swap) should target the acquisition of assets that are of commercial value to the broader portfolio;
- Exchange information: As with any form of M&A, the exchange of information must be handled correctly in a potential competitively sensitive environment;
- Plan thoroughly: A robust assessment of the operational implications is necessary, including the impacts on valuation of the assets in question.
Asset swap example
Novartis and GSK’s asset swap a few years ago remains one of the highest profile involving Switzerland. At a deal value of around USD20 billion, it involved Novartis buying GSK’s Oncology unit while selling to GSK its Vaccines business and creating a world-leading consumer health business through a joint venture between Novartis OTC and GSK Consumer Healthcare. By doing so, Novartis primed itself for further growth and reinforced its leadership in cancer medicines, while GSK became number one in vaccines and consumer health. Neither party was compelled to purchase assets they didn’t want, or to spend resources divesting such in the short term. To achieve this, Novartis excluded the flu business from the Vaccines divestment and initiated a separate sales process. It was a clear example of two groups bolstering growth and generating operational synergies in businesses in which they sought leadership, while exiting segments in which they were weaker.
An asset swap requires appropriate post-deal integration. This is where I see many transactions fail to deliver on their promises. Clear goals and a smooth execution must be followed up by a plan that allows the assets to become productive from day one under new ownership and start delivering the expected synergies. By doing so, asset swaps have the potential to become more commonplace – not only in the fast-moving, innovative Swiss Life Sciences sector.