Teva Pharmaceuticals Buys Barr Pharmaceuticals to Create a Global Powerhouse

Foreign acquirers often choose to own U.S. firms in limited liability corporations.
American Depository Shares (ADSs) often are used by foreign buyers, since their shares do not trade directly on U.S. stock exchanges.
Despite a significant regulatory review, the firms employed a fixed share-exchange ratio in calculating the purchase price, leaving each at risk of Teva share price changes.
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On December 23, 2008, Teva Pharmaceuticals Ltd. completed its acquisition of U.S.-based Barr Pharmaceuticals Inc. The merged businesses created a firm with a significant presence in 60 countries worldwide and about $14 billion in annual sales. Teva Pharmaceutical Industries Ltd. is headquartered in Israel and is the world's leading generic-pharmaceuticals company. The firm develops, manufactures, and markets generic and human pharmaceutical ingredients called biologics as well as animal health pharmaceutical products. Over 80% of Teva's revenue is generated in North America and Europe.
Barr is a U.S.-headquartered global specialty pharmaceuticals company that operates in more than 30 countries. Barr's operations are based primarily in North America and Europe, with its key markets being the United States, Croatia, Germany, Poland, and Russia. With annual sales of about $2.5 billion, Barr is engaged primarily in the development, manufacture, and marketing of generic and proprietary pharmaceuticals and is one of the world's leading generic-drug companies. Barr also is involved actively in the development of generic biologic products, an area that Barr believes provides significant prospects for long-term earnings and profitability.
Based on the average closing price of Teva American Depository Shares (ADSs) on NASDAQ on July 16, 2008, the last trading day in the United States before the merger's announcement, the total purchase price was approximately $7.4 billion, consisting of a combination of Teva shares and cash. Each ADS represents one ordinary share of Teva deposited with a custodian bank. As a result of the transaction, Barr shareholders owned approximately 7.3% of Teva after the merger. The merger agreement provides that each share of Barr common stock issued and outstanding immediately prior to the effective time of the merger was to be converted into the right to receive 0.6272 ordinary shares of Teva, which trade in the United States as American Depository Shares, and $39.90 in cash. The 0.6272 represents the share-exchange ratio stipulated in the merger agreement. The value of the portion of the merger consideration comprising Teva ADSs could have changed between signing and closing, because the share-exchange ratio was fixed, per the merger agreement.
ADSs may be issued in uncertificated form or certified as an American Depositary Receipt, or ADR. ADRs provide evidence that a specified number of ADSs have been deposited by Teva commensurate with the number of new ADSs issued to Barr shareholders.
By most measures, the offer price for Barr shares constituted an attractive premium over the value of Barr shares prior to the merger announcement. Based on the closing price of a Teva ADS on the NASDAQ Stock Exchange on July 16, 2008, the consideration for each outstanding share of Barr common stock for Barr shareholders represented a premium of approximately 42% over the closing price of Barr common stock on July 16, 2008, the last trading day in the United States before the merger announcement. Since the merger qualified as a tax-free reorganization under U.S. federal income tax laws, a U.S. holder of Barr common stock generally did not recognize any gain or loss under U.S. federal income tax laws on the exchange of Barr common stock for Teva ADSs. A U.S. holder generally would recognize a gain on cash received in exchange for the holder's Barr common stock.
Teva was motivated to acquire Barr because of the desire to achieve increased economies of scale and scope as well as greater geographic coverage, with significant growth potential in emerging markets. Barr's U.S. generics drug offering in the United States is highly complementary with Teva's and extends Teva's product offering and product development pipeline into new and attractive product categories, such as a substantial women's healthcare business. The merger also is a response to the ongoing global trend of consolidation among the purchasers of pharmaceutical products as governments are increasingly becoming the primary purchaser of generic drugs.
Under the merger agreement, a wholly owned Teva corporate subsidiary, the Boron Acquisition Corp. (i.e., acquisition vehicle), merged with Barr, with Barr surviving the merger as a wholly owned subsidiary of Teva. Immediately following the closing of the merger, Barr was merged into a newly formed limited liability company (i.e., postclosing organization), also wholly owned by Teva, which is the surviving company in the second step of the merger. As such, Barr became a wholly owned subsidiary of Teva and ceased to be traded on the New York Stock Exchange.
The merger agreement contained standard preclosing covenants, in which Barr agreed to conduct its business only in the ordinary course (i.e., as it has historically, in a manner consistent with common business practices) and not to alter any supplier, customer, or employee agreements or declare any dividends or buy back any outstanding stock. Barr also agreed not to engage in one or more transactions or investments or assume any debt exceeding $25 million. The firm also promised not to change any accounting practices in any material way or in a manner inconsistent with generally accepted accounting principles. Barr also committed not to solicit alternative bids from any other possible investors between the signing of the merger agreement and the closing.
Teva agreed that from the period immediately following closing and ending on the first anniversary of closing it would require Barr or its subsidiaries to maintain each compensation and benefit plan in existence prior to closing. All annual base salary and wage rates of each Barr employee would be maintained at no less than the levels in effect before closing. Bonus plans also would be maintained at levels no less favorable than those in existence before the closing of the merger.
The key closing conditions that applied to both Teva and Barr included satisfaction of required regulatory and shareholder approvals, compliance with all prevailing laws, and that no representations and warranties were found to have been breached. Moreover, both parties had to provide a certificate signed by the chief executive officer and the chief financial officer that their firms had performed in all material respects all obligations required to be performed in accordance with the merger agreement prior to the closing date and that neither business had suffered any material damage between the signing and the closing.
The merger agreement had to be approved by a majority of the outstanding voting shares of Barr common stock. Shareholders failing to vote or abstaining were counted as votes against the merger agreement. Shareholders were entitled to vote on the merger agreement if they held Barr common stock at the close of business on the record date, which was October 10, 2008. Since the shares issued by Teva in exchange for Barr's stock had already been authorized and did not exceed 20% of Teva's shares outstanding (i.e., the threshold on some public stock exchanges at which firms are required to obtain shareholder approval), the merger was not subject to a vote of Teva's shareholders.
Teva and Barr each notified the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice of the proposed deal in order to comply with prevailing antitrust regulations. Each party subsequently received a "second request for information" from the FTC, whose effect was to extend the HSR waiting period another 30 days. Teva and Barr received FTC and Justice Department approval once potential antitrust concerns had been dispelled. Given the global nature of the merger, the two firms also had to file with the European Union Antitrust Commission as well as with other country regulatory authorities.
-Why do you believe that Teva chose to acquire the outstanding stock of Barr rather than selected assets? Explain your answer.

It Is Seldom Important That the Buyer and Seller Agree

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