Elan and Royalty Pharma
Elanand Royalty Pharma
Elanand Royalty Pharma
Elanwas a company controlled by shareholders that had all the ownershiprights. The owners had an agency relationship with the management whoemployed various tactics to prevent a hostile takeover. As expected,they tried by the sale of ‘crown jewels,` among other tactics so asto make Elan less attractive to the potential predator that wished toacquire it. Finally, when its valuation was being done, it was onlytailored around the cash flows from Tysabri. However, other factorsought to have been considered in the assessment of the business.
First,they were to find Elan`s financial leverage as it would be vital inthe determination of average cost of capital. If Elan had a highleverage associated with a strong asset base, then the valuationwould be high, working to the advantage of Royalty Pharma (Moffett etal., 2014). On the other hand, a little leverage characterized by asmall asset base would significantly lower the value of the firm,working to shareholders` advantage.
Besides,the asset type is of great importance in the valuation of Elan, as ithas a direct influence on the interest rate and depreciation. A lowworking capital by Elan meant that a larger proportion of cashgenerated was used to cater for the net of borrowing, leaving littlemoney to be paid out to shareholders (Damodaran 2016). The scenariowould lower the biopharmaceutical company. Finally, the other aspectthat ought to be considered is the buyer`s return on investment. Thelittle value of a business is a function of high return on investmentwhich has with unpredictable margins of profit, a concentration ofconsumers, thin product lines, and lack of sound management which wascharacteristic of Elan (Damodaran 2016).
Inconclusion, the process of valuing a business or company involvesmore than just the projected cash flows or the historical figures,but also other factors such as financial leverage, working capitaland return on investment. Therefore, it becomes significant toincorporate them to establish the correct value of a company that isto undergo acquisition.
Damodaran,A. (2016). Damodaran on valuation: security analysis for investmentand corporate finance (Vol. 324). John Wiley & Sons.
Moffett,M. H., Stonehill, A. I., & Eiteman, D. K. (2014). Fundamentalsof multinational finance.Pearson.
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