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Note...

Below, we have included commentary and a summary of the background knowledge needed to answer the case study questions in blue. Our model answers are then in black. We've included more detail than you would need to in a 45 minute case study, just to ensure we're also providing opportunities to consolidate your understanding of key technical/commercial topics. Don't worry if your attempt at the case study isn't as long/detailed.

The email from your supervisor neatly lays out the key questions that you must address in your presentation. Many law firms will structure their case study/exercises like this. 

  1. Keep an eye out for questions throughout the case study/materials that you may need to address in your presentation. 
  2. Also consider whether you might need to summarise back the facts and key issues (for the purposes of this case study, this isn't necessary).

You must remain flexible when approaching case study/presentation exercises. Questions may not be nicely laid out for you and they may be placed in an order that is intentionally challenging. Do not feel like you have to address the questions in order; you should create your own structure that allows you to address the questions in the most efficient and clear manner.

1. Reasons for and against the acquisition

The first question simply asks ‘should Panacead go ahead with the transaction? What are the reasons for and against?’. 

This question is testing your critical thinking skills and your judgement. Your task is to weigh up the commercial, legal, and financial advantages and disadvantages surrounding this transaction and come to a decision as to whether it is beneficial for the acquirer, Panacead. 

You must note that these reasons for and against the transaction will be relevant for your answer to question three as they will inform whether you will advise pursuing a sale purchase or an asset purchase. Consequently, although this commentary is written in answer to the questions in order, you may find it more practical to structure your presentation such that you answer questions one and three together.

Reasons for the transaction

The key reasons for the transaction are as follows:

Revenue synergies  

Cost synergies 

Panacead will reduce its costs and save money in the long-run by purchasing Krynoxi outright as opposed to purchasing their product for each usage.

Summary of reasons in favour of the transaction  

Clearly, there are strong commercial and financial reasons for the transaction. As detailed in Panacead’s internal memorandum,  there are substantial synergies between Krynoxi’s Introdisem and Panacead’s Permorbus, most notably, the reduction of side-effects. 

Additionally, Andy Taft indicates in his emails to Karen Norris that the Introdisem equipment could be packaged and used in conjunction with some of Panacead’s other drugs, and that with future research and development, there could be wider applications for Introdisem technology.

Furthermore, this acquisition would give Panacead the exclusive rights to Introdisem’s manufacture and licencing. By Panacead manufacturing Introdisem themselves, they are likely to save money in the long-run because they can manufacture the product at cost price, rather than incorporating a margin in the price that Panaced pays to Krynoxi. 

There is scope to generate further revenue by selling Introdisem to other pharmaceutical companies, but we have not seen any data or evidence that demonstrates this in the materials provided.

Reasons against the transaction

The key reasons against the transaction are:

The first point is an obvious one: any purchase of a successful drug manufacturing company will not be cheap. While certain financing may be arranged to help with the purchase, there is still a major cost to buying Krynoxi. 

Points 2 and 3 surround the alleged sexual discrimination in Krynoxi. The litigation poses a financial risk to Panacead, as, if they were to acquirer Krynoxi, they would be liable to paying the costs of the lawsuit as the new owner of Krynoxi. 

Additionally, and perhaps more importantly, it seems likely that Ms Smith would want to leave Krynoxi as a result of the alleged discrimination. This is problematic as it is likely that Panacead would want to retain Krynoxi’s employees for their expertise given that Panacead manufacturers drugs and not equipment. 

The fourth point is an issue because if Panacead acquirers Krynoxi, it will take on their liabilities and obligations (as with point 3). Consequently, if there are such illegal and unethical practices occurring, Panacead is taking on a large financial and reputational risk (and even potential criminal liability).  This is because anti-bribery legislation such as the UK’s Bribery Act 2010 have extra-territorial effect and will include offences committed overseas if a UK-based company is involved.

This commentary will explain these points in greater depth when addressing questions three and four and detail how the points against the transaction could be mitigated. You can stand out in assessment centres by identifying next steps that the company can take to mitigate disadvantages like this.

2. The choice of debt or equity financing

Importantly, a case study/presentation is a chance for interviewers to test your technical knowledge. Hence, knowing the advantages and disadvantages of debt and equity financing will be essential in many of your assessment centres. However, more crucially, you must also be able to analyse a commercial context and recognise whether debt or equity financing is most appropriate; in essence, you must be able to apply your theoretical knowledge in a practical scenario.

You will not be expected to know intricate details of the differences between debt and equity financing, but you are expected to have some basic knowledge about how the two work and their key differences. Below, we have set out some of the following main points to keep in mind. Debt v equity is covered in more detail in our Mergers and acquisitions course.

Debt financing

Equity financing

Advantages

Advantages

  • No loss of control as shareholding is unaffected.
  • There is no requirement to pay back the capital raised.
  • The interest on the debt is tax deductible (namely, the interest you pay reduces your overall profits, which means you pay less tax on the remaining profits).
  • No interest needs to be paid (although shareholders may expect dividends).
  • There are a variety of term lengths to choose from in which to pay back the cost of the loan.
  • Investors may provide their insight and expertise. This can be thought of as the “Dragons’ Den effect” – wealthy business-people are increasingly likely to act as angel investors, whereby they provide funding, advice, and access to their network in exchange for an equity stake in the company (usually at an early stage).
  • The return on investment regarding equity may be higher due to the “leverage effect”. 
  • By way of example, if you buy something for £100, we can compare buying it with (A) £100 of equity versus (B) £10 of equity and £90 of debt. If the value goes up after you buy it to £110 then (A) means your return on your equity would be 10% (i.e. you have made £10 on your initial investment of £100). However, with (B) your return on equity would be 100% (i.e. you have made £10 on your initial investment of £10). This is why leverage is a powerful tool that can boost returns (less the cost of interest).
  • If the borrower is already a public company, the company already has access to wider capital markets and may find share issuances easier.
  •  Depending on the size of the loan and credit rating of the borrower, bank loans may be easier and faster to implement.
  • Risk is spread across multiple shareholders thereby diminishing the risk held by existing shareholders.
  • Issuing bonds gives the issuer access to a wider breadth of investors (e.g. possibly to individuals (known as “retail investors”) via the capital markets. This may make raising capital easier.
  • No security or collateral is needed.

Disadvantages

Disadvantages

  • Banks may demand security or collateral in return for a loan/bond.
  • There may be a loss of control as selling shares to other investors dilutes ownership of the business. Sometimes these new shareholders ask for additional rights as well (for example, to put a director of their choosing on the borrower’s board of directors).
  • Depending on the borrower’s credit rating, reputation, and economic climate, interest payments may be considerable.
  • Issuing shares publicly can be a costly and lengthy process due to the associated administration and regulation.
  • The capital raised must be paid back, or else the lender(s) can enforce their security (i.e. take control of your business from you). There are also likely to be restrictive terms imposed on the business during the term of the loan/bonds.
  • The profits gained by the business must be split amongst more individuals (if the company pays dividends).

Aside from a few specific points, the table above summarises the generic advantages and disadvantages for debt and equity financing. To really stand out, it’s helpful (but not always necessary) to explain the specific types of debt and equity financing. In summary, for debt financing, you should have a decent knowledge of:

For equity financing, you should know about:

Returning to the case study at hand, there are several indicators which provide evidence for (or against) the financing options listed above.

Debt financing: bank loan     

First, there are some suggestions that debt financing, in the form of a bank loan, can be a viable option. 

Additionally, it would be worth addressing some of the other benefits of taking out a bank loan. The “leverage effect” refers to the impact of debt on the return on equity investment. Typically, using leverage in such an investment amplifies the garnered profits (and losses). 

Another key benefit of financing an acquisition with a bank loan is that the acquired assets may become the collateral for the loan. 

Furthermore, using a loan to finance the transaction may be more tax efficient as interest is tax deductible. What this means is that the interest that is paid on bank loans may be deducted from the Panacead’s final profit or loss figure when it comes to calculating how much tax the company must pay. Simply put, Panacead’s net profits may not be as harshly impacted by having to make interest payments as, by making such payments, Panacead saves some money elsewhere by paying less tax.

Finally, unlike equity financing, by taking out a bank loan, Panacead does not further dilute the ownership of its business. The existing management of Panacead may be significant shareholders of the company, notwithstanding other public shareholders. Subsequently, taking out a loan (or even issuing bonds) means that Panacead’s management maintains their level of ownership in the business and proportion of profit (in the form of dividends, if paid).

Debt financing: bonds

Second, Karen also mentions to Jane that there is another debt financing option; however, she cannot remember it. This is a prompt for you to consider bond issuances as a potential way of raising finance. An additional prompt can also be found in the news article about Ms Jane Smith and Mr Lovewood where the article details how Mr Lovewood used bonds to build his businesses and amass his fortune.

Like bank loans, bonds have some similar advantages compared with equity financing options: issuing bonds would not dilute Panacead’s ownership and Panacead may benefit from the “leverage effect”. 

One of the key differences between bonds and loans is that it is usually easier to ask for waivers or favours with a bank than bondholders. 

In case you are asked, both bonds and loans can be secured (with collateral, and so on) or unsecured – the only difference is that the interest rate will be much higher if there is not an adequate security package to protect the lenders/bondholders.

Equity financing: share issuance 

Finally, Karen also mentions that Panacead is a public company which may give them another option to raise finance. This is a prompt for you to recognise that Panacead can engage in a share issuance to finance the transaction. Additionally, in the marketing material regarding Panacead and Permorbus, there is a short paragraph which indicates that equity financing is a potential option for Panacead and the current state of Panacead’s shareholding.

It is important for you to note that Panacead is already a public company, and so conducting an IPO does not make any sense ("IPO" stands for "Initial" Public Offering, meaning the first time a company offers shares publicly). 

Instead, Panacead could issue shares either to their existing shareholders (a ‘rights issue’) or to new shareholders. 

Naturally, however, share issuances come with several drawbacks. 

Conclusion  

From the materials provided, it appears that debt financing in the form of a bank loan is the more preferable option. 

Ultimately, it will be up to you as to which financing option you recommend. However, in your presentation, you must be prepared to systematically work through each option, its advantages, and its disadvantages. It is imperative that the interviewer is able to observe your thought process and judgement-forming ability. Regardless of the option that you may pick, be prepared for your interviewer to disagree with you or challenge your analysis. 

In your preparation, imagine that your interviewer tries to argue for the financing options you did not pick. Use the material above to understand what your interviewer’s arguments might be and how you could rebut them.

Finally, you may want to consider how your answer to question three impacts your recommendation for this question. If you recommend that Panacead pursues an asset purchase, the amount of finance needed to be raised may be lower than if Panacead wanted to purchase Krynoxi’s shares because the purchase price is likely to be reduced to reflect the fact that the buyer is not acquiring the whole of the business. 

Although the case study has questions on different topics, you should notice if and how they are interrelated. You are giving one coherent presentation and so your responses to each question should be congruent with each other; if not, you run the risk of not appropriately addressing the case study in its entirety.

3. The choice of a share or asset purchase

Much of this case study depends on the way that the purchase of Krynoxi will be structured. The two main ways to structure a transaction are via a share purchase agreement or via an asset purchase agreement. You should have a strong understanding of what they both entail, their positives, and their negatives. Some of the key advantages and disadvantages of a share purchase and an asset purchase are detailed in the table below. 

Share purchase

Asset purchase

Advantages

Advantages

  • The acquirer will receive the target company’s entire business. This includes intangible assets, such as brand loyalty.
  • The acquirer can choose exactly what assets they want or need. They do not pay for or receive any more than they choose.
  • It is generally easier and more straightforward to document as you acquire the highest company/companies in the structural chain and through that gain control of any subsidiaries. There is no need to revalue specific assets of the target business.
  • Buying individual material assets is less subjective when it comes to price unlike with a share purchase where it is challenging to work out the value of intangible assets.
  • It may be more tax efficient as the acquirer may be able to take advantage of tax credits for depreciation or amortisation. The acquirer could also offset some of the cost against tax on the grounds of capital expenditure allowances.
  • The acquirer does not take on all of the target company’s obligations and liabilities. The acquirer assumes less risk.


  • The legal due diligence process is likely to be faster than a share purchase as diligence only needs to be conducted in respect of the assets being acquired, rather than the whole company.

Disadvantages

Disadvantages

  • The acquirer will need to convince the target’s shareholders to sell their shares. Depending on the company’s constitution, there may be scope for minority shareholders that are opposed to the transaction to refuse to take part and thereby prevent the transaction.
  • However, most sophisticated companies are likely to have a shareholders’ agreement which usually includes a provision which compels minority investors to take part in the transaction if a set amount of the other shareholders agree (e.g. 75% or 90% of the shareholders overall).
  • The acquirers will not garner total control of the target company itself. This can cause the acquirer to lose out on important intangible assets and employees, and risks missing certain assets it should have purchased (e.g. assets that help to ensure the purchased assets can be utilised effectively).
  • The acquirer takes on all of the target company’s obligations and liabilities (potentially including unforeseen liabilities).
  • It can be challenging to persuade a target company to agree to an asset purchase if the acquirer wishes to buy assets that are integral to the target company. The target may fear that they will be “hollowed out”, meaning left without the assets needed to continue operating effectively.

Arguments for a share purchase / against an asset purchase

First, it is unlikely that Krynoxi would agree to an asset purchase. 

One does not usually sell the ‘crown jewel’ of their business on its own. It can also be noted that an asset purchase usually leads to a more costly and complex negotiation process, which neither side may desire. 

Second, as mentioned by Andy in his email, Panacead would want to acquire some of Krynoxi’s employees. 

In this case, these are two main arguments for pursuing a share purchase. 

Arguments for an asset purchase / against a share purchase

However, notwithstanding the substantial benefits of a share purchase, there are several drawbacks to acquiring full control of Krynoxi. 

A further issue, however, is that in pursuing a share purchase, Panacead would be assuming all of Krynoxi’s liabilities and obligations. This may prove to be problematic given that Krynoxi has been alleged to have Mozambican mines and factories engaging in unethical and illegal activity. 

Nonetheless, Panacead may still pursue a share purchase as there could be a solution to the Mozambique issue. 

You should be aware that your interviewing partner will expect you to raise potential issues but then suggest a solution. Companies employ counsel to help them achieve their goals: lawyers are meant to be “deal-makers” and not “deal-breakers”.

Conclusion

Overall, this commentary would suggest that the acquisition, in light of current information, should proceed. 

Furthermore, if the transaction is to go ahead, this commentary suggests that a share purchase would be the best option. 

In practice, case study exercises try to give you a range of possible answers to choose from. Whilst it would be unwise to say that there is no wrong answer, it is possible for candidates to develop different answers and still have a successful interview provided they are prepared to qualify and defend their arguments. You must be able to qualify your answers and demonstrate an appreciation for not only your answer’s merits but also its weaknesses. 

4. Protection against a lawsuit

The final question in your supervisor’s email concerns Ms Joanna Smith and her lawsuit against Krynoxi. Lawsuits are common in the pharmaceutical industry, especially those brought by consumers. Hence, it is important for lawyers to know how to protect their pharmaceutical clients in acquisitions, as, whilst their clients may not face ongoing lawsuits, the companies they wish to acquire certainly may. 

The main solution to protect Panacead from Ms Smith’s lawsuit is to incorporate an indemnification clause in the share purchase agreement with Krynoxi. 

Whilst this is a simple answer, you can develop your answer further by describing how you would advise the indemnification clause to be structured. Here are some things you may wish to consider (although note that these are advanced concepts and you would not be expected to know how indemnities work in such great detail):

We hope that you have found the case study materials and this corresponding commentary helpful. The key to success in case study/presentation exercises is research and practice. You may find that this case study has touched on topics or concepts that you are unfamiliar with. We urge you to take the time to research these topics and build up your understanding. Once you feel more confident, you can always return to the case study to test yourself and corroborate what you have learnt. See our Mergers and acquisitions and Private equity courses for more information. 

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