Speculation: Down – Performance: Up

Today it was announced that pharmaceutical company Sanofi-Aventis has acquired Genzyme, a biotech company.  But this deal is much different from past biotech acquisitions, and it’s reflective of a new economy that values performance and shies away from speculation.

This acquisition was structured as a CVR (contingent-value right).  Basically this means that Sanofi has offered a cash payment of $74 per share along with a CVR which could bring an additional $14 per share.  The current market value of the CVR is estimated at $1.50 per share.  Sanofi has agreed to pay $1 per CVR share if certain production levels are acheived by Genzyme.  In the end, Sanofi is ensuring that Genzyme burden some of the risk – forcing performance in order to receive the maximum payoff from the acquisition.

This deal that relies heavily on mitigating risk and focuses on performance is akin to other markets making similar moves.  Real estate is no longer based so heavily based on speculation – smart investors are focusing on cash flow.  VC’s are seeking companies that are profitable – having the next big thing with sky-rocketing revenues isn’t so hot if the profit isn’t there.  Lenders aren’t lending unless borrowers have a hefty downpayment or collateral.

The new economy is correcting towards the right metrics.  The key to long term success will be to keep it that way.  Unfortunately, I fear that this focus on performance will be short lived.  Why?  As individuals and families, we still aren’t focused on performance.  Most families are still in too much debt and going further into debt with consumer purchases.  As a people, I don’t believe we’ve been humbled enough to truly change.  The Great Depression changed people.  It created savers.  I don’t see the saving mentality arising as a lasting benefit of the current recession.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.