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Weighted average equivalent shares used in
primary share calculation (Note 4) 508,565
Weighted average equivalent shares used
in fully diluted per share calculation (Note 4) 521,446

The accompanying notes are an integral part of the unaudited condensed pro forma combined financial statements.
647
Mergers and Acquisitions




15-51 Part 3 Business Analysis and Valuation Applications




PHARMACIA AND UPJOHN, INC.”NOTES TO UNAUDITED CONDENSED
PRO FORMA COMBINED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share data)

The unaudited condensed pro forma combined ¬nancial statements have been prepared
to re¬‚ect the Combination of Pharmacia and Upjohn through the formation of the com-
pany which will issue an assumed 503,722,558 shares of New Common Stock and an
assumed 7,263 shares of New Preferred Stock, which will be exchanged for all of the
outstanding Pharmacia Securities and shares of Upjohn Common Stock and the Upjohn
The Uphohn Company




Preferred Stock. The Combination is accounted for under the pooling-of-interests method
of accounting in accordance with U.S. GAAP.

Note 1
The historical Pharmacia consolidated ¬nancial statements included elsewhere herein
have been prepared in accordance with Swedish GAAP and denominated in Swedish
kroner with a reconciliation of net income and stockholders™ equity to U.S. GAAP included
in the Notes to the consolidated ¬nancial statements. See “Note 25 to the Consolidated
Financial Statements of Pharmacia.” The Pharmacia historical ¬nancial information
included in these unaudited condensed pro forma combined ¬nancial statements has
been presented in accordance with U.S. GAAP and translated into U.S. dollars at a rate of
$1 = SEK 7.2625 as of June 30, 1995 and using the weighted average rate of exchange
for the six-month periods ended June 30, 1995 and 1994, and for the years ended
December 31, 1994, 1993 and 1992 of $1 = SEK 7.3402.

Note 2
To record estimated expenses associated with the Combination, which include, without
limitation, fees and expenses of investment bankers, legal counsel, accountants and
consultants incurred by Pharmacia and Upjohn in connection with or related to the autho-
rization, preparation, negotiation and execution of the Combination Agreement and the
preparation, printing, ¬ling and mailing of this Prospectus including solicitation of stock-
holder approvals and all other matters related to closing the Transactions.

Note 3
To record the issuance of shares of New Common Stock, and 7,263 shares of New
Preferred Stock in exchange for the outstanding Pharmacia Securities, the outstanding
shares of Upjohn Common Stock (at an exchange ratio of 1.45 to 1) as set forth below,
and 7,263 outstanding shares of Upjohn Preferred Stock.
Pharmacia
Pharmacia Class A Common Shares outstanding (par value SEK 25) 164,724,715
Pharmacia Class B Common Shares outstanding (par value SEK 25) 91,027,398
Upjohn Common Stock outstanding (par value $1.00) ”

255,752,113
Exchange ratio to New Common Stock (par value $.01) 1.00
255,752,113
(continued)
648 Mergers and Acquisitions




15-52
Mergers and Acquisitions




Upjohn

Pharmacia Class A Common Shares outstanding (par value SEK 25) ”
Pharmacia Class B Common Shares outstanding (par value SEK 25) ”
Upjohn Common Stock outstanding (par value $1.00) 171,014,100

171,014,100
Exchange ratio to New Common Stock (par value $.01) 1.45

247,970,445




The Uphohn Company
New Common Stock to be issued 503,722,558


Note 3a
Record issuance of New Common Stock to Pharmacia stockholders.

Note 3b
Record issuance of new Common Stock to Upjohn stockholders.

Note 3c
Record cancellation of Upjohn treasury stock pursuant to the Combination Agreement.

Note 3d
Record exchange of Upjohn™s Preferred Stock for New Preferred Stock (an exchange ratio
of 1:1) pursuant to the Combination Agreement.

Note 4
Primary earnings from continuing operations per share are computed by dividing
earnings from continuing operations available to holders of New Common Stock by the
weighted average of common shares outstanding based on the share exchange ratio
(including common share equivalents, principally stock options). Fully diluted earnings
from continuing operations per share have been computed assuming that all of the
convertible preferred stock and convertible debenture loans are converted into common
shares.
649
Mergers and Acquisitions




15-53 Part 3 Business Analysis and Valuation Applications




EXHIBIT 3
Upjohn Pharmacia Merger Announcement”August 20, 1995

A Upjohn Stock Price and Trading Volume
Volume (thousands of shares)
Price ($U.S.)
45 14000

40
The Uphohn Company




12000
35
10000
30
8000
25

20 6000
Price
15 Volume 4000
10
2000
5

0 0
8/94 8/95
10/94 4/95 6/95
12/94 2/95




B Pharmacia Stock Price and Trading Volume
Volume (thousands of shares)
Price ($U.S.)
45 14000

40
12000
35
10000
30
8000
25

20 6000
Price
15 Volume 4000
10
2000
5

0 0
8/94 8/95
10/94 4/95 6/95
12/94 2/95
650 Mergers and Acquisitions




15-54
Mergers and Acquisitions




C Upjohn and Pharmacia Daily Stock Returns on Trading Days
Surrounding the Merger Announcement

Upjohn Pharmacia
3 days prior to announcement +0.34% +1.54%
2 days prior to announcement -2.36 +1.08
1 day prior to announcement +9.31 +4.63
1 day after announcement +2.84 +4.43




The Uphohn Company
2 days after announcement +5.52 +5.21
3 days after announcement -2.33 -2.23

Source: Datastream International.




D Valuation Data at Announcement

Upjohn™s share price on August 18, 1995 $39.63
Pharmacia™s share price on August 18, 1995 $25.38
Upjohn™s Beta 0.95
Pharmacia™s Beta 0.91
US T-Bills, 30 day, August 1995 5.3%
30-Year US Treasury Bonds 6.9%
16
16 C orp o r at e F in a n c ing Po l i c i e s
chapter




I n this chapter, we discuss how ¬rms set their capital structure and div-
idend policies to maximize shareholder value. There is a strong relation between these
two decisions. For example, a ¬rm™s decision to retain internally-generated funds rather
than paying them out as a dividend can also be thought of as a ¬nancing decision. It is
Business
3
not surprising, therefore, to ¬nd that many of the factors that are important in setting cap-
ital structure (such as taxes, costs of ¬nancial distress, agency costs, and information
Analysis costs) are also relevant for dividend policy decisions. In the following sections we dis-
and cuss these factors, how they affect capital structure and dividend policy, as well as how
the ¬nancial analysis tools, discussed in Part 2 of this book, can be used to evaluate cap-
Valuation ital structure and dividend policy decisions.
A variety of questions are dealt with in analysis of corporate ¬nancing policies:
Application
• Securities analysts can ask: Given its capital structure and dividend policy, how
s should we position a firm in our fund”as a growth or income stock?
• Takeover specialists can ask: Can we improve stockholder value for a firm by
changing its financial leverage or by increasing dividend payouts to owners?
• Management can ask: Have we selected a capital structure and dividend policy
which supports our business objectives?
• Credit analysts can ask: What risks do we face in lending to this company, given its
business and current financial leverage?
Throughout our discussion, we take the perspective of an external analyst who is
evaluating whether a ¬rm has selected a capital structure and dividend policy that max-
imize shareholder value. However, our discussion obviously also applies to manage-
ment™s decisions about what debt and dividend policies it should implement.


FACTORS THAT DETERMINE FIRMS™ DEBT POLICIES
As discussed in Chapter 9, a ¬rm™s debt policy can be represented by comparing its net
debt, de¬ned as interest-bearing debt less excess cash and marketable securities, and its
equity. In practice, since it is dif¬cult to estimate excess cash and marketable securities,
analysts typically use total cash and marketable securities as a proxy. For example, con-
sider the debt policies for Merck, a large pharmaceutical company, and American Water

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