Case Study: Attempting a Global Merger
On an August afternoon in 2008, Joe Santangelo stepped out of a meeting and into the hot Singapore sun with a heavy heart. Santangelo had been working hard to engineer a new partnership for SingVax, his Singapore-based vaccine-development start-up -- a move he had hoped would provide the resources his venture so dearly needed. But when Santangelo met with one of his investors that day, he learned that the deal was dissolving. Due diligence had turned up some troubling facts about the would-be partner. Santangelo would have no choice but to call the whole thing off.
It was the second time in five months that a corporate union had fallen flat. With cash running out, his board was losing patience.
Nine thousand miles away, in Fort Collins, Colorado, Dan Stinchcomb's vaccine-development company, Inviragen, was feeling similarly jilted. Stinchcomb had learned that a venture capital firm couldn't raise enough money to join a syndicate of investors he had painstakingly put together. Without funding for clinical trials, progress on Inviragen's dengue fever vaccine would stall indefinitely. Stinchcomb had given himself 12 months to get the financing. It had now been nearly two years.
Enter Fred Schwarzer. A Palo Alto, California, venture capitalist, Schwarzer had been eyeing both start-ups for months -- and he believed he had the solution to both men's problems. Fancying himself a bit of a matchmaker, he was convinced that if they joined forces, the combined company could make an attractive investment for his firm, Charter Life Sciences. But negotiating a merger between companies on opposite sides of the globe wouldn't be easy.
Schwarzer had first heard Stinchcomb's pitch for Inviragen back in 2005. The two had worked together in the past, and one day over lunch Schwarzer listened carefully as Stinchcomb described his plan to license dengue fever research from the Centers for Disease Control and use it to develop a vaccine for a disease that infects more than 70 million people each year. Schwarzer's response: great idea, but good luck funding it. Few investors, he said, would be interested in a company focused on an ailment barely present in the U.S. and prevalent only in developing countries.
But that didn't deter Stinchcomb or his co-founder, Jorge Osorio, a professor at the University of Wisconsin-Madison School of Veterinary Medicine who grew up in Colombia, where dengue fever is endemic. Inviragen lined up $250,000 in angel funding and some grants from the National Institutes of Health, and initial animal trials of Inviragen's vaccine were soon showing promising results. Even Schwarzer started to believe that this could be a compelling business proposal.
Meanwhile, in Singapore, Santangelo was working on a vaccine for hand, foot, and mouth disease, or HFMD -- a sometimes fatal childhood illness with annual outbreaks across Asia. By mid-2008, SingVax's vaccine was ready for clinical trials. But Santangelo's main backer, Bio*One Capital -- an investment arm of Singapore's Economic Development Board -- would make a second investment in SingVax only if the company brought on another investor, something Santangelo was unable to find. Scaling up via a merger seemed the best way to get the attention of capital from the U.S. or Europe, but so far SingVax's attempts had been ill fated.
Stinchcomb was familiar with SingVax's work. He had met the company's previous CEO in 2007, and the two had even considered partnering, though nothing had come of the talks. Now, Schwarzer was urging Stinchcomb to give SingVax another look.
In October 2008, Stinchcomb and Osorio flew to Singapore for two days of intense discussions with Santangelo and his investors. By the end of the second day, Stinchcomb, Osorio, and Santangelo felt confident that a union was the answer to both companies' problems. SingVax had expertise Inviragen lacked in scaling up lab production. And Inviragen's dengue fever vaccine had a larger potential market than SingVax's HFMD vaccine. Still, there were myriad details to work through. Who would lead the company? What would it be called? Which products should be given the highest priority in the new company's business plan?
Perhaps the biggest sticking point was the question of each company's relative valuation going into the merger. Although Inviragen had received no VC investment, Schwarzer insisted that the two firms be valued equally, fearing that complex valuation negotiations would kill the deal. Santangelo, for his part, had shareholders to report to. Persuading SingVax's board to accept the equal valuation -- and to provide funds to cover costs during the months it was expected to take to hammer out the details of the union -- would not be easy. "All of us left not knowing whether this would be possible," Santangelo says.
The Decision Four weeks later, Schwarzer got a call from Bio*One, SingVax's largest shareholder: The deal was on. It was ready to give Santangelo one more chance. "If this didn't come off, SingVax was likely to be wound up," Santangelo says. "We only had limited cash. We had to make it work."
Over the next nine months, Stinchcomb and Santangelo spent hours working together in person, on the phone, and by e-mail to unite their two ventures. The pair hit it off, discovering that they shared management styles as well as a passion for public health. But their discussions weren't without the occasional debate. Stinchcomb was surprised at the high costs of SingVax's employee benefits. But Santangelo insisted that they were unavoidable, in part because of Singapore's income tax structures as well as local labor laws (on top of salaries, employers have to contribute up to 14.5 percent of wages to the Central Provident Fund, a social security savings plan). "It certainly required a learning curve on my part," says Stinchcomb. Eventually the pair were able to work out a way to adjust compensation packages in each country so that they were fair across the company.
The new company soon had a business plan and fundraising target: at least $11 million. The merged entity, the two agreed, would inherit the Inviragen name and focus first on developing the dengue fever vaccine, the most advanced product in the companies' combined portfolio.
Coming up with a new budget was probably the most laborious process for the two CEOs, who spent three months e-mailing back and forth with line-by-line adjustments on everything from manufacturing costs to air conditioning (the second largest expense for SingVax's offices in Singapore, where temperatures are 85 degrees to 90 degrees year round). Then there was the nerve-racking due diligence process, which kicked off in the spring and wasn't over until the late summer.
Next, the two had to decide who would lead the merged entity. Santangelo suggested that Stinchcomb become CEO. After all, the company would be headquartered in the United States, where most biotech investors are. And Santangelo, who took the title of COO, would remain in Singapore, close to many of the new company's target markets. (Osorio became chief scientific officer.) The 26-employee company has its main offices in Fort Collins. Osorio runs a laboratory in Madison for preclinical animal trials of all the company's vaccines. And the former SingVax facility in Singapore manages Southeast Asia -- based trials and coordinates with the company's manufacturer in India.
Last September, Inviragen and SingVax announced their merger and a $15 million Series A equity investment from Bio*One, Charter, Madison-based Venture Investors, and Phillip Private Equity of Singapore. Human trials for Inviragen's dengue fever vaccine will be under way in the U.S. by May and in Colombia by September, with trials for the HFMD vaccine planned for later in the year. Success is far from certain. Pharmaceutical giant Sanofi-Aventis, for example, is developing its own dengue fever vaccine. But Stinchcomb is confident that his company will be a strong competitor. Meanwhile, the three executives -- who coordinate from their disparate locations by conference call three times a week -- are growing accustomed to one another. "Sometimes you wonder whether people will be more difficult than you think," says Osorio. "But right now, we're making a great team."
The Experts Weigh In
Geography Is Destiny
I am concerned that these are two different teams with no shared history, located in different countries, operating under different regulatory and manufacturing environments -- with investors and board members split by geography as well. The principals should overinvest in communicating and spending a lot of face-to-face time together. Such preemptive moves would help deflect the tendencies of geographically separated groups to spiral into a lack of coordination and unproductive conflicts.
Partner, McKinsey & Company
Who Gets the Money?
Given Stinchcomb's and Santangelo's ability to reach agreement on CEO and COO roles, this merger is off to a good start. But the biggest source of contention is likely to be about applying scarce resources to the different programs as one or the other advances more quickly. They have solved the valuation issue of whose company is prettiest, but the issue of whose project is prettiest could reemerge. If the team can get over the source of the programs and treat them all as "ours," making those decisions will be a lot easier.
General Partner, Alloy Ventures
Palo Alto, California
Marriage of Convenience
If you measure success on the basis of the ability to raise money, then this merger was a good move. However, I would question the motives that Stinchcomb and Santangelo had for seeking a "partner." It looks like their marriage was born out of financial desperation -- as opposed to seeking to optimize the growth of a business. The best mergers are those in which the parties first identify true business synergies and only then seek the best partner to fulfill that opportunity. It raises the question of whether scaling up is a core requirement of Inviragen's business right now.
Vice President, Intel Capital
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