Financial Strategy BMBA715.2 W149303021

Financial Strategy BMBA715.2 W149303021
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“The buying back of shares by companies is a dangerous financial
strategy as it increases the company’s gearingratio.”
My point of view.
Francesco Merone
25.3.2015

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Contents:
1. Executive summer page 2
2. Introduction page 3
3. High level of gearing page 4
4. Maximized the WACC with the buy-back shares page 8
5. A real case: Shire Plc page 9
6. Conclusions page 14
References page 15
Appendix 1: Shire: Prices, Dividend, Div. growth and expected 2015 page 17
Appendix 2: Shire: Balance Sheet 2010/14 page 20
Appendix 3: Shire: Income Statement 2010-2014 page 22
1. Executivesummer
This assignment considers some different theories regarding the action of buying-back their own
shareswithan increase of the level of the gearing (leverage) ratio.
Many authors consider that increasing the level of the gearing is dangerousfor firms,others think it
couldbe necessary, acceptable orpositivefordifferentreasons.
AccordingtoHealeas(2012) the value of the firmismaximizedwhenthe WACC(WeightAverage Cost
of Capital) isminimized. The problemisthe trade-off betweenthe gearingratiowiththe firm’sWACC.
In the final part of the reportis presenteda real buy-backshare case made in the late 2012 by Shire
Plc,and whatwouldhave happenedif theyhadusedadditional debtstobuybacktheirshares.

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2. Introduction
Share buy-back is considered as an alternative way of giving moneyto the shareholders rather than
paying them dividends. In both cases the result is a decrease of the Equity value and an increase of
the gearingratio.
A companycan decide tobuyits ownsharesinthree differentways:
1. actingas the othershareholders, buyingtheminanopenmarket.The companydoes
not reveal itself asthe buyer.
2. The firm can set up a tender offer announcing to all stockholders that it is willing to
purchase a numberof stocks at a specificprice.
3. The company could buy shares from specific individual shareholders, this way it is
calledtargetrepurchase.
Wayne &Harford (2000) wrote thatthe stockprice reactionto dividend increaseismore positive than
the reactionto repurchases.
Yet,a recentstudymade inthe German’sstockmarketby Andresa,Doumetb, FernaubandTheissenc
(2015), shows that after the introduction of stock repurchases in 1998, the importance of (regular)
dividends have diminished. They noticeda decrease in average dividend payout-ratiofrom 60.9% to
46.0%.
In additiontothis, Skinner(2008) showsthatthe total annual value of share repurchases now usually
exceeds that of cash dividends in the United States,and reports that repurchases have become the
preferredmethodof distributingcashto investors. These factsshow how importantand widespread
are forfirmsbuying-backtheirshares.
In the next pages I will describe some theories pros and cons the buy-back share because related to
an increase of the leverage ratio.

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3.High levelof gearing
AccordingtoModigliani (1981),anincrease inthe level of the gearingwillnegativelyeffectthemarket
value of the firm;the principal reasonsforthatare:
(i) bankruptcycostswhichreduce the expectedflow toall concerned;
(ii) agencycosts,resultingfromthe arrangementsneededtoprotectthe creditors;
(iii) moral hazardor foregone valuable opportunitieswhichwouldbeparticularlyrelevant
for firms withtrue growthopportunities;
(iv) debt is valuable in so far as it serves to shelter income from taxes,though at a cost.
As debtrises,there isa growingprobabilityof income fallingbelow athresholdlevel
where the sheltercannotbe used.
In additiontothat, the peckingordertheorysaysthatthe firmwill borrow,ratherthanissuingequity,
when internal cash flow is not sufficient to fund capital expenditures.Thus the amount of debt will
reflectthe firm'scumulativeneedforexternal funds.
Hovakimian,Opler&Titman(2011) have recentlywrittenthat profitablefirmsoftenusetheirearnings
to pay down debt and, as a result, are usually less levered than their lessprofitable counterparts. In
addition, firms tend to issue equity following an increase in stock prices, implying that firms that
performwell subsequently reduce theirleverage.
Arnold (2013) considers the major disadvantage for a high leverage the increase of the financial risk
distress,andultimately the liquidation.
Graph 1
Ke is the costof equity - Kd is the costof debt - Ko is the overall or weighted average cost of capital
Ingraph 1 itshows the theoreticaloptimallevelof gearing,atpointX.From thatpointstartsa level of
gearingriskierforthe firm.

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The problemisthat any firmwill have adifferentXpoint,sohow can someone understandwhenthe
firmisbehindorahead of that value?
Damodaran(2001) relatedthe differentfirm’sstages withthe riskandopportunitiesrelatedwiththe
gearing(see table 1).
Table 1
Myers (1984) wrote that average debt ratios will vary from industry to industry because asset risk,
assettype,andrequirementsforexternal fundsalsovarybyindustry.
If the leverage is dangerous, why firms simply do not avoid any debt? If the gearing is not always
dangerous,whendoesthe levelstarttobecome dangerous?Doesitdependonthe typeof sectorand
couldit be prevented inthe lastyears?
The tradeoff theorysaysthatfirmsseekdebtlevelsthatbalance thetax advantagesof additional debt
against the costs of possible financial distress. The tradeoff theory predicts moderate borrowingby
tax-payingfirms.
Hence, can a profitable firm increase its gearing because of its corporate taxes? Does the taxation
have an importanteffectonthe gearingratioof a firm?
Stage 2
Rapid Expansion
Stage 1
Start-up
Stage 4
Mature Growth
Stage 5
Decline
IV. The Debt-Equity Trade off and Life Cycle
Time
Agency Costs
Revenues
Earnings
Very high, as firm
has almost no
assets
Low. Firm takes few
new investments
Added Disceipline
of Debt
Low, as owners
run the firm
Low. Even if
public, firm is
closely held.
Increasing, as
managers own less
of firm
High. Managers are
separated from
owners
Bamkruptcy Cost
Declining, as firm
does not take many
new investments
Stage 3
High Growth
Net Trade Off
Need for Flexibility
$ Revenues/
Earnings
Tax Benefits
Zero, if
losing money
Low, as earnings
are limited
Increase, with
earnings
High High, but
declining
Very high. Firm has
no or negative
earnings.
Very high.
Earnings are low
and volatile
High. Earnings are
increasing but still
volatile
Declining, as earnings
from existing assets
increase.
Low, but increases as
existing projects end.
High. New
investments are
difficult to monitor
High. Lots of new
investments and
unstable risk.
Declining, as assets
in place become a
larger portion of firm.
Very high, as firm
looks for ways to
establish itself
High. Expansion
needs are large and
unpredicatble
High. Expansion
needs remain
unpredictable
Low. Firm has low
and more predictable
investment needs.
Non-existent. Firm has no
new investment needs.
Costs exceed benefits
Minimal debt
Costs still likely
to exceed benefits.
Mostly equity
Debt starts yielding
net benefits to the
firm
Debt becomes a more
attractive option.
Debt will provide
benefits.

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If you considerthe UScorporate tax rate, the rate reacheditspeakinthe ’50s thenstartedto fall (see
graph2). We shoulddothe same analysisforeachcountrywhere aspecificfirmhasthe headquarters
and pay its corporate taxes. It is clear that if your financial debtswill cost20-50% less,thanks to the
positive fiscal effects of the taxation, the real cost of the leverage will decrease, so well the firm’s
WACC.
Graph 2
Another important aspect that impacts on the gearing ratio is the interest rates of the debt. In this
case we can notice different periods where it was much higher than in nowadays (see graph 3). As
writtenabove,we shouldconsiderthe differentcountrieswherefirmsare based.
In addition to this case, if your WACC is roughly 10% and the interest rates are 20%, any financial
additional debtwill increase yourWACC.Therefore itwill be difficulttofinda profitable projectwith
a NetPresentValue (NPV) higherthanthe WACC.
Graph 3

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Hence,we cannotcompare a Brazilianfirmwitha34% corporate tax rate1
plusa level of interestrate
of 12.75%2
with a UK firm with a 20-21% corporate tax rate3
plus the level of the interest rate at
0,50%4
.
Brazilian UK Equity 10,000,000 10,000,000
Income 1,500,000 1,500,000 Debts 6,000,000 6,000,000
Interest 765,000 300,000 Gearing1 37.5% 37.5%
Tax 249,900 246,000
NetIncome 485,100 954,000
NewEquity 10,485,100 10,954,000
WACC1 12.3% 9.4% KE 12% 12%
WACC2 12.3% 9.5% Gearing2 36.4% 35.4%
Table 2
In the table 2 I highlightedhow muchthe corporate tax rate plus the level of the interestrate affects
twoidenticfirms,one basedin Brazil andthe otherinUK. I assumedthat they have the same gearing
and the same revenue,butthe WACCis12,30% for the Brazilianand9,40% forthe UK basedone.
How theycan define the same Xpoint?
It is evidentthatthe X point,forfirmswiththe same revenue butlocatedindifferentcountries,with
differentlevelof taxationandinterestrate,istotallydifferent.InBrazil should be farlowerthaninUK.
In additiontothat,there are alsosome highprofitablecompanieswithlargeamountof cashflow and
a high WACC that have difficulties to find new projects with NPVs higher than their WACC, so they
preferbuybuck theirownsharesto create a sort of fake new investments5
(see principle5).Theyare
investing in themselves reducing the number of the shares and the WACC. It shows a lack of
perspective projects for the future and so a difficult to guarantee the same growth for the coming
years.
1 http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx
2 http://www.tradingeconomics.com/brazil/interest-rate
3 https://www.gov.uk/corporation-tax-rates/rates
4 http://www.tradingeconomics.com/united-kingdom/interest-rate
5 Ten w ays to create shareholdervalue by A. Rappaport http://hbr.org/2006/09/ten-ways-to-create-shareholder-value

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4.Maximized the WACC with a buy-backshares
The free cash flowtheory saysthatdangerouslyhighdebtlevelswillincrease value,despitethe threat
of financial distress,whenafirm'soperatingcash flow significantlyexceedsitsprofitable investment
opportunities.
Generallyaccepted benefitsof repurchasing theirown stocksare:
i. signalingundervaluation,
ii. reducingthe agencycostsassociatedwithexcess cash,
iii. fendingoff takeoverattempts,
iv. mimickingindustrypeers.
Bonaimé, Öztekin & Warr (2014) documented that capital structure adjustments are a value-
increasingmotive forrepurchasesandthat the extentto whichadjustingcapital structure through a
repurchase creates value depends on the undervaluation of the firm. Firms repurchase stock for a
variety of reasons, including signalling undervaluation, reducing the agency costs associated with
excesscash,fendingoff takeoverattempts,andmimickingindustrypeers.
Danis, Rettl & Whited (2014) showed that firms chose levels of debt in order to balance the benefits
fromthe interest tax shieldwiththecostsof futurefinancialdistressorof currentfinancialinflexibility.
They reckon that at times when firms are at or close to their optimal level of leverage,the cross-
sectional correlationbetweenprofitabilityandleverage ispositive.
Mr TerrySmith,the founderand chiefexecutiveof assetmanagerFundSmith,declaresthatbuy-backs
onlycreate shareholdervalueif the stockbeingpurchasedistradingbelowitsintrinsicvalue andthere
isno betteruse forthe cash that wouldgenerate ahigherreturn.
Mr Smith’sopinionfindsconfirmswitharecentstudyby Brav, Graham, Harvey and Michaely (2005).
They interviewed384financial executivesanddiscovered thatmaintainingthe dividendlevelisonpar
withinvestmentdecisions,while repurchasesare made outof the residual cashflow afterinvestment
spending. Many managers prefer to repurchase because they are view as being more flexible than
dividendsandcanbe usedinan attemptto time the equitymarketor to increase earningspershare.
Many of those firmsthatpay dividendswishtheydidnot,sayingthatif theycouldstartall overagain,
they would not pay as much in dividends as they currently do. Firms with stable and sustainable
increases in earnings are for the most part the only firms that consider increasing or initiating
dividends.Butevenmanyof these firmswouldprefertopayoutin the formof repurchases.
Hence a lot of executives think that to maximize the WACC is preferable to buy-back share, it also
dependsonthe favourable momentof the gapbetweenthe costof the debtcomparedto the equity
cost.
Itisclearthat boththeories considerahighlevel of gearingdangerous.The bigdifferenceisthatsome
authors and professionals consider the buy-back an opportunity when a company has projects with
NPVs higher than its WACC and/or the firm’s shares are undervalued. In these cases they thinkthat
the X pointcan be pushedmore onthe rightside of the graph 1.

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5. A real case: Shire Plc
Shire Plcisa biopharmaceutical company foundedin1986 andis headquarteredinDublin.
They used their cash flow to buy back shares. This means that their gearing ratio increased in
percentage withtheirequitybutnotinreal terms.
IusedtheirUSAnnual Report(seeappendix 2-3) andevaluatedwhathappenedafterthey haddecided
to buy-backtheirshares.
The firststepistodefine theircostof capital (Ke) andthe costof debt(Kd) duringthe periodthatthey
boughtback the shares.
2012 Equity 3,185,000,000
DividendsPaid 86,300,000
NetEquity 3,098,700,000
Ke (dividendgrowth) 12.0%
Table 3
The table 3 shows that, before deciding to activate the buy-back, Shire had an equity value of US$
3,185 Million with dividends for US$ 86,3 Million. Hence, I considered as a starting point an Equity
value of US$ 3,098.7 Million (3,185 – 86,3), withoutthe dividends.Iconsidered the costof the capital
(Ke) at 12% because it represented the dividend growth from 2010 until 2014 (see appendix 1). I
assumeditwasthe same in 2012.
2013 Equity 3,098,700,000
Share buy back 500,000,000
Price perShare 29.19
Numberof share 17,129,154
Bookvalue of shares 5.509
Value of buyback for Equity 94,361,083
NewEquity Value 3,004,338,917

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% reductionof equity 3.0%
Table 4
Shire announced their buy-back programme on October 25, 20126
up to US$ 500 Million. On
November 11, 2013 they declared that this programme was terminated. They had bought only US$
300 Millionwithanaverage price pershare of £ 19,46 (US$ 29.19, exchange rate US$/£ 1,50). Hence,
theybought9,823,536 shares.
Lookingthe Table 4, letus considerwhatit could have happened whenthey hadbought-backof US$
500 Millionwithanaverage price of £ 19.46 (US$ 29.19); because thisiswhat probablythe investors
had considered onOctober25, 2012.
Theyprobablyevaluatedthatthe real equityvaluewouldbe worth US$3,004.34 Millionafterthe buy-
back. To obtain this value I divided the value of the buy-back with the number of shares purchased
with US$ 500 Million and then I erased this value from the “old” equityvalue. I needed to consider
the bookvalue of the shares and not the stock exchange’sprice.Afterthisbuy-backthe value of the
equitywouldbecome lowerforaboutthe 3%.
Average share price 2012 28.41
Average share price 2013 34.845
Share price for buyback 29.19
Table 5
The table 5 showsthe real average price7
of Shire duringthe years2012 and2013. It alsohighlightthe
average price paidfromShire forits buy-back. All price are expressedinUS$.
6 http://www.shire.com/shireplc/en/investors/irshirenews?id=883
7 https://uk.finance.yahoo.com/q/hp?s=shp.l

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Graph 4
The Graph 4, uses a different value scale, but clearly shows how well this programme had worked
because Shire wasstuckbetween the value 1,5-2,0until the endof 2012, before theyannouncedthe
buy-backprogram.Afterthat,theystartedtogrow. We donotknow if thisprogramme worked better
than expected or they did not need it so far because they decided to interrupt it before buying the
US$ 500 Millionthattheyhadannounced.
.
WACC 9.79% Market Capitalisation 562,200,000 29.19 16,410,618,000
Future cash flows 1,606,174,531 9.79% 16,410,618,000
What happens after buy back of 26,315,789 share at £ 19,46 ($ 29.19)
each?
Shares Price Value

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Shares WACC Value
WACC 9.74% NewMarketCapitalisation 1,606,174,531 9.74% 16,496,355,492
Numberof sharesafter
buyback 545,070,846
NewPrice of share 30.26
Increase value inshares 3.68%
Leverage pre buyback 26.2%
Leverage postbuyback 26.8%
Table 6
Inthe Table 6I calculatedthe marketcapitalisationconsideringthe numberof shareandtheiraverage
price paidfromShire forthe buy-back. Isimulatedtheircashflow thatcombinedwiththe WACCgave
thisvalue at Shire.Itisuseful todefine the new valuewhenyouuse adifferentWACC.
Then, I calculated the Shire’s WACC considering the cost of the Equity at 12%, using the dividend
growthformula(dividendsfrom2010 until 2014) and the cost of the debtsas perBalance Sheet 2012
(US$ 39.1 MillionforUS$ 1,100 Millionof Bond,equal to3.55%).
Shire’s WACC pre buy-back was 9,79%, after the buy-back became 9,74%. With a lower WACC, the
firm’svalue immediatelyincreased.The share price became US$30.26from29.19 (+3,67%). The same
effectisfor the leverage,from26,2% to 26.8%. In this case Shire usedits cash flow for the buy-back,
butit ismathematical thatwhenyoureduce the numberof the share,sothe value of yourequity,the
relationbetweendebtsandequity,will increase.
What will happen to EPS?
EPS 2012 pre buy back 1.33
EPS 2012 postbuy back 1.37
Table 7
In Table 7 I showedhowthisbuy-backprogramme increased alsothe EPS value. Alsointhiscase it is
mathematical that if your Earning is the same and you reduce the number of share, their ratio will
increase.
Hypotesis buy back share with more debts at the same cost (Kd)
Newvalue of financial debts 1,600,000,000
Value of Equity 3,004,338,917
Ke 12.0%
Kd 3.55%
WACC 9.07%

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Leverage 34.75%
NewMarketCapitalisation 17,717,989,666
New Price of share 32.51
Table 8
In table 8 I consideredahypotheticcase:if Shire increasedthe financial debtsforbuying-back,what
wouldhappen?ForsimplicityIdidnotchange any otherparameter.
The Shire’sWACCwoulddecreaseto9,07% andthe relative shareprice wouldincrease to atheoretical
US$ 32,51, from US$ 29.19 it represents aplus 11.37%, compared to US$ 30,26 (+ 3,67%) happened
inreality.
At the same time,the gearingratiowouldincrease from26.2% to 34.75%.
The hypothetical case showed how happy the Shire’s shareholders would have been if Shire had
purchaseditsshare usingadditional debt.
Yet,what wouldhave happenedforthe company,if theyhadusedadditional debt?
What will happen in the company?
NetIncome 2012 pre buy-back 745,400,000
NetIncome 2012 afterbuy-back 743,625,000
Dividendpaid2012 86,300,000
Free cash flow2012 pre buy-back 659,100,000
Free cash flow2012 post buy-back 657,325,000
Table 9
The Table 9 shows that more debts could increase the share’s price,as seen in the previous table 6,
but they decrease the company’s cash flows (reduced because of the loan’s interests paid). Shire
wouldhave had lesscash flowto investingrowth. To be precise,the real NetIncome 2012 afterthe
buy-backwithmore debts wouldbe higherthanI wrote in the Table 9 because I didnot considerthe
benefitof the taxationonthe interestspaid.The tax rate forthe interestisdifferentineachcountries
and itdoesnot change the fact that withmore financial debtsyouhave lessfree cashflow toinvest.

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6. Conclusion
 In 1984, Myers wrote that theoriesdonot seemto explainactual financingbehaviour,andit
seems presumptuous to advise firms on optimal capital structure when we are so far from
explainingactual decisions.
 Some years later (2001), he added that there is no universal theory of the debt/equity
choice and no reason to expect one.
 Every firm is different and operates in a different market and environment. What could
be considered a good structure in the UK market would be dangerous in the Brazilian and
so on.
 When you need to define a capital structure of your firm, the main points to consider are
the WACC and the project’s NPVs. The higher the NPV compare to the WACC, the lower
the risk that the company is going on the right side of the optimal “X” point.
 Bonaimé, Öztekin & Warr (2014) consider the benefits to repurchasing will be more
pronouncedwhenafirm's equityisundervalued,andthusthe overall costof repurchasingis
low.Correspondingly,whenthe firm'sstockisovervaluedandrepurchasingequityisrelatively
expensive, adjustments requiring stock repurchases will be more costly and hence less
beneficial.
 According to Damodaran (2001) Debt matters in valuation. It can both create and destroy
value.

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References
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versustotalpayouts, Journal of Banking&Finance,Volume 55,pp. 56–69
Arnold,G.(2013) Corporate Financial Management,Pearson,fifthedition.
Bonaimé, A.A., Öztekin, O. & Warr, R.S. (2014) Capital structure, equity mispricing, and stock
repurchases,Journal of Corporate Finance, 26,pp. 182–200
Brav, A. , Graham, J.R., Harvey, Michaely R., (2005) Payout policy in the 21st century, Journal of
Financial Economics,77,pp. 483–527
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Damodaran, A. (2001) Corporate Finance 2nd Edition with BusinessExtra Password Card Set, Wiley,
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Finance,3,pp. 95–287
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versusrepurchases,Journal of Financial Economics, 57,pp. 385-415
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Quantitative Analysis,Vol.36,No.1, pp. 1-24
Johnson,S.(2011) Fewreasonsto cheer share buy-backs, http://www.ft.com/cms/s/0/22629d1e-
7d8d-11e0-b418-00144feabdc0.html#axzz3UGHoLnAd
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Appendix 1
Shire:PricShire:Prices,Dividend,Div.growthandexpected2015
Date Open High Low Close Volume Adj Close
01/12/2010 1510 1573 1469 1543 1217600 1511.9
01/11/2010 1468 1574 1460 1503 1376400 1472.71
01/10/2010 1425 1514 1393 1471 2099700 1441.35
01/09/2010 1411 1532 1410 1434 1399900 1405.1
02/08/2010 1459 1522 1370 1406 1978000 1376.59
01/07/2010 1358 1502 1329 1455 1749800 1424.57
01/06/2010 1415 1488 1367 1374 1938400 1345.26
03/05/2010 1443 1487 1318 1421 2132300 1391.28
01/04/2010 1460 1508 1400 1443 2030300 1412.82
01/03/2010 1417 1526 1407 1454 1799500 1423.59
01/02/2010 1235 1448 1223 1407 2205700 1372.03
01/01/2010 1210 1276 1204 1237 1469100 1206.25
Average 1,398.62 £13.99 Price
DividendPaid 7.04 7.04 Pences
01/12/2011 2128 2243 2096 2243 866300 2207.99
01/11/2011 1919 2133.49 1900 2132 1309200 2098.73
03/10/2011 1993 2072 1836 1951 1534100 1920.55
01/09/2011 1985 2034 1896 2010 1205800 1978.63
01/08/2011 2127 2145 1761 1987 2140300 1954.46
01/07/2011 1949 2147 1943 2119 1791500 2084.3
01/06/2011 1929 1947 629.5 1945 1502600 1913.15
03/05/2011 1831 1987 1831 1917 2136900 1885.61
01/04/2011 1814 1911 1683 1850 1714400 1819.71
01/03/2011 1749 1841.98 1713 1811 1631600 1781.34
01/02/2011 1646 1754 1610 1741 1565400 1705.91
04/01/2011 1535 1707 1532 1647 1455900 1613.81
Date Open High Low Close Volume
Adj
Close
03/12/2012 1809 1968 1802 1887 1536700 1866.1
01/11/2012 1741 1822.32 1715 1806 1439400 1786

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01/10/2012 1825 1886 1682 1743 2315300 1723.69
03/09/2012 1905 2000 1792 1814 2059900 1793.91
01/08/2012 1840 2058 1834 1916 1197400 1893.05
02/07/2012 1836 1937 1776 1848 1606000 1825.87
01/06/2012 1835 1976.5 1706 1832 2192500 1810.06
01/05/2012 2008 2059 1816 1828 1674600 1806.11
02/04/2012 2000 2066.82 1928 2010 2481200 1985.93
01/03/2012 2193 2270 2006 2020 2506000 1995.81
01/02/2012 2105 2316 2074.41 2198 2081800 2163.7
02/01/2012 2243 2278 2090 2106 1064300 2073.13
Dividend
Paid 9.70 9.70 Pences
02/12/2013 2730 2865 2620 2852 1436300 2835.46
01/11/2013 2763 2939 2738 2772 1769200 2755.92
01/10/2013 2473 2885 2373 2751 1635000 2735.04
02/09/2013 2395 2602 2384 2478 1360400 2463.63
01/08/2013 2415 2470 2356 2377 1251200 2361.28
01/07/2013 2088 2430.71 2069 2402 1513800 2386.12
03/06/2013 2158 2170 1978 2085 1581200 2071.21
01/05/2013 2009 2235 1853 2170 2460900 2155.65
01/04/2013 2004 2039 1891.68 2002 1727900 1988.76
01/03/2013 2065 2117 1961 2004 1624100 1990.75
01/02/2013 2116 2173 1996 2065 1793500 2042.13
01/01/2013 1887 2133 1887 2113 1453700 2089.6
01/12/2014 4553 4739 4333 4533 1407500 4522.19
03/11/2014 4153 4582 4060 4557 1941800 4546.13
01/10/2014 5310 5470 3448.28 4163 5547500 4153.07
01/09/2014 4904 5425 4844 5340 1974300 5327.26
01/08/2014 4870 4934 4500 4923 2412300 4909.02
01/07/2014 4522 5050 4386 4891 4924100 4877.11
02/06/2014 3409 4686.02 3357 4570 2826200 4557.02
01/05/2014 3393 4133 3227 3414 1653800 3404.3
01/04/2014 2964 3491 2827 3378 2458000 3368.41

19
03/03/2014 3279 3444 2937 2945 2449400 2936.64
03/02/2014 3047 3426 2983 3320 2533100 3300.74
01/01/2014 2852 3055 2815 3043 1348000 3025.35
2010 2011 2012 2013 2014 Growth 2015
7.04 8.25 9.7 11.34 12.45 1.768466 12% 13.944 Expected

20
Appendix 2
Shire:Balance Sheet2010-2014
Period End Date 31-Dec-14 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10
Accounting Standard
U.S.
standards
(GAAP)
U.S.
standards
(GAAP)
U.S.
standards
(GAAP)
U.S. standards
(GAAP)
U.S. standards
(GAAP)
Annual Balance Sheet: (GBP, In millions)
Cash and Short Term Investments 1,947.73 1,365.49 922.36 412.2 368.79
Cash 1,947.73 1,365.49 10.52 13.26 368.79
Short Term Investments 0 0 911.84 398.94 0
Total Receivables Net 750.62 696.21 600.25 586.83 483.12
Net Receivables 663.84 580.35 507.04 543.72 442.31
Accounts Receivable Gross 694.95 609.27 532.7 563.73 457.25
Provision for Bad Debt -31.1 -28.92 -25.65 -20.01 -14.95
Other Receivables 86.77 115.86 93.2 43.11 40.81
Total Inventories 349.4 274.9 268.78 218.84 166.07
Finished Goods 87.22 94.55 76.53 64.28 58.7
Raw Materials 66.38 35.14 56.54 49.93 34.62
Work In Process 195.8 145.21 135.71 104.63 72.75
Other Current Assets 276.35 252.56 184.68 203.01 182.99
Prepaid Expenses 23.67 17.75 19.5 30.18 28.81
Miscellaneous Current Assets 252.69 234.81 165.18 172.83 154.19
Total Current Assets 3,324.10 2,589.16 1,976.07 1,420.89 1,200.97
Net Property, Plant and Equipment 537.12 538.45 588 599.77 545.08
Property, Plant and Equipment -
Gross
990.99 895.88 901.88 900.65 818.77
Buildings 459.9 419.62 431.37 455.57 440.65
Machinery/Equipment 185.99 166.76 176.68 174.96 76.26
Construction in Progress 28.15 27.53 57.71 52.57 107.11
Other Property/Plant/Equipment 316.95 281.96 236.11 217.55 194.74
Accumulated Depreciation 453.87 357.43 313.87 300.88 273.69
Total Investments and Advances 28.03 19.2 23.81 19.24 64.89
Long Term Investments 0 19.2 20.06 13 57.36
Investments in Associated
Companies
28.03 -- 3.75 6.24 7.54
Intangible Assets 4,751.84 1,773.40 1,865.64 1,985.46 1,521.03
Goodwill- Net 1,587.24 377.12 396.49 381.31 257.08
Other Intangible Assets 3,164.60 1,396.29 1,469.15 1,604.14 1,263.95
Deferred Tax Assets 71.89 85.19 28.61 32.62 70.51
Other Assets 29.76 19.8 19.38 47.42 38.64
Other Tangible Assets 29.76 19.8 19.38 47.42 38.64
Total Assets 8,742.73 5,025.21 4,501.51 4,105.40 3,441.13

21
ST Debt and Curr Portion LT Debt 545.13 0 0 707.81 0
Short Term Debt 545.13 0 0 0 0
Current Portion of Long Term
Debt/Capital Leases
-- 0 0 707.81 --
Accounts Payable 158.86 122.32 128.02 167.04 149.91
Income Taxes Payable 10.39 41.66 48.23 17.82 13.16
Other Current Liabilities 1,223.67 927.58 836.11 738.05 662.98
Accrued Payroll 166.62 126.97 106.74 104.43 89.23
Miscellaneous Current Liabilities 1,057.05 800.6 729.38 633.61 573.76
Total Current Liabilities 1,938.05 1,091.56 1,012.37 1,630.72 826.05
Long-Term Debt 0 0 676.71 0 707.63
Long Term Debt excluding
Capitalized Leases
0 0 676.71 0 702.58
Convertible Debt 0 -- 676.71 0 702.58
Captilized Lease Obligations 0 0 0 0 5.05
Provision for Risks and Charges -- 0.6 7.57 9.33 8.62
Deferred Tax Liabilities 776.4 338.48 320.39 332.41 224.89
Other Liabilities 472.47 354.72 141.06 83.52 108.2
Other Liabilities (excl. Deferred
Income)
463.62 341.98 126.73 66.66 91.02
Deferred Income 8.85 12.74 14.33 16.86 17.18
Total Liabilities 3,186.92 1,785.36 2,158.11 2,055.98 1,875.39
Common Equity 5,555.81 3,239.85 2,343.40 2,049.42 1,565.74
Common Stock 37.65 35.38 34.27 35.84 35.58
Capital Surplus 2,782.11 2,527.58 1,834.20 1,835.98 1,754.16
Retained Earnings 2,978.10 882.42 612.43 323.6 -102.39
Common Equity ESOP Guarantees -221.84 -272.06 -190.96 -184.8 -176.35
Unrealized Foreign Exchange
Gain/Loss
-16.48 66.66 52.35 39.51 54.55
Unrealized Gain/Loss Marketable
Securities
-3.72 -0.12 1.11 -0.71 0.19
Other Appropriated Reserves -20.2 0 0 0 --
Total Shareholders Equity 5,555.81 3,239.85 2,343.40 2,049.42 1,565.74
Accumulated Minority Interest 0 0 0 0 0
Total Stockholders' Equity 5,555.81 3,239.85 2,343.40 2,049.42 1,565.74
Total Liabilities and Shareholders Equity 8,742.73 5,025.21 4,501.51 4,105.40 3,441.13

22
Appendix 3
Shire:Income Statement2010-2014
Accounting Standard
U.S.
standards
(GAAP)
U.S.
standards
(GAAP)
U.S.
standards
(GAAP)
U.S.
standards
(GAAP)
U.S. standards
(GAAP)
Annual Income Statement: (GBP, In millions)
Net Sales or Revenue 3,657.39 3,156.75 2,954.21 2,659.52 2,248.23
Cost of Goods Sold incl. Depreciation 807.44 584.03 581.73 524.87 386.61
Cost of Goods Sold excl. Depreciation 560.08 405.16 386.98 340.97 221.12
Depreciation, Depletion and
Amortization
247.36 178.88 194.75 183.9 165.49
Depreciation 99.3 81.63 71.82 79.91 77.21
Amortization of Intangibles 148.07 97.24 122.93 103.99 88.28
Gross Income 2,849.95 2,572.72 2,372.48 2,134.65 1,861.62
Selling, General and Administrative Expense 1,550.39 1,485.96 1,644.09 1,405.30 1,330.57
Research and Development 517.87 569.51 550.17 455.06 428.45
Other Selling, General and
Administrative Expenses
1,032.52 916.45 1,093.91 950.24 902.12
Operating Income 1,299.56 1,086.75 728.39 729.35 531.05
Unusual Expense (Income) – Net -671.34 -12.09 140.79 33.69 28.37
Nonoperating Income (Net) - Total 73.97 9.02 11.67 8.73 18.33
Miscellaneous Non-Operating Income
(Expense)- Net
58.97 7.68 9.72 7.55 16.78
Non-Operating Interest Income 15 1.34 1.96 1.19 1.55
Interest Expense 18.71 24.37 24.11 24.39 22.73
Interest Expense on Debt 18.71 24.37 24.11 24.39 22.73
Interest Capitalized 0 0 0 0 --
Pretax Income 2,026.17 1,083.49 575.17 680.01 498.28
Income Taxes 34.07 177.79 105.39 141.98 118.33
Total Current Income Taxes 15.91 227.5 142.94 149.9 --
Income Tax - Current - Domestic -176.67 40.56 0 0 --
Income Tax - Current - Foreign 192.58 186.94 142.94 149.9 --
Deferred Income Taxes 18.16 -49.71 -37.55 -7.92 --
Deferred Domestic Income Tax -1.82 7.36 8.2 -0.62 --
Deferred Foreign Income Tax 19.98 -57.07 -45.75 -7.3 --
Equity in Earnings of Affiliated Companies 1.64 2.5 0.63 1.56 0.91
Consolidated Net Income 1,993.74 908.2 470.41 539.59 380.85
Net Income Before Extraordinary Items 1,993.74 908.2 470.41 539.59 380.85
Net Income 1,993.74 908.2 470.41 539.59 380.85

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