TABLE OF CONTENTS SR.NO TOPIC PAGE NO 1 INTRODUCTION TO MERGER AND ACQUISITION 1-6 2 OVERVIEW OF PHARMACEUTICAL INDUSTRY 7-14 3 OBJECTIVE OF THE STUDY 15-25 4 RELEVANCE OF THE STUDY 26-33 5 DATA COLLECTION 34-52 6 CONCLUSION 53-56 7 LIMITATION 57 8 BIBLIOGRAPHY 58
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TABLE OF CONTENTS
SR.NO TOPIC PAGE NO
1 INTRODUCTION TO MERGER AND
ACQUISITION
1-6
2 OVERVIEW OF PHARMACEUTICAL
INDUSTRY 7-14
3 OBJECTIVE OF THE STUDY 15-25
4 RELEVANCE OF THE STUDY 26-33
5 DATA COLLECTION 34-52
6 CONCLUSION 53-56
7 LIMITATION 57
8 BIBLIOGRAPHY 58
1
INTRODUCTION
HISTORY:
In the year 2012, India witnessed a substantial slowdown in the mergers and
acquisitions (“M&A”). In 2012, M&A deals fell to almost a three year low and
down nearly 61% from 2011 and 138.5 % from 2010.The pressure on the M&A
activity was primarily due to a difficult macro-economic climate throughout the
year. The global slowdown and the euro zone crisis had a significant impact on the
Indian economy. On the domestic front, the growing fiscal deficit, high inflation
and currency devaluation coupled with high interest rates had a severe impact on
the growth trajectory. In the initial months of 2012, the India economy grew at its
slowest rate since 2003 with GDP growth of only 5.3%.In addition to these macro-
economic factors India Inc. was also adversely affected by regulatory uncertainties
and bottlenecks. There was no movement on some of the key regulatory and
legislative changes such as the new Companies Bill, foreign direct investment in
retail, international financial reporting standards etc. till almost the fourth quarter
of 2012. Further, there was no clarity on the crucial General Anti Avoidance Rules,
introduced through the Union Budget, 2012, till almost the end of 2012.However,
the challenging economic climate, India Inc. in 2012 witnessed significant M&A
activity across diverse industry segments. The year witnessed 639 M&A deals
worth USD 26.4 billion, compared to 817 deals worth USD 42.5 billion in 2011
and 800 deals worth USD 62 billion in 2010.One of the key trends that emerged in
2
2012 was the increase in domestic deals compared to cross border M&As. The
domestic deal value stood at USD 9.7 billion, an increase of almost 50.9%
compared to 2011. In terms of deal count, the domestic deals were primarily seen
in the financial service sector (23%).4 Some of the key domestic deals in 2012
include the merger of Tech Mahindra with Satyam and the all share merger of Sesa
Goa and Sterlite Industries. The total cross border deals amounted to USD 14.9
billion, down almost 45.8% from the first nine months of 2011. Inbound M&A
showed some signs of slowdown with an aggregate deal value of USD 17.4 billion,
30.1% lower than the corresponding sum last year. One of the features of 2012 in
so far as inbound investments are concerned is that Japan emerged as the third
largest country, after the United States and the United Kingdom, with over 25 deals
amounting to USD 1.5 billion. Outbound deal by contrast, stood at USD 11.2
billion, a 68.5% jump from last year.5 ONGC Videsh’s acquisition of 8.4% in
Kazakhstan oilfield from Conoco Phillips for about USD 5 billion was the largest
outbound transaction in 2012. In terms of industry segment, the Energy, Mining
and Utilities, Industries and Chemicals, Pharma, Medical and Biotech and Business
Services continues to witness the majority of the M&A deals.
MERGER
The term ‘merger’ is not defined under the Companies Act, 1956 (the “Companies
Act”), the Income Tax Act, 1961 (the “ITA”) or any other Indian law. Simply put,
a merger is a combination of two or more distinct entities into one; the desired
effect being not just the accumulation of assets and liabilities of the distinct
entities, but to achieve several other benefits such as, economies of scale,
acquisition of cutting edge technologies, obtaining access into sectors / markets
with established players etc. Generally, in a merger, the merging entities would
cease to be in existence and would merge into a single surviving entity. Very often,
the two expressions "merger" and "amalgamation" are used synonymously. But
there is, in fact, a fine distinction between a ‘merger’ and an ‘amalgamation’.
Merger generally refers to a circumstance in which the assets and liabilities of a
company (merging company) are vested in another company (the merged
company). The merging entity loses its identity and its shareholders become
shareholders of the merged company. On the other hand, an amalgamation is an
arrangement, whereby the assets and liabilities of two or more companies
(amalgamating companies) become vested in another company (the amalgamated
company).The amalgamating companies all lose their identity and emerge as the
amalgamated company; though in certain transaction structures the amalgamated
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company may or may not be one of the original companies. The shareholders of
the amalgamating companies become shareholders of the amalgamated company.
While the Companies Act does not define a merger or amalgamation, Sections 390
to 394 of the Companies Act deal with the analogous concept of schemes of
arrangement or compromise between a company, it shareholders and/or its
creditors. A merger of a company ‘A’ with another company ‘B’ would involve
two schemes of arrangements, one between A and its shareholders and the other
between B and its shareholders.
The ITA defines the analogous term ‘amalgamation’ as the merger of one or more
companies with another company, or the merger of two or more companies to form
one company. Mergers may be of several types, depending on the requirements of
the merging entities:
i. Horizontal Mergers
Also referred to as a ‘horizontal integration’, this kind of merger takes place
between entities engaged in competing businesses which are at the same stage of
the industrial process. A horizontal merger takes a company a step closer towards
monopoly by eliminating a competitor and establishing a stronger presence in the
market. The other benefits of this form of merger are the advantages of economies
of scale and economies of scope.
ii. Vertical Mergers
Vertical mergers refer to the combination of two entities at different stages of the
industrial or production process. For example, the merger of a company engaged in
the construction business with a company engaged in production of brick or steel
would lead to vertical integration. Companies stand to gain on account of lower
transaction costs and synchronization of demand and supply. Moreover, vertical
integration helps a company move towards greater independence and self-
sufficiency. The downside of a vertical merger involves large investments in
technology in order to compete effectively.
iii. Congeneric Mergers
These are mergers between entities engaged in the same general industry and
somewhat interrelated, but having no common customer-supplier relationship. A
company uses this type of merger in order to use the resulting ability to use the
same sales and distribution channels to reach the customers of both businesses.
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iv. Conglomerate Mergers
A conglomerate merger is a merger between two entities in unrelated industries.
The principal reason for a conglomerate merger is utilization of financial
resources, enlargement of debt capacity, and increase in the value of outstanding
shares by increased leverage and earnings per share, and by lowering the average
cost of capital. A merger with a diverse business also helps the company to foray
into varied businesses without having to incur large start-up costs normally
associated with a new business.
v. Cash Merger
In a typical merger, the merged entity combines the assets of the two companies
and grants the shareholders of each original company shares in the new company
based on the relative valuations of the two original companies. However, in the
case of a ‘cash merger’, also known as a ‘cash-out merger’, the shareholders of one
entity receive cash in place of shares in the merged entity. This is a common
practice in cases where the shareholders of one of the merging entities do not want
to be a part of the merged entity.
vi. Triangular Merger
A triangular merger is often resorted to for regulatory and tax reasons. As the name
suggests, it is a tripartite arrangement in which the target merges with a subsidiary
of the acquirer. Based on which entity is the survivor after such merger, a
triangular merger may be forward (when the target merges into the subsidiary and
the subsidiary survives), or reverse (when the subsidiary merges into the target and
the target survives).
ACQUISITIONS
An acquisition or takeover is the purchase by one company of controlling interest
in the share capital, or all or substantially all of the assets and/or liabilities, of
another company. A takeover may be friendly or hostile, depending on the offeror
company’s approach, and may be effected through agreements between the offeror
and the majority shareholders, purchase of shares from the open market, or by
making an offer for acquisition of the offeree’s shares to the entire body of
shareholders.
5
i. Friendly Takeover
Also commonly referred to as ‘negotiated takeover’, a friendly takeover involves
an acquisition of the target company through negotiations between the existing
promoters and prospective investors. This kind of takeover is resorted to further
some common objectives of both the parties.
ii. Hostile Takeover
A hostile takeover can happen by way of any of the following actions: if the board
rejects the offer, but the bidder continues to pursue it or the bidder makes the offer
without informing the board beforehand.
iii. Leveraged Buyouts
These are a form of takeovers where the acquisition is funded by borrowed money.
Often the assets of the target company are used as collateral for the loan. This is a
common structure when acquirers wish to make large acquisitions without having
to commit too much capital, and hope to make the acquired business service the
debt so raised.
iv. Bailout Takeovers
Another form of takeover is a ‘bail out takeover’ in which a profit making
company acquires a sick company. This kind of takeover is usually pursuant to a
scheme of reconstruction/rehabilitation with the approval of lender banks/financial
institutions. One of the primary motives for a profit making company to acquire a
sick/loss making company would be to set off of the losses of the sick company
against the profits of the acquirer, thereby reducing the tax payable by the acquirer.
This would be true in the case of a merger between such companies as well.
Acquisitions may be by way of acquisition of shares of the target, or acquisition of
assets and liabilities of the target. In the latter case it is usual for the business of the
target to be acquired by the acquirer on a going concern basis, i.e. without
attributing specific values to each asset / liability, but by arriving at a valuation for
the business as a whole. An acquirer may also acquire a target by other contractual
means without the acquisition of shares, such as agreements providing the acquirer
with voting rights or board rights. It is also possible for an acquirer to acquire a
greater degree of control in the target than what would be associated with the
acquirer’s stake in the target, e.g., the acquirer may hold 26% of the shares of the
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target but may enjoy disproportionate voting rights, management rights or veto
rights in the target.
JOINT VENTURES
A joint venture is the coming together of two or more businesses for a specific
purpose, which may or may not be for a limited duration. The purpose of the joint
venture may be for the entry of the joint venture parties into a new business, or the
entry into a new market, which requires the specific skills, expertise, or the
investment of each of the joint venture parties. The execution of a joint venture
agreement setting out the rights and obligations of each of the parties is usually a
norm for most joint ventures. The joint venture parties may also incorporate a new
company which will engage in the proposed business. In such a case, the bye laws
of the joint venture company would incorporate the agreement between the joint
venture parties.
DEMERGERS
A demerger is the opposite of a merger, involving the splitting up of one entity into
two or more entities. An entity which has more than one business, may decide to
‘hive off’ or ‘spin off’ one of its businesses into a new entity. The shareholders of
the original entity would generally receive shares of the new entity. If one of the
businesses of a company is financially sick and the other business is financially
sound, the sick business may be demerged from the company. This facilitates the
restructuring or sale of the sick business, without affecting the assets of the healthy
business. Conversely, a demerger may also be undertaken for situating a lucrative
business in a separate entity. A demerger, may be completed through a court
process under the Merger Provisions, but could also be structured in a manner to
avoid attracting the Merger Provisions.
7
OVERVIEW OF PHARMACEUTICAL INDUSTRY
An Introduction
The pharmaceutical industry in India is among the most highly organized sectors.
This industry plays an important role in promoting and sustaining development in
the field of global medicine. Due to the presence of low cost manufacturing
facilities, educated and skilled manpower and cheap labor force among others, the
industry is set to scale new heights in the fields of production, development,
manufacturing and research. In 2008, the domestic pharma market in India was
expected to be US$ 10.76 billion and this is likely to increase at a compound
annual growth rate of 9.9 per cent until 2010 and subsequently at 9.5 per cent till
the year 2015.The Indian pharmaceutical industry currently tops the chart a mongst
India's science-based industries with wide ranging capabilities in the complex field
of drug manufacture and technology. A highly organized sector, the Indian
pharmaceutical industry is estimated to be worth $ 4.5 billion, growing at about 8
to 9 percent annually. It ranks very high a mongst all the third world countries, in
terms of technology, quality and the vast range of medicines that are manufactured.
It ranges from simple headache pills to sophisticated antibiotics and complex
cardiac compounds, almost every type of medicine is now made in the Indian
pharmaceutical industry. The Indian pharmaceutical sector is highly fragmented
with more than 20,000 registered units. It has expanded drastically in the last two
decades. The Pharmaceutical and Chemical industry in India is an extremely
fragmented market with severe price competition and government price control.
The Pharmaceutical industry in India meets around 70% of the country's demand
for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals,
tablets, capsules, orals, and injectibles. There are approximately 250 large units
and about 8000 Small Scale Units, which form the core of the pharmaceutical
industry in India (including 5 Central Public Sector Units).
The Government has also played a vital role in the development of the India
Software Industry. In 1986, the Indian government announced a new software
policy which was designed to serve as a catalyst for the software industry. This
was followed in 1988 with the World Market Policy and the establishment of the
Software Technology Parks of India (STP) scheme. In addition, to attract foreign
direct investment, the Indian Government permitted foreign equity of up to 100
percent and duty free import on all inputs and products.
8
Industry Trends
The pharma industry generally grows at about 1.5-1.6 times the Gross
Domestic Product growth
Globally, India ranks third in terms of manufacturing pharma products by
volume
The Indian pharmaceutical industry is expected to grow at a rate of 9.9 % till
2010 and after that 9.5 % till 2015
In 2007-08, India exported drugs worth US$7.2 billion in to the US and
Europe followed by Central and Eastern Europe, Africa and Latin America
The Indian vaccine market which was worth US$665 million in 2007-08 is
growing at a rate of more than 20%
The retail pharmaceutical market in India is expected to cross US$ 12-13
billion by 2012
The Indian drug and pharmaceuticals segment received foreign direct
investment to the tune of US$ 1.43 billion from April 2000 to December 2008
Government Initiatives
The government of India has undertaken several including policy initiatives and
tax breaks for the growth of the pharmaceutical business in India. Some of the
measures adopted are:
Pharmaceutical units are eligible for weighted tax reduction at 150% for the
research and development expenditure obtained.
Two new schemes namely, New Millennium Indian Technology Leadership
Initiative and the Drugs and Pharmaceuticals Research Program have been
launched by the Government.
The Government is contemplating the creation of SRV or special purpose
vehicles with an insurance cover to be used for funding new drug research
The Department of Pharmaceuticals is mulling the creation of drug research
facilities which can be used by private companies for research work on rent
Pharma Export
In the recent years, despite the slowdown witnessed in the global economy, exports
from the pharmaceutical industry in India have shown good buoyancy in growth.
Export has become an important driving force for growth in this industry with
more than 50 % revenue coming from the overseas markets. For the financial year
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2008-09 the export of drugs is estimated to be $8.25 billion as per the
Pharmaceutical Export Council of India, which is an organization, set up by the
Government of India. A survey undertaken by FICCI, the oldest industry chamber
in India has predicted 16% growth in the export of India's pharmaceutical growth
during 2009-2010.
Current Scenario
Indian pharmaceutical industry is expected to grow at 19% in 2013. India is
now among the top five pharmaceutical emerging markets. There will be new drug
launches, new drug filings, and Phase II clinic trials throughout the year. On back
of increasing sales of generic medicines, continued growth in chronic therapies and
a greater penetration in rural markets, the domestic pharmaceutical market is
expected to register a strong double-digit growth of 13-14 per cent in 2013.
Moreover, the increasing population of the higher-income group in the country will
open a potential US$ 8 billion market for multinational companies selling costly
drugs by 2015. Besides, the domestic pharma market is estimated to touch US$ 20
billion by 2015, making India a lucrative destination for clinical trials for global
giants. Further estimates the healthcare market in India to reach US$ 31.59 billion
by 2020. According to the estimates, the Indian diagnostics and labs test services,
in view of its growth potential, is expected to reach Rs159.89 billion by 2013. The
Indian market for both therapeutic and diagnostic antibodies is expected to grow
exponentially in the coming years. Findings from the report suggest that more than
60% of the total antibodies market is currently dominated by diagnostic antibodies.
Some of the major Indian pharmaceutical firms, including Sun Pharma, Cadila
Healthcare and Piramal Life Sciences, had applied for conducting clinical trials on
at least 12 new drugs in 2010, indicating a growing interest in new drug discovery
research.
Future Scenario
With several companies slated to make investments in India, the future scenario of
the pharmaceutical industry in looks pretty promising. The country's
pharmaceutical industry has tremendous potential of growth considering all the
projects that are in the pipeline. Some of the future initiatives are:
According to a study by FICCI-Ernst & Young India will open a probable
US$ 8 billion market for MNCs selling expensive drugs by 2015
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The study also says that the domestic pharma market is likely to reach US$
20 billion by 2015
The Minister of Commerce estimates that US$ 6.31 billion will be invested
in the domestic pharmaceutical sector
Public spending on healthcare is likely to raise from 7 per cent of GDP in
2007 to 13 per cent of GDP by 2015
Dr Reddy's Laboratories has tied up with GlaxoSmithKline to develop and
market generics and formulations in upcoming markets overseas
Lupin, a Mumbai based pharmaceutical company is looking to tap
opportunities of about US$ 200 million in the US oral contraceptives market
Due to the low cost of R&D, the Indian pharmaceutical off-shoring industry
is designated to turn out to be a US$ 2.5 billion opportunity by 2012
Advantage India
The Indian Pharmaceutical Industry, particularly, has been the front runner
in a wide range of specialties involving complex drugs' manufacture, development,
and technology. With the advantage of being a highly organized sector, the
pharmaceutical companies in India are growing at the rate of $ 4.5 billion,
registering further growth of 8 - 9 % annually. More than 20,000 registered units
are fragmented across the country and reports say that 250 leading Indian
pharmaceutical companies control 70% of the market share with stark price
competition and government price regulations. Competent workforce: India has a
pool of personnel with high managerial and technical competence as also skilled
workforce. It has an educated work force and English is commonly used.
Professional services are easily available.
Cost-effective chemical synthesis: Its track record of development, particularly in
the area of improved cost-beneficial chemical synthesis for various drug molecules
is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk
drugs.
Legal & Financial Framework: India has a solid legal framework and strong
financial markets. There is already an established international industry and
business community.
Information & Technology: It has a good network of world-class educational
institutions and established strengths in Information Technology.
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Globalization: The country is committed to a free market economy and
globalization. Above all, it has a 70 million middle class market, which is
continuously growing.
Consolidation: For the first time in many years, the international pharmaceutical
industry is finding great opportunities in India. The process of consolidation, which
has become a generalized phenomenon in the world pharmaceutical industry, has
started taking place in India.
MAJOR PHARMACEUTICAL COMPANIES IN INDIA
Some of the leading Indian players by sales (INR Billion)
Company name Sales in INR billion
Cipla 69.77
Ranbaxy Lab 76.86
Dr Reddy's Labs 66.86
Sun Pharma 40.15
Lupin Ltd 53.64
Aurobindo Pharma 42.84
Jubilant Life 26.41
Cadila Health 31.52
Ipca Labs 23.52
Wockhardt 26.50
Ranbaxy
Ranbaxy is among the predominant pharmaceutical companies in India and
was founded in 1961. Ranbaxy is a research based pharma giant and became a
public limited company in 1973. Ranbaxy was recently ranked among the top 10
international pharmaceutical companies in the world have presence across 49
countries. Ranbaxy is also reputed for its 11 state-of-the-art manufacturing
12
facilities in countries like China, India, Brazil, South Africa, and Nigeria. The
company has also won several awards and recognitions for its pioneering
initiatives in the developing markets of the world. Ranbaxy is also a member of the
Indian Pharmaceutical Alliance and Organization of Pharmaceutical Producers of
India. In the present scenario Ranbaxy commands more than 5% share of the
Indian pharmaceutical market. Ranbaxy’s product portfolio is diverse and includes
drugs that cater to nutrition, infectious diseases, gastro-enteritis, pain management,
cardiovascular ailments, dermatology, and central nervous system related ailments.
Ranbaxy’s operations in India are designed under as many as 9 SBUs which take
care of the various categories of medicines and drugs that are manufactured by
Ranbaxy. The company is especially well-known for having the highest research
and development (R&D) budget among pharma companies in the world which is
as high as US$ 100 million. Ranbaxy India operations are handled by 2,500
employees and the company’s market share in India is worth around US$6 billion.
Dr. Reddy's Laboratories
Dr. Reddy's Laboratories is one of the popular pharmaceutical companies
with base in more than 100 countries. The medicines of Dr. Reddy's Laboratories
Limited are easily available all across the globe. Dr. Reddy's Pharmaceutical
Company is very much customer friendly. It takes care of the fact that maximum
people get benefited by the products of this pharmaceutical company. It
commercialized various treatments so as to provide high tech treatment to the
masses. It tries to meet the medical needs of the people.
Though Dr. Reddy's Laboratories is located in various parts of the world, it
has its headquarters in India. The subsidiaries of this company are found at various
countries like US, Germany, UK, Russia, and Brazil. 16 countries have the
representative offices of Dr. Reddy's Laboratories Limited. 21 countries have third
party distribution.
Cipla
Cipla was founded by Khwaja Abdul Hamied in 1935 and was known as
The Chemical, Industrial and Pharmaceutical Laboratories, though it is better
known by the acronym Cipla today. Cipla was registered in August, 1935 as a
public limited enterprise and it began with an authorized capital of Rs. 6 lakh.
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Though set up in 1935, it was only in 1937 that Cipla began manufacturing and
marketing its pharmaceutical products. Today, the company has its facilities spread
across several locations across India such as Mumbai, Goa, Patalganga,
Kurkumbh, Bangalore, and Vikhroli.Apart from its strong presence in the Indian
market, Cipla also has an extensive export market and regularly exports to more
than 150 countries in regions such as North America, South American, Asia,
Europe, Middle East, Australia, and Africa. For the year ended 31st March, 2007
Cipla’s exports were worth approximately Rs. 17,500 million. Cipla is also
considerably well-known for its technological innovation and processes for which
the company received know-how loyalties to the tune of Rs. 750 million during
2006-07.
Sun Pharmaceuticals
Sun Pharmaceuticals was set up in 1983 and the company started off with
only 5 products to cure psychiatric illness. Sun Pharma is known worldwide as the
manufacture of specialty Active Pharmaceuticals Ingredients and formulations.
However, the company is also concerned with chronic treatments such as
cardiology, psychiatry, neurology, gastroenterology, diabetology, and respiratory
ailments. Active Pharmaceuticals Ingredients (API) includes peptides, steroids,
hormones, and anti-cancer drugs and their quality is internationally approved. The
international offices of Sun Pharmaceuticals Industries Ltd. are located in British
Virgin Islands, Russia, and Bangladesh. In India, the offices are in Vapi, Silvassa,
Panoli, Ahmednagar, and Chennai.
There are 3 major group companies of Sun Pharmaceuticals Industries are:
Caraco Pharmaceuticals Laboratories (based in Detroit, Michigan)
Sun Pharmaceuticals Industries Inc. (Michigan)
Sun Pharmaceuticals (Bangladesh)
Aurobindo Pharma
Aurobindo Pharma, an India-based private pharmaceutical company having
presence around the world. Aurobindo Pharma was set up in the year 1986 and
started its operations in 1988-89 in Pondicherry, India. Now, the company is
14
headquartered at Hyderabad, India. Aurobindo Pharma is one of the most respected
generic pharmaceuticals and active pharmaceutical ingredients (API)
manufacturing company of the world. Aurobindo Pharma operates in over 100
countries across the world. Further, the pharmaceutical major markets are over 180
APIs and 250 formulations throughout these destinations. This Indian
pharmaceutical major has filed over 110 DMFs and 90 ANDAs for the USA
market. So far, Aurobindo has received 45 ANDA approvals (both final and
tentative) from USA alone.
Aurobindo Pharma products cover segments like –
Antibiotics,
Anti-Retro Virals
CVS
CNS
Gastroenterological Anti-Allergic
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OBJECTIVE OF STUDY
1) To study the definition of acquisition, and merger their types in
general, underlying rationales.
2) To find the required conclusion and suggestion for better M&A
policy.
3) Procedure under Indian companies act 1956, for Merger
4) Rationale for acquiring Ranbaxy, despite the troubles faced by Ranbaxy in
Foreign markets?
5) Studying merger and acquisition with example of recent case
WHY COMPANIES MERGE AND ACQUIRE?
There are numerous reasons why one company chooses to merge with or acquire
another. The literature suggests that the underlying motivation to merge is driven
by a series of rationales and drivers. Rationales consist of the higher-level
reasoning that represents decision conditions under which a decision to merge
could be made. Drivers are mid-level specific (often operational) influences that
contribute towards the justification or otherwise for a merger.
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SOME UNDERLYING RATIONALES
There are several primary rationales that determine the nature of a proposed
merger or acquisition. These rationales are:
Strategic rationale -The strategic rationale makes use of the merger or acquisition
in achieving a set of strategic objectives. As discussed above, a merger to secure
control of capacity in the chosen sector is an example. Mergers and acquisitions
are usually not central in the achievement of strategic objectives, and there are
usually other alternatives available. For example, company A might want to gain a
foothold in a lucrative new expanding market but lacks any experience or expertise
in the area. One way of overcoming this may be to acquire a company that already
has a track record of success in the new market. The alternative might be to
develop a research and development division in the new market products in an
attempt to catch up and overtake the more established players. This alternative
choice has obvious cost and time implications. In the past it has only really been
achieved successfully where the company wishing to enter the new market already
produces goods or has expertise in a related area. As an example, an established
producer of electronic goods might elect to divert some of its own resources into
developing a new related highly promising area such as digital telephones. A large
scale example is the electronics giant Sony in taking the strategic decision to create
a research and development facility in electronics games consoles in order to
develop a viable competitive base in this area despite there being a relatively small
number of very powerful and established competitors in the area.
Speculative rationale -The speculative rationale arises where the acquirer views the
acquired company as a commodity. The acquired company may be a player in a
new and developing field. The acquiring company might want to share in the
potential profitability of this field without committing itself to a major strategic
realignment. One way to achieve this is to buy established companies, develop
them, and then sell them for a substantial profit at a later date. This approach is
clearly high risk, even if the targets are analyzed and selected very carefully. A
major risk, particularly in the case of small and highly specialized targets, is that a
significant proportion of the highly skilled people who work for the target may
leave either before, during or immediately after the merger or acquisition. If this
does happen the actual (rather than apparent) value of the target could diminish
significantly within a very short time. Another form of speculative rationale is
where the acquirer purchases an organization with the intention of splitting the
17
acquired organization into pieces and selling these, or major parts of them, for a
price higher than the cost of acquisition. The speculative rationale is also high risk
in that it is very vulnerable to changes in the environment. Apparently attractive
targets, purchased at inflated (premium) cost, may soon diminish significantly in
value if market conditions change.
Management failure rationale -Mergers or acquisitions can sometimes be forced on
a company because of management failures. Strategies may be assembled with
errors in alignment, or market conditions may change significantly during the
implementation timescale. The result may be that the original strategy becomes
misaligned. It is no longer appropriate in taking the company where it wants to go
because the company now wants to go somewhere else. Such strategy
compromises can arise from a number of sources including changing customer
demand and the actions of competitors. In such cases, by the time the strategy
variance has been detected, the company may be so far off the new desired
strategic track that it is not possible to correct it other than by merging with or
acquiring another company that will assist in correcting the variance.
Financial necessity rationale -Mergers and acquisitions are sometimes required for
reasons of financial necessity. A company could misalign its strategy and suddenly
find that it is losing value because shareholders have lost confidence. In some
cases the only way to address this problem is to merge with a more successful
company or to acquire smaller more successful companies.
Political rationale -The impact of political influences is becoming increasingly
significant in mergers and acquisitions. In the UK between 1997 and 2002, the
government instructed the merger of a number of large government departments in
order to rationalize their operations and reduce operating costs. Government policy
also encouraged some large public sector organizations to consider and execute
mergers. These policies resulted in the merger of several large health trusts. By
2002 several large universities were also considering merging as a result of
changes in government funding policy.
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MERGER DRIVERS SOME TYPICAL MERGER DRIVERS ARE
CONSIDERED BELOW:
A requirement for specialist skills and/or resources-A company sometimes seeks to
merge with or acquire another company because the company is keen to acquire a
specific skill or resource owned by the other company. This type of merger or
acquisition often occurs where a smaller company has developed high-value
specific skills over a number of years and where it would take an acquiring
company a long time and a great deal of investment to develop these same skills.
National and international stock markets-Variations in share prices can act as
powerful drivers for mergers and acquisitions. A stock market boom tends to make
acquisition activity more attractive because it becomes easier to use the acquirer’s
shares as the basis for the transaction rather than cash. Alternatively a falling stock
market can lead to potential targets being valued lower, and therefore they become
more attractive for a cash purchase.
Globalization drivers-Increasing globalization, facilitated to a considerable extent
by the growth and development of IT, tends to encourage mergers as the
geographical separation between individual companies becomes less of an obstacle
to organizations working together as single entities, both within the same countries
and across international boundaries.
National and international consolidation-This type of driver occurs where there are
compatible companies available for merger or acquisition within the same general
geographical area(s).
Diversification drivers-A company may want to diversify into new areas or sectors
as a means of balancing the risk profile of its portfolio. Diversification was a
primary driver of many mergers and acquisitions in the 1960s, 1970s and 1980s.
More recently there has been a discernible move away from diversification as a
risk-management strategy. Numerous researchers and practitioners have argued
that diversification and non-related acquisition does not in fact reduce the risk
profile faced by an organization. This argument is supported by the assertion that
the more diversified an organization is, the less it has developed the specific tools
and techniques needed to address individual problems relating to any one of its
range of business activities.
Industry and sector pressures-In the 1990s, mergers became very commonplace in
some sectors. Large-scale mergers were particularly popular in the oil exploration
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and production sector. In one notable case British Petroleum Amoco merged with
Exxon Mobil on the same day that Total and Petrofina also merged.
Capacity reduction-The total production in a given sector may exceed or be near to
demand so that the value of the product is low. In some cases it may be desirable
for a company to merge with or acquire a competitor in order to secure a greater
degree of control over total sector output. If company A acquires company B,
company A has achieved greater control over total sector production and also has
the opportunity to maintain more of its own production facilities and employees
within the new company at the expense of company B.
A drive for increased management effectiveness and efficiency. A particular
company may have a deficit in management expertise in one or more key
areas. Such areas may be ‘key’ because they are central to a new growth area
the company is seeking to develop, or because they relate to the achievement
of new strategic objectives that have just been established.
A drive to acquire a new market or customer base. A merger or acquisition
can often provide a fast-track route to new and established markets. If a
large high street bank merges with another bank, each bank acquires the
customer base of the other bank. In some cases the acquired customer base
may represent a market that was previously unavailable For example one
bank may have previously specialized in business customers and the other
bank in domestic customers. The new arrangement provides a more balanced
customer base.
A drive to buy into a growth sector or market. Companies sometimes use
mergers or acquisitions as a way to enter a desirable new market or sector,
particularly if they expect that market or sector to expand in the future.
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INTRODUCTION OF PHARMA COMPANY BEFORE MERGER
SUN PHARMACEUTICAL INDUSTRIES LIMITED
It is a multinational pharmaceutical company headquartered in Mumbai,
Maharashtra that manufactures and sells pharmaceutical formulations and active
pharmaceutical ingredients (APIs) primarily in India and the United States. The
company offers formulations in various therapeutic areas, such
ascardiology, psychiatry, neurology, gastroenterology and diabetology. It also
provides APIs such as warfarin, carbamazepine, etodolac, and clorazepate, as well
as anti-cancers, steroids, peptides, sex hormones, and controlled substances.
Sun Pharmaceuticals was established by Mr. Dilip Shanghvi in 1983 in Vapi with
five products to treat psychiatry ailments. Cardiology products were introduced in
1987 followed by gastroenterology products in 1989. Today it is the largest chronic
prescription company in India and a market leader in psychiatry, neurology,
cardiology, orthopedics, ophthalmology, gastroenterology and nephrology. The
2014 acquisition of Ranbaxy will make the company the largest pharma company
in India, the largest Indian pharma company in the US, and the 5th largest specialty
generic company globally. Over 72% of Sun Pharma sales are from markets
outside India, primarily in the US. The US is the single largest market, accounting
for about 60% turnover in all, formulations or finished dosage forms, account for
93% of the turnover. Manufacturing is across 26 locations, including plants in the
US, Canada, Brazil, Mexico and Israel. In the US, the company markets a large
basket of generics, with a strong pipeline awaiting approval from the U.S. Food
and Drug Administration (FDA). Sun Pharma was listed on the stock exchange in