TABLE OF CONTENTS

SR.NO

TOPIC

PAGE NO

INTRODUCTION TO MERGER AND

ACQUISITION

1-6

OVERVIEW OF PHARMACEUTICAL
INDUSTRY

7-14

OBJECTIVE OF THE STUDY

15-25

RELEVANCE OF THE STUDY

26-33

DATA COLLECTION

34-52

CONCLUSION

53-56

LIMITATION

57

BIBLIOGRAPHY

58

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 macroeconomic 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
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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 Videshs 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
2

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 selfsufficiency. 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
companys 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 offerees shares to the entire body of
shareholders.

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
acquirers stake in the target, e.g., the acquirer may hold 26% of the shares of the

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.

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.

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
8

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
9

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.

10

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
11

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. Ranbaxys 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.
Ranbaxys 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 companys 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.
12

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
Ciplas 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
13

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

14

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.
15

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
16

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.

17

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 acquirers
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
18

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.

19

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
20

1994 in an issue oversubscribed 55 times. The founding family continues to hold a

majority stake in the company. Today Sun Pharma is the second largest and the
most profitable pharmaceutical company in India, as well as the largest
pharmaceutical company by market capitalization on the Indian exchanges. The
Indian pharmaceutical industry has become the third largest producer in the world
in terms of volumes and is poised to grow into an industry of $20 billion in 2015
from the current turnover of $12 billion] In terms of value India still stands at
number 14 in the world.
ACQUISITIONS AND JOINT VENTURES
Sun Pharma has complemented growth with select acquisitions over the last two
decades. In 1996, Sun purchased a bulk drug manufacturing plant
at Ahmednagar from Knoll Pharmaceuticals and MJ Pharma's dosage plant at
Halol that are both U.S. FDA approved today. In 1997, Sun acquired Tamil Nadu
Dadha Pharmaceuticals Limited (TDPL) based in Chennai, mainly for their
extensive gynecology and oncology brands. Also in 1997, Sun Pharma initiated
their first foray into the lucrative US market with the acquisition of Caraco
Pharmaceuticals, based in Detroit. In 1998, Sun acquired a number of respiratory
brands from Natco Pharma. Other notable acquisitions include Milmet Labs and
Gujarat Lyka Organics (1999), Pradeep Drug Company (2000), Phlox Pharma
(2004), a formulation plant at Bryan, Ohio and ICN, Hungary from Valeant
Pharma and Able Labs (2005), and Chattem Chemicals (2008). In 2010, the
company acquired a large stake in Taro Pharma, Inc., a mongst the largest generic
derma companies in the US, with operations across Canada and Israel. The
company currently owns ~ 69% stake in Taro, for about $260 million. In 2011, Sun
Pharma entered into a joint venture with MSD to bring complex or differentiated
generics to emerging markets (other than India).In 2012, Sun announced
acquisitions of two US companies: DUSA Pharmaceuticals Inc.,a dermatology
device company; and generic pharma company Inc. In 2013, the company
announced an R&D joint venture for ophthalmology with the research company,
Intrexon. On 6 April 2014, Sun Pharma announced that it would acquire 100%
of Ranbaxy Laboratories Ltd, in an all-stock transaction, valued at $4 billion.
Japan's Daiichi Sankyo held 63.4% stake in Ranbaxy. After this acquisition, which
is expected to close by end 2014, Sun Pharma would be the largest pharmaceutical
company in India, the largest Indian Pharma company in the US, and the 5th
largest generic company worldwide In December 2014, the Competition
Commission of India approved Sun Pharma's $3.2 billion bid to buy Ranbaxy
21

Laboratories, but ordered the firms to divest seven products to ensure the deal
doesn't harm competition. Sun Pharmaceutical Industries Ltd, India's largest drug
maker by sales, said on Tuesday it has agreed to buy Glaxo SmithKline's opiates
business in Australia to strengthen its pain management portfolio.

Ranbaxy Laboratories Limited (BSE: 500359) is an Indian

multinational pharmaceutical company that was incorporated in India in 1961. The
company went public in 1973 and Japanese pharmaceutical company Daiichi
Sankyo acquired a controlling share in 2008. In 2014, Sun Pharma acquired the
entire 63.4% share of Ranbaxy making the conglomerate worlds fifth largest
specialty generic pharma company. Ranbaxy exports its products to 125 countries
with ground operations in 43 and manufacturing facilities in eight countries. In
2011, Ranbaxy Global Consumer Health Care received the OTC Company of the
year award. In the Brand Trust Report 2012, Ranbaxy was ranked 161st among
India's most trusted brands and subsequently, according to the Brand Trust
Report 2013, Ranbaxy was ranked 225th among India's most trusted brands. In
2014 however, Ranbaxy was ranked 184th among India's most trusted brands
according to the Brand Trust Report 2014, a study conducted by Trust Research
Advisory, a brand analytics company. Ranbaxy was started by Ranbir Singh and
Gurbax Singh in 1937 as a distributor for a Japanese company Shionogi. The name
Ranbaxy is a portmanteau of the names of its first owners Ranbir and Gurbax. Bhai
Mohan Singh bought the company in 1952 from his cousins Ranbir and Gurbax.
After Bhai Mohan Singh's son Parvinder Singh joined the company in 1967, the
company saw an increase in scale

22

ACQUISITIONS
In June 2008, Daiichi-Sankyo acquired a 34.8% stake in Ranbaxy, for a value $2.4
billion. In November 2008, Daiichi-Sankyo completed the takeover of the
company from the founding Singh family in a deal worth $4.6 billion by acquiring
a 63.92% stake in Ranbaxy. Ranbaxy's Malvinder Singh remained as CEO after the
transaction. The addition of Ranbaxy Laboratories extends Daiichi-Sankyo's
operations already comprising businesses in 22 countries. The combined
company is worth about US$30 billion. In 2009 it was reported that
former Novartis Senior Vice-President Yugal Sikri would lead the India operations
of Ranbaxy Laboratories. On 7 April 2014 India based Sun Pharmaceutical and
Japan based Daiichi Sankyo jointly announced the sale of entire 63.4% share
from Daiichi Sankyo to Sun Pharma in a $4 billion all share deal. Under these
agreements, shareholders of Ranbaxy, will receive 0.8 share of Sun Pharmaceutical
for each share of Ranbaxy. After this acquisition, the partner Daiichi-Sankyo will
hold a stake of 9% in Sun Pharmaceutical. The combination of Sun Pharma and
Ranbaxy creates the fifth-largest specialty generics company in the world and the
largest pharmaceutical company in India.
TAKEOVER OF RANBAXY BY DAIICHI SANKYO
Introduction
Ranbaxy Laboratories Limited was incorporated in 1961, promoted by Ranbir
Singh and Gurbax Singh. It was listed on Bombay Stock Exchange on 1973 and it
became one of the largest pharmaceutical companies in India.
Rational of takeover
In 2001 India liberalised foreign direct investment (FDI) norms for the
pharmaceutical sector. As a result, 100% FDI was allowed through the 'automatic
route' (without prior permission) in pharmaceutical manufacturing (except in
sectors using DNA technology). The FDI policy did not make any distinctions
between 'greenfield' (new facilities) and 'brownfield' (takeover of existing
facilities) investments. However, during the last 12 years MNCs did not make any
major effort to undertake Greenfield investments in India, largely opting for
brownfield investments, i.e., acquisition of Indian companies. Ranbaxy at the time
of takeover was among the top 100 pharmaceuticals in the world and that it was the
15th fastest growing company in India. Daiichi Sankyo was Japan's third-largest
drug maker. Daiichi Sankyo had its operations in 21 countries at the time of the
23

deal. The deal with Ranbaxy would expand its presence to 56 countries and
provide it the platform to launch its innovator products at competitive prices and
expand its global operations.
Trigger point the binding agreement
In the month of June, 2008, Daiichi entered into a share purchase and share
subscription agreement with Ranbaxy and the controlling shareholders (i.e.
Promoters), to acquire controlling stake in Ranbaxy. It acquired 129,934,134 fully
paid-up equity shares representing 34.81% of the total fully paid-up equity capital
of Ranbaxy at a Negotiated price of INR 737/-per fully paid up equity share in
cash. As per Regulations 10 and 12 of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover
Code), acquisition of hares/ voting rights in a listed company, which in aggregate,
gave the acquirer 15% or more of the voting rights in the company or acquisition
of control over a listed company, would immediately trigger an open offer
requirement. On June 27, 2008, Daiichi made the open offer at a price of INR 737
per share to all shareholders of the Company. Daiichi acquired 11.42% shares from
the stock market & raised equity stake in Ranbaxy up to 63.92%.

PROCEDURE UNDER THE COMPANIES ACT, 1956 FOR MERGER/

AMALGAMATION OF COMPANIES
Even though most provisions of CA 2013 have been notified by the Ministry of
Corporate Affairs, the provisions relating to M&A have not been notified as of
April 1, 2014. Therefore, the scheme of merger/ amalgamation would have to be
executed under the provisions of CA 1956.
Sections 391 to 394 of the CA 1956 lay down the procedure for mergers and
amalgamations.
following approval of the scheme by the boards of the merging and surviving
companies, the companies are required to file the scheme with the High Court
situated in the jurisdiction of their respective registered offices.
prior to the scheme being presented before the court, listed companies are also
required to file the proposed scheme with the stock exchanges where the equity
shares of such companies are listed, for approval.

24

 on receiving the scheme, the High Court shall give directions fixing the date,
time and venue and quorum for the members meeting and appoint a Chairman to
preside over the meeting and submit a report to the Court. The scheme should be
approved by a majority of the shareholders representing at least three-fourths in
value of the shareholders of each of the companies, present and voting.
the resolution of the shareholders approving the scheme should be filed with the
Registrar of Companies within 30 days of passing the resolution.
Within 7 days from the date of the meeting of shareholders, the chairman of the
general meeting is required to submit a report to the High Court, setting out the
number of persons who attended personally or by proxy and the percentage of
shareholders who voted in favor of the scheme as well as the resolution passed by
the meeting.
Within 7 days of the chairman submitting the report, the merging and surviving
companies shall make a joint petition to the High Court for approving the scheme.
on receipt of the petition for amalgamation under Section 391 of the CA 1956,
the court is required to give notice of the petition to the Regional Director,
Company Law Board (RD) and will take into consideration, any representations
made by him.
The Ministry of Corporate Affairs, has by way of General Circular 01/ 2014
dated January 15, 2014, instructed the RD to obtain inputs and comments from the
Income Tax Department, while furnishing their report to the court.71 This is to
ensure that the proposed scheme of amalgamation has not been designed in such a
way as to defraud the tax department.
If there are no objections to the scheme from the RD or any other person entitled
to oppose the scheme, the court may after hearing the petition, pass an order
approving the scheme.
the companies may then file the courts order with the Registrar of Companies in
their respective jurisdictions, as required under Section 394(3) of the CA 1956.
It would be interesting to analyze the situation where the M&A provisions under
CA 2013 are notified prior to approval of the scheme by the High Courts. In such a
case, the Ministry of Corporate Affairs may issue a notification exempting all
companies which have filed their schemes prior to the notification of the M&A
25

provisions under CA 2013 from the requirement of following the process for
scheme of merger under CA 2013

RELEVANCE OF THE STUDY

SUN PHARMA AND RANBAXY MERGER

Sun Pharmaceutical Industries Limited (Sun Pharma) and Ranbaxy Laboratories
Limited (Ranbaxy) set the Indian pharmaceutical industry abuzz with excitement
on April 6, 2014 when they released a press statement announcing that they had
entered into definitive documents under which Sun Pharma would acquire 100
percent of Ranbaxy (Transaction).
1.The Transaction which was a heavily guarded secret until the public
announcement, is to be effected by means of a merger/ amalgamation between Sun
Pharma and Ranbaxy. The combined entity, upon successful consummation of the
Transaction, would be the fifth-largest specialty generics company in the world
and the largest pharmaceutical company in India.
2. The scale of operations of the resulting entity would be massive, with operations
spanning across 65 countries and 47 manufacturing facilities across 5 continents,
26

as well as a sizeable portfolio of specialty and generic products sold across the
world, including 629 abbreviated new drug applications (ANDAs).
The announcement of the Transaction was of particular interest to the
pharmaceuticals industry as it came at a crucial time for Ranbaxy. Ranbaxys
manufacturing facilities in Toansa, Paonta Sahib, Dewas and Mohali in India have
been under the scanner of the United States Food and Drug Administration
(USFDA) following observation of certain lapses in complying with current
good manufacturing practices during the course of inspection of these facilities by
the USFDA.5 As a result, the USFDA had prohibited Ranbaxy from distributing
drugs manufactured using active pharmaceutical ingredients (APIs) from these
facilities, in the United States. The USFDA sanctions on Ranbaxy and certain other
companies in India have caused the multi-billion dollar Indian generic
pharmaceutical industry severe loss in international markets. The acquisition by
Sun Pharma may result in a turnaround for the beleaguered Ranbaxy and is
therefore, welcome news for Ranbaxy as well as its Japanese parent Daiichi
Sankyo Co Ltd (Daiichi). The Competition Commission of India (CCI) by
way of its order dated December 5, 2014 approved the Transaction subject to
satisfaction of certain conditions.
The Transaction comes in the wake of various big ticket deals entered, or proposed
to be entered into by pharmaceutical companies across the globe, such as Novartis
and Glaxo SmithKlines (~USD 23 billion) business swap, Pfizers USD 100
billion offer for AstraZeneca, Bayers acquisition of Mercks consumer care
business for USD 14.2 billion and Valeants USD 47 billion offer for Allergan. On
the home front, Sun Pharma itself has been gearing up for an acquisition drive,
with its open offer to the shareholders of Zenotech Laboratories Limited
immediately after the announcement of the Transaction.
Several reasons may be attributed to such M&A activity by pharma companies,
some of them being:
i. Attaining the scale necessary in those therapeutic areas where they intend to
focus, by building a broader product portfolio and services;
ii. Pressure by governmental agencies, insurance companies in North America and
Europe to reduce cost of medicines, due to difficulty in meeting mounting
healthcare costs etc.

27

Building a product portfolio is research-intensive and cost-prohibitive for

pharmaceutical companies. Therefore, pharmaceutical companies may opt to
achieve their objectives through inorganic growth by way of M&A. Further, M&A
activity in certain industries such as pharmaceuticals follows a cyclical trend, with
acquisitions ramping up over five-year periods. This is evident from the spurt of M
& A in 2008-2009 with Pfizers acquisition of Wyeth, Mercks acquisition of
Schering-Plough Corp, Novartis acquisition of Alcon Inc., as well as Daiichis
acquisition of Ranbaxy.
Indian pharmaceutical companies hold considerable advantage over foreign
pharmaceutical manufacturers in terms of cost-effectiveness of manufacturing
processes as well as research and development. Thus, the Transaction has the
potential to give rise to a formidable force in pharmaceutical manufacturing
leading to wider presence and broader product portfolio. This M&A Lab analyzes
in detail, the legal, regulatory, tax and commercial considerations behind the
Transaction.
A CRUCIAL TIME FOR RANBAXY
Ranbaxy Laboratories was established in 1961 and is a member of the Daiichi
Sankyo group (Tokyo, Japan), a leading global pharma innovator. Daiichi Sankyo
is also a majority shareholder of Ranbaxy, with 63.4% outstanding
shares. Ranbaxy has ground operations in 43 countries and 21 manufacturing
facilities located in 8 countries, and its impressive portfolio of products is sold in
over 150 countries. Although the company met its sales targets for the latest
financial year, it has been incurring a net loss and suffering a decline in net
worth since 2011, which can be attributed to a few key circumstances. These
include the settlement amount of US$ 515 million paid to the US Department of
Justice (DOJ) in May 2013 after civil and criminal charges were brought against it
for misrepresentation of data and irregularities found in two of its facilities in
India, diminution in the value of its investments and a loss on foreign currency
option derivatives. Thus, the merger of the company with Sun Pharma comes at a
crucial time when Ranbaxy is struggling to improve its financial position.

28

REGULATORY APPROVALS

By August 2014, Sun Pharma and Ranbaxy had obtained clearances from
both the stock exchanges in India (NSE and BSE) as well as from anticompetition authorities in all applicable markets except India and the U.S.
The CCI (Competition Commission of India) approved the acquisition of
Ranbaxy by Sun Pharma on December 5, 2014 on the precondition that
seven brands, constituting less than 1% of total revenues of the combined
entity in India, be divested in order to prevent the merger from negatively
impacting competition in the domestic market.
On February 2, 2015, both companies announced that the U.S. FTC(Federal
Trade Commission) had granted early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976(HSR Act)
on the precondition that Sun Pharma and Ranbaxy divest Ranbaxys
interests in generic minocycline tablets and capsules to an external third
party. As per the proposed settlement, Ranbaxys generic minocycline assets
will be sold to Torrent Pharmaceuticals, which markets generic drugs in the
U.S.
As of February 22, 2015, the companies were awaiting approval of the High
Court of Punjab and Haryana, India. Both Sun Pharma and Ranbaxy will
also have to meet the pre-conditions set forth by the CCI and U.S. FTC for
the merger to be closed.

THE OUTCOME AND RESULTING SYNERGIES

The annual report of Sun Pharma for FY 2013-14 highlights the following points
of significance to note about this merger, and the opportunities that are to result
from it:

The new entity will be the worlds fifth largest specialty-generic pharma
company with sales of US$ 4.2 billion on a pro-forma basis for CY 2013.
The entity will have a presence in 55 countries and be supported by 40
manufacturing facilities worldwide, with a highly complementary portfolio
of products for both acute and chronic treatments.
29

In the U.S., the merged entity will be No.1 in the generic dermatology
market and No. 3 in the branded dermatology market. It will also become the
largest Indian pharma company operating in the U.S.
The pro-forma U.S. revenues of the merged entity for CY 2013 are
estimated at US$ 2.2 billion and the entity will have a strong potential in
developing complex products through a broad portfolio of 184 ANDAs
(Abbreviated New Drug Application) awaiting US FDA approval, including
many High-value FTF (First to File) opportunities.
The merger will make Sun Pharma the largest pharma company in India
with pro-forma revenues of US$ 1.1 billion for CY 2013 and over 9%
market share. The acquisition will also enable Sun Pharma to enhance its
edge in acute care, hospitals and OTC businesses with 31 brands among
Indias top 300 brands and a better distribution network.
The merger will also improve Sun Pharmas global footprint in emerging
pharma markets like Russia, Romania, Brazil, Malaysia and South Africa,
offering opportunities for cross-selling and better brand-building. The
merged entity will have combined pro-forma revenues of US$ 0.9 billion for
CY 2013 in emerging pharma markets.
Pro-forma EBITDA of the merged entity for CY 2013 is estimated at US$
1.2 billion.
Synergy benefits of US$ 250 million are expected to be realized by the third
year following the closure of the deal, driven by a combination of revenue,
procurement and supply chain efficiencies and other cost synergies.
Post-deal closure, Daiichi Sankyo (the majority shareholder of Ranbaxy)
will become the second largest shareholder of Sun Pharma with a 9% stake.
Daiichi Sankyo has also agreed to indemnify the merged entity for costs and
expenses incurred in Ranbaxys recent settlement with the US Department
of Justice in regards to its Toansa facility in India.

30

DETAILS OF THE DEAL

A. Sun Pharma
Sun Pharma is an Indian origin, specialty pharmaceutical company, established in
1983 with a portfolio of five psychiatric medications and a manufacturing facility
in Vapi, Gujarat. Sun Pharma established its first research center in 1991, driving
further growth for the company. It went public in 1994 and is currently listed on
the Bombay Stock Exchange (BSE) as well as the National Stock Exchange
(NSE). Approximately 64 percent of the shareholding of Sun Pharma is still held
by the promoters and promoter group. In addition to its formulations in various
therapeutic areas, Sun Pharma also manufactures APIs to facilitate the manufacture
of complex formulations such as anti-cancers, peptides, sex hormones and
controlled substances.
In 30 years of its existence, Sun Pharma has become one of the worlds most
profitable pharmaceuticals manufacturers. Sun Pharma has complemented its
31

growth by way of extensive acquisitions and joint ventures in India and abroad.
The acquisition of Tamil nadu Dadha Pharma has helped Sun Pharmas entry into
oncology and gynecology. The companys initial investment in and subsequent
takeover of Gujarat Lyka Organic Ltd provided access to a manufacturing facility
for cephalexin for supply to the international market. Sun Pharmas 2002acquisition of MJ Pharma has provided Sun Pharma a USFDA and UKMHRA
approved plant which is currently a manufacturing base for the European generic
market. In 1997, Sun Pharma invested in Caraco, a Detroit-based manufacturer of
generics and in 2010, completely acquired Caraco, enabling its entry into the U.S
generic market. The acquisition of majority stake in Taro Pharmaceutical
Industries Limited in 2010, an established multinational generics manufacturer,
increased the companys U.S presence, as well as in Israel and Canada. In addition
to developed markets, Sun Pharma has also focused on emerging markets with its
joint venture with MSD.

B. Ranbaxy
Established in 1961, Ranbaxy is an Indian company listed on the BSE, NSE and
the Luxembourg stock exchange, with ground operations in 43 countries and 21
manufacturing facilities spread across 8 countries. It is engaged in development,
manufacture and marketing of pharmaceutical products and APIs. In 1988,
Ranbaxys Toansa plant achieved USFDA approval, thereby enabling it to
manufacture pharmaceuticals for the US market.
Ranbaxy has also engaged in acquisitions to further its growth objectives. The
companys acquisition of Crosland Research Laboratories, Rima Pharmaceuticals
etc. provided it a foothold in niche, high-value markets in the European Union. The
32

acquisition of RPG Aventis helped Ranbaxy achieve a turnover of USD 1 billion,

making it the first Indian company to reach such global status.
In 2008, Daiichi entered into definitive agreements with the erstwhile promoters of
Ranbaxy (the Singh family) to acquire a controlling stake in Ranbaxy. This was an
off-market transaction, pursuant to which Daiichi was required to make an open
offer to the public shareholders of Ranbaxy. Pursuant to the conclusion of the open
offer, Daiichi acquired an additional 20 percent equity stake in Ranbaxy resulting
in an aggregate shareholding of 63.92 percent in Ranbaxy.
Following the acquisition of controlling stake by Daiichi however, Ranbaxy has
had a number of entanglements with the USFDA for issues related to qualitycontrol, making it difficult to keep a clean name. Ranbaxys plants at Dewas and
Paonta Sahib were slapped with import alerts by the USFDA in 2008.In May 2013,
Ranbaxy also pleaded guilty to felony charges in the US, relating to the
manufacture and distribution of certain adulterated drugs made at Ranbaxys
manufacturing facilities in India and had to pay a fine of USD 500 million. Further,
in September 2013, the companys Mohali facility was also banned from
manufacturing pharmaceuticals which were intended to be exported to the US.
This was followed by the ban on the Toansa facility in Punjab for lapses in quality
control and adherence to procedure.

C. Daiichi
Daiichi is a global pharmaceutical company with corporate origin in Japan. In
2008, Daiichi acquired a controlling stake in Ranbaxy. However, the value of
Daiichis investments has halved over the years, as Ranbaxy has not been able to
ensure compliance of its factories supplying to the US, with USFDA guidelines.
33

DATA COLLECTION
RESEARCH OBJECTIVE:

Merging Company Ranbaxy Surviving Company Sun Pharma Share Swap Ratio
0.8 share of Sun Pharma of face value of INR 1/- each will be allotted to the
shareholders of Ranbaxy for each share of INR 5/- each held by them in Ranbaxy.
Implied value per share INR 457 for each Ranbaxy share, representing an 18
percent premium to Ranbaxys 30-day volume weighted average share price 30
Total equity value of the Transaction USD 3.2 billion (USD 4 billion including
payment to NCD holders)

34

A BRIEF CHRONOLOGY OF EVENTS PERTAINING TO THE

TRANSACTION IS PROVIDED BELOW:
Date Event April 6, 2014 Resolutions regarding the amalgamation agreement and
other matters passed at the Board of Directors meetings of Sun Pharma and
Ranbaxy
April 30, 2014 Andhra Pradesh High Court issues notices to the Securities and
Exchange Board of India (SEBI), BSE, NSE, Sun Pharma, Ranbaxy and Silver
Street Developers LLP to maintain status quo, based on a writ petition alleging
insider trading in the shares of Ranbaxy in the days prior to the announcement of
the Transaction
May 11, 2014 Daiichi files a petition before the Andhra Pradesh High Court
requesting it to vacate the 'status quo' order
31 May 13, 2014 Sun Pharma moves the Supreme Court against the status quo
order of the Andhra Pradesh High Court.
May 13, 2014 FIPB to take up Daiichis FDI proposal in Sun Pharma
May 21, 2014 Supreme Court directs the Andhra Pradesh High Court to decide the
matter and posts the case for hearing on May 27, 2014 May 24

35

2014 Andhra Pradesh High Court vacates status quo order July 11, 2014 Approval
for the scheme from BSE and NSE
August 22, 2014 Court-convened extraordinary general meeting of shareholders of
Sun Pharma conducted pursuant to an order dated August 5, 2014 of the High
Court of Punjab and Haryana
August 27, 2014 Competition Commission of India (CCI) directs the Company
to publish the details of the proposed combination in the prescribed format
September 4, 2014 CCI invites comments from public in respect of the Transaction
September 19, 2014 Court-convened extraordinary general meetings of
shareholders Ranbaxy to be conducted pursuant to an order dated August 5, 2014
of the High Court of Punjab and Haryana
December 5, 2014 CCI grants conditional approval to the Transaction
December-end, 2014 / January 2015 (estimated) Merger/ amalgamation completed
with approval from high courts in India, the Indian central government and
relevant state governments, stock exchanges and approval under the HartScottRodino Act in the US.
KEY TERMS OF THE DEAL
Ranbaxy will merge into Sun Pharma pursuant to a scheme of merger under
Companies Act, 1956. At present, Daiichi owns approximately 63.41 percent of the
shares of Ranbaxy. Both Daiichi and the promoters of Sun Pharma have
irrevocably agreed to vote in favour of the Transaction at the general meetings of
Ranbaxy and Sun Pharma respectively.
Under the terms of the Transaction, 0.8 share of Sun Pharma of face value of INR
1/- each will be allotted to the shareholders of Ranbaxy for each share of INR 5/held by them in Ranbaxy. Like other subsidiaries of Ranbaxy, Ranbaxy
(Netherlands) B.V., which is a wholly owned subsidiary of Ranbaxy, will also
become a subsidiary of Sun Pharma pursuant to the Transaction.
A. Shareholding Post Consummation of Transaction
Post closing of the Transaction, Daiichi will become the second largest shareholder
in Sun Pharma with a stake of 9 percent, while the shareholding of the promoter
group of Sun Pharma will stand reduced to ~55 percent. The public shareholders of
36

Ranbaxy are expected to hold 14 percent and existing public shareholders of Sun
Pharma will hold 22 percent in Sun Pharma, post-closing of the Transaction.
B. Daiichi Director
Daiichi shall also have the right to nominate one director on the board of Sun
Pharma. This right will terminate when Daiichis shareholding falls below 5
percent of the equity shareholding of Sun Pharma.
C. Indemnity
Ranbaxy has recently received a subpoena from the United States Attorney for the
District of New Jersey requiring Ranbaxy to produce certain documents relating to
issues previously raised by the USFDA with respect to Ranbaxys Toansa facility
in Punjab, India. In connection with the Transaction, Daiichi has agreed to
indemnify Sun Pharma and Ranbaxy for, among other things, certain costs and
expenses that may arise from the proceeding. Such indemnity may be essential for
the consummation of the Transaction as any liability which may arise as a result of
an adverse order by the judicial authority may have implications for the successor
entity post the merger.
In addition, under the scheme, Sun Pharma is required to indemnify each present or
former officer or director of Ranbaxy or any of its subsidiaries, for a period of 6
years from the effective date of the scheme, to the extent such officers and
directors are indemnified under the policies of Ranbaxy and its subsidiaries, in the
manner and to the extent mutually agreed between Sun Pharma and Ranbaxy.
D. Global Depositary Receipts of Ranbaxy
The board of directors of Sun Pharma may elect, at its sole discretion, to pursue
either of the below options for the global depositary receipts of Ranbaxy
(GDRs).
i. Equity option: effect the exchange and cancellation of the GDRs for a
proportional number of equity shares of Sun Pharma based on the Share Swap
Ratio; or
ii. Cash-out option: cash out existing GDR holders following the
effectiveness of the scheme.

37

E. ESOPs of Ranbaxy
Upon the scheme being approved by the High Courts, Sun Pharma shall issue stock
options (Sun Pharma ESOPs) to employees of Ranbaxy holding stock options of
Ranbaxy (Ranbaxy ESOPs), which shall entitle the eligible employees to
purchase equity shares of Sun Pharma. The number of Sun Pharma ESOPs issued
shall equal the product of the number of Ranbaxy ESOPs (whether vested or
unvested) outstanding at the time the scheme comes into effect, multiplied by the
Share Swap Ratio, with any fractional shares rounded down to the next higher
whole number of shares (i.e. for every Ranbaxy ESOP held by an eligible
employee which entitles such eligible employee to acquire 1.00 equity share in
Ranbaxy, such eligible employee will be conferred a Sun Pharma ESOP to acquire
0.80 equity shares in Sun Pharma).
The terms and conditions applicable to the Sun Pharma ESOPs shall be no less
favorable than those provided under the Ranbaxy ESOPs. Such Sun Pharma
ESOPs will be issued under a new employee stock option scheme created by Sun
Pharma, inter alia for the purpose of granting stock options to the eligible
employees pursuant to the scheme

38

F. Reduction of Share Capital and Reserves and Surplus of Ranbaxy

An amount equal to the balance lying to the debit in statement of profit and loss in
the books of Ranbaxy on the close of March 31, 2014 shall be adjusted/ reduced as
follows in accordance with Sections 391 to 394, sections 78 and 100 to 103 of the
Companies Act, 1956 (CA 1956) and Section 52 of the Companies Act, 2013
(CA 2013) and any other applicable provisions of law:
i. Firstly, against reduction of the capital reserve account of Ranbaxy amounting to
INR 1.762 billion;
ii. Secondly, against reduction of securities premium account of Ranbaxy
amounting to INR 35.014 billion;

39

iii. Thirdly, against reduction of the general reserve of Ranbaxy amounting to INR
5.519 billion, to the extent available or required;
iv. The balance, if any remaining in the debit in statement of profit and loss in the
books of Ranbaxy shall be carried in the books of Ranbaxy as on March 31, 2014.
G. Appointed Date and Effective Date
The appointed date implies the date of amalgamation, that is, the date from which
the undertaking including assets and liabilities of the transferor company vest in
the transferee company. Typically, accounts of the transferor company on the
appointed date form the basis for valuation of shares and determination of the share
exchange ratio. Appointed date is relevant for the purpose of assessment of income
of the transferor and transferee companies. The effective date is the date on
which the formalities of the merger / amalgamation are completed, i.e., when the
certified copy of the High Courts order is filed with the registrar of companies or
the final approvals in relation to the scheme have been obtained. From the effective
date, the merger becomes effective.

40

SUN PHARMAS RATIONALE FOR ACQUIRING RANBAXY, DESPITE

THE TROUBLES FACED BY RANBAXY IN FOREIGN MARKETS?

A. Increased Market Penetration and Entry into New Markets

A merger or amalgamation is essentially an integration of synergies and one of the
prime considerations for the Transaction includes the integration of product
portfolio (including APIs), supply chain and manufacturing. Ranbaxy has a
significant presence in the Indian market (21 percent sales) and in the US (29
percent sales). Sun Pharma on the other hand, has a strong presence in the US (60
percent of sales) and India (23 percent), while the rest of the world accounts for 17
percent sales of Sun Pharma. Thus, the combined entity will be more diversified
with the US, the rest of the world and India contributing 47 percent, 31 percent and
22 percent of sales respectively. In the emerging markets (50 percent of Ranbaxys
sales), it provides a platform which complements Sun Pharmas strengths. Through
the Transaction, along with the emerging markets, Sun Pharma will also gain entry
into Japan, a market with high growth potential and low penetration of generic
drugs. Sun Pharma has estimated that it will save ~USD 250 million in the third
year of the merger/ amalgamation because of operating synergy. The Transaction
will create the No. 1 drug company in India with a market share of approximately
9% and the fifth largest generic drug firm globally.
B. Diversified Product Portfolio
A combined Sun Pharma and Ranbaxy will have a diverse, highly complementary
portfolio of specialty
And generic products marketed globally, including 445 ANDAs. Additionally, the
combination will create one of the leading dermatology platforms in the United
States. Sun Pharma will also get access to Ranbaxys new product pipeline
including a generic version of AstraZenecas heartburn drug Nexium. A diversified
product portfolio is important from a business risk control perspective, with
emerging markets leaning towards generic drugs and customers in developed
markets preferring to use branded products. Further, rising healthcare costs and
increasing awareness of the efficacy of generics has also led to a surge in demand
for generics in the developed world.
Mr. Dilip Shanghvi, the promoter of Sun Pharma, had mentioned that resolving
Ranbaxys regulatory troubles would be his priority, saying For Sun, it is not the
41

size of the deal which mattersit is the quality of business (we acquire) and its
integration.He further said that Sun Pharmas primary focus will be to comply
with regulatory standards, a key issue Ranbaxy is facing now, and make it healthy
before jumping into the business priorities.
Sun Pharma is believed to have chalked out a detailed turnaround plan for Ranbaxy
and prepared a three pronged strategy which includes integration of supply chain
and field force for enhanced efficiency and productivity, resolution of regulatory
issues and higher growth through synergy in domestic and emerging markets. It is
believed that Sun Pharma is targeting a three- to four-year period after the closure
of the transaction to engineer the full turnaround of Ranbaxy.

LEGAL AND REGULATORY CONSIDERATIONS

The exchange control implications of the Transaction
A. FDI in Pharmaceuticals History
Prior to 2011, foreign direct investment (FDI) up to 100 percent was permitted in
the pharmaceutical sector under the automatic route. However, following the
acquisitions of various home grown Indian pharmaceutical companies such as
Ranbaxy by Daiichi in 2008, Shanta Biotech by Sanofi Aventis of France in 2009
and Piramal Health Cares formulation business by Abbott Laboratories of the US
in 2010 68, the Indian Government adopted a cautious approach in 201169
bringing all the investment in the brownfield pharmaceutical sector, under the
government approval route. The Indian Governments actions may have been
driven by the concern that the entry of foreign pharmaceutical manufacturers into
the Indian market may drive up prices of essential drugs, leading to basic
healthcare becoming expensive and therefore, inaccessible to a large chunk of the
Indian population.
B. FDI Issues and Approval from the Foreign Investment Promotion Board
Under Circular 1 of 2014 notified by the Department of Industrial Policy and
Promotion (FDI Policy), foreign investment in the pharmaceuticals sector is
permitted up to 100 percent in both greenfield and brownfield projects.70 In a
greenfield project, FDI of up to 100 percent is permitted under the automatic route
and in a brownfield project, FDI of up to 100 percent is permitted with approval
from the Foreign Investment Promotion Board (FIPB). Also, for both such kind
42

of investments, non-compete clause is not allowed except in special

circumstances with the approval of the FIPB. It is to be noted that the general
approach of the FIPB seems to be positive as it has been granting approvals to
most of the FDI proposals in brownfield projects.
As discussed above, as a result of the Transaction, Daiichi will become the second
largest shareholder in Sun Pharma with a stake of ~9 percent. Since Daiichis
holding in Sun Pharma, on successful consummation of the Transaction will be a
brownfield investment, Daiichi shall be required to obtain approval from the FIPB.
Similarly, approval of the FIPB would also be required for the other nonresident
shareholders of Ranbaxy obtaining shares in Sun Pharma.
C. ODI Filings
Ranbaxy has a subsidiary in the Netherlands, which will be owned by Sun Pharma
post the successful consummation of the Transaction. Under the provisions of
RBIs Master Circular on Direct Investment by Residents in Joint Venture (JV) /
Wholly Owned Subsidiary (WOS) Abroad dated July 1, 2013 (ODI
Regulations), Sun Pharma would be required to report the details of such change
in shareholding pattern of the overseas subsidiary to the RBI, within 30 days of the
approval of the decision by the board of the subsidiary in terms of local laws of the
host country and include the same in the Annual Performance Report required to
be forwarded to the AD Category-I bank.
Further, under the ODI Regulations, an Indian party is permitted to invest in
overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not
exceeding 400 percent of the net worth as on the date of last audited balance sheet
of the Indian party. Post successful consummation of the Transaction, Sun Pharma
would have to make filings in Form ODI along with all prescribed enclosures/
documents and ensure that its combined investments in JVs and WOS abroad does
not exceed 400 percent of its net worth as on the date of its last audited balance
sheet. If an Indian company proposes to directly invest more than 400 percent of its
net worth in an offshore JV or WOS, the RBI may consider such proposal under
the approval route. However, any financial commitment exceeding USD 1 billion
(or its equivalent) in a financial year by an Indian party would require prior
approval of the RBI even when the total financial commitment of the Indian party
is within the limit of 400% of its net worth as per the last audited balance sheet.

43

THE COMPLIANCES TO BE CARRIED OUT BY SUN PHARMA AND

RANBAXY WITH RESPECT TO SEBI AND THE STOCK EXCHANGES
A. Stock Exchange
Sun Pharma and Ranbaxy both being listed on the BSE as well as the NSE, are
required to comply with the existing Clause 24(f) of the Listing Agreement which
mandates them to file a proposed scheme with the stock exchange, for approval, at
least a month before it is presented to the court or tribunal.
B. SEBI Circulars
Further, under the provisions of the SEBI Circular No. CIR/CFD/DIL/5/2013 dated
February 4, 201373 (February 4 Circular), read with the provisions of SEBI
Circular No. CIR/CFD/DIL/8/2013 dated May 21, 2013 (May 21 Circular), there
are certain obligations required to be met by listed companies:
i. Paragraph 5.2 of the February 4 Circular requires the listed company to place the
valuation report obtained from an independent chartered accountant before their
audit committee for approval.
ii. Companies listed on any stock exchange having nationwide terminals and/ or a
regional stock exchange are required to choose the stock exchange having
nationwide trading terminals as the designated stock exchange for the purpose of
44

coordinating with SEBI, under Paragraph 5.3 of the February 4 Circular read with
Paragraph 5 of the May 21 Circular.
iii. Under Clause 5.4 of the February 4 Circular, listed companies shall be required
to: (a) include the observation letter of the stock exchanges, in the notice sent to
the shareholders seeking approval of the scheme; and (b) bring the same to the
notice of the High Court at the time of seeking approval of the scheme.
iv. Under Clause 5.11 of the February 4 Circular, the listed company shall disclose
the draft scheme and all the relevant documents on its website immediately upon
filing of the draft scheme with the stock exchanges. It shall also disclose the
observation letter of the stock exchanges on its website within 24 hours of
receiving the same.
v. in addition, under Clause 5.13 of the February 4 Circular, all
complaints/comments received by SEBI on the draft scheme shall be forwarded to
the designated stock exchange, for necessary action and resolution by the
company. The company shall submit to stock exchanges a Complaints Report
which shall contain the details of complaints/comments received by it on the draft
scheme from various sources prior to obtaining observation letter from stock
exchanges on the draft scheme.
C. Insider Trading Regulations
Further, there are certain disclosure obligations on Ranbaxys directors, officers,
promoters or persons belonging to the promoter group under the provisions of
Regulation 13 of SEBI (Prohibition of Insider Trading) Regulations, 1992 (SEBI
Insider Trading Regulations) which are required to be made with the stock
exchange on which the company is listed, in case of change in shareholding or
voting rights of such persons.
D. Takeover Code
Since the Transaction is structured by way of merger, Sun Pharma would be
exempt from the obligation to make an open offer, since under the provisions of
Regulation 10(1)(d) of the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (Takeover Code), an acquisition pursuant to a scheme of
arrangement involving the target company as a transferor company or as a
transferee company, including merger pursuant to an order of a court, is exempt
from the requirement to make an open offer under Regulations 3 and 4 of the
Takeover Code subject to certain reporting requirements.
45

Ranbaxy and Daiichi hold 46 percent and 20 percent in Zenotech Laboratories

Limited (Zenotech). Since the Transaction would involve Sun Pharma acquiring
55 percent of the shareholding in Ranbaxy, post consummation of the Transaction,
it would enable Sun Pharma to exercise 25 percent voting rights indirectly in
Zenotech. This would be considered as indirect acquisition of voting rights under
the provisions of Regulation 5 of the Takeover Code. Accordingly, Sun Pharma on
April 11, 2014, made an open offer to the equity shareholders of Zenotech for
shares constituting 28.1 percent of the fully diluted voting capital of Zenotech.

THE CHALLENGES FACED BY THE TRANSACTION IN RESPECT OF

THE SEBI INSIDER TRADING REGULATIONS?
On April 30, 2014, the Andhra Pradesh High Court ordered the BSE and NSE not
to approve the Transaction until it decided on a petition alleging insider trading in
the shares of Ranbaxy in the days leading to the announcement of the Transaction.
The court issued the order pursuant to a writ petition filed by a group of investors
who claimed that entities with prior knowledge of the deal illegally profited to the
extent of INR 2.85 billion. Shares of Ranbaxy, which is majority-owned by Japans
Daiichi-Sankyo, saw an unusual increase in price and turnover during six trading
days before the deal was announced on April 6.The price of Ranbaxy shares rose
by almost 33 percent between March 28, 2014 and April 4, 2014. Retail investors
say that Ranbaxy and Sun Pharma, as well as Silver Street Developers LLP, an
entity related to Sun Pharma had used price sensitive information to their benefit,
and to the detriment of the retail investors.
Silver Street Developers LLP held 1.64 percent stake in Ranbaxy as on March 31,
2014.Sun Pharma clarified that the purchase of purchase of shares of Ranbaxy by
Silver Street Developers LLP does not violate insider trading rules, since both
partners of Silver Street Developers LLP are wholly owned subsidiaries of Sun
Pharma. Hence, all benefits flowing from the investment in Ranbaxy shall accrue
to Sun Pharma. Further, it is also understood that such shares held by Silver Street
Developers LLP shall be cancelled and no further shares of Sun Pharma will be
issued to Silver Street upon the completion of the merger.
Based on the writ petition, the Andhra Pradesh High Court, issued notices to SEBI,
BSE, NSE, Sun Pharma, Ranbaxy, Daiichi Sankyo and Silver Street Developers
LLP to maintain status quo. On May 13, 2014, Sun Pharma moved the Supreme
Court of India against the status quo ordered by the Andhra Pradesh High Court in
46

the Transaction. On May 21, 2014, the Supreme Court of India, after hearing the
appeal, directed the Andhra Pradesh High Court to decide the issue and posted the
case for hearing on May 27, 2014.On May 24, 2014, the Andhra Pradesh High
Court vacated the status quo order it issued, clearing the way for the BSE, the NSE
and SEBI to scrutinize the scheme and grant their assent to the Transaction.
Under the provisions of the SEBI Insider Trading Regulations, an insider is
prohibited from dealing in securities of a listed company, either on his behalf or on
behalf of any other person, when in possession of any unpublished price sensitive
information.Silverstreet Developers LLP may be considered an insider by virtue
of its shareholding in Ranbaxy. However, with the Andhra Pradesh High Court
exonerating Silver Street, all claims as to insider trading have been dropped.

THE OTHER REGULATORY ISSUES INVOLVED IN THE

TRANSACTION?
A. Pharmaceutical Licenses
Upon successful consummation of the Transaction, the licenses issued by the Drug
Controller General of India and the State Drug Licensing Authorities (such as State
Food and Drug Administration) to Ranbaxy for all of its products will be
extinguished. Sun Pharma will be required to make fresh applications to the State
Drug Licensing Authorities for manufacturing and sale of Ranbaxys products
under the Drugs and Cosmetics Act, 1940 read with the Drugs and Cosmetics
Rules, 1945. In addition, Sun Pharma would also have to obtain a no-objection
certificate from the Drug Controller General of India for exporting its products, if
such products include unapproved or approved new drugs or prohibited drugs.
B. Indirect Tax Registrations
Post the consummation of the Transaction, Sun Pharma would be required to
obtained fresh VAT registrations in the states where Ranbaxys products are sold.
C. Successor Liability
In case of a merger of two corporations, a successor corporation will be liable for
the debts and liabilities of the predecessor corporation. In the event of the
successful consummation of the merger between Ranbaxy and Sun Pharma, the
surviving entity, i.e., Sun Pharma would have to shoulder the debts and liabilities
of Ranbaxy which existed prior to the merger. As discussed earlier, Ranbaxy had
47

recently received a subpoena from the United States Attorney for the District of
New Jersey in respect of USFDA compliance of its plants, as well as several other
regulatory actions that are still pending. Daiichi may have agreed to indemnify Sun
Pharma against all liabilities arising out of such regulatory actions and/ or existing
liabilities of Ranbaxy. However, the scope of such indemnity is not known as the
definitive documents are not available in the public domain. In the event of any
losses arising out of previously existing liabilities of Ranbaxy, Sun Pharma would
have to make a claim against Daiichi for indemnity against such loss.
D. Delisting
The shares of Ranbaxy will be delisted from the NSE and BSE if the merger is
successfully consummated
E. Change of Control Provisions under Contracts or Financing Arrangement
Considering that Ranbaxy has operations spanning continents, it has entered into a
large number of agreements with suppliers, financiers, lenders etc. The terms of
these agreements may dictate that change of control of Ranbaxy shall not occur
without prior notification to/ consent of the parties to such agreements.
Accordingly, Ranbaxy may have to obtain prior consent/ notify the opposite parties
to its agreements, prior to entering into the Transaction.

TAX CONSIDERATIONS
I. Is the Transaction tax-exempt?
Under the provisions of Section 47(vi) of the ITA, any transfer, in a scheme of
amalgamation, of a capital asset by the amalgamating company to the
amalgamated company if the amalgamated company is an Indian company, will
not be considered as a transfer for the purpose of assessment of capital gains.

Section 2 (1B) of the ITA defines amalgamation as follows:

amalgamation, in relation to companies, means the merger of one or more
companies with another company or the merger of two or more companies to form
one company (the company or companies which so merge being referred to as the
amalgamating company or companies and the company with which they merge or
48

which is formed as a result of the merger, as the amalgamated company) in such a

manner that,
i. All the property of the amalgamating company or companies immediately before
the amalgamation becomes the property of the amalgamated company by virtue of
the amalgamation
ii. All the liabilities of the amalgamating company or companies immediately
before the amalgamation become the liabilities of the amalgamated company by
virtue of the amalgamation
iii. shareholders holding not less than three-fourths in value of the shares in the
amalgamating company or companies (other than shares already held therein
immediately before the amalgamation by, or by a nominee for, the amalgamated
company or its subsidiary) become shareholders of the amalgamated company by
virtue of the amalgamation, otherwise than as a result of the acquisition of the
property of one company by another company pursuant to the purchase of such
property by the other company or as a result of the distribution of such property to
the other company after the winding up of the first-mentioned company
As a result of the Transaction, (i) the property of Ranbaxy immediately before the
merger will become the property of Sun Pharma, (ii) all liabilities of Ranbaxy
immediately before the merger will become the liabilities of of Sun Pharma and
(iii) current shareholders of Ranbaxy will become the shareholders of Sun Pharma
and hence, this should result in a tax-neutral transaction for both Ranbaxy and its
shareholders.
II. What are the tax implications for holders of ESOPs and GDRs?
A. ESOPs
The Transaction should have tax implications for stock option holders of Ranbaxy.
Post the consummation of the transaction, the Ranbaxy ESOPs will be cancelled
and the holders of the Ranbaxy ESOPs will be issued Sun Pharma ESOPs in
exchange. While exchange of ESOPs may be considered as transfer as per the ITA,
if Ranbaxy ESOPs do not have cost of acquisition, an argument can be made that
such exchange should not be subject to tax. Upon vesting of the Sun Pharma
ESOPs, the difference in fair market value of Sun Pharma ESOPs and the exercise
price may be taxed as salary income in the hands of such stock option holders.
Further, upon transfer of the Sun Pharma shares, the difference between the
49

consideration received and fair market value of Sun Pharma ESOPs may be taxable
as capital gains.
B. GDRs
Sun Pharma would have two options to deal with the GDRs the equity option and
the cash-out option, as mentioned in the section titled Details of the Deal. One
view is that the equity option is akin to conversion of the GDRs into equity shares.
The report of the Committee to Review the FCCBs and Ordinary Shares (Through
Depository Receipt Mechanism), 1993 had recommended that the conversion of
depository receipts not be treated as a taxable event. However, currently there are
no specific provisions in the ITA which exempt the conversion of GDRs from
taxation and hence its a taxable event. The other view is that depositary will
receive Sun Pharma shares in exchange for Ranbaxy shares which is a tax neutral
transaction and then cancel Ranbaxy GDRs against in specie distribution of Sun
Pharma shares. The second leg will be a tax exempt transaction for the GDR
holders since transfer will be from nonresident to non-resident but may be taxable
for the depositary since depositary may transfer shares of an Indian company to
depositary receipt holder off the floor of the exchange. To that extent, there is an
ambiguity with respect to the tax implications of the equity option.
The cash-out option would effectively be extinguishment of the GDRs. Under
Section 2(47) of the ITA, transfer in relation to capital asset is defined to include
the extinguishment of any rights in such capital asset. The cash-out option may
hence be treated as a transfer of capital asset from a nonresident to a resident.
Section 115AC of the ITA provides for taxation of capital gains arising from
transfer of global depository receipts. Therefore, capital gains arising from the
exercise of the cash-out option of the GDRs may be taxable at 10 percent in the
hands of the GDR holders under Section 115AC of the ITA.

CHALLENGES and FUTURE GROWTH

Challenges
Every industry has its own sets of advantages and disadvantages under which they
have to work; the pharmaceutical industry is no exception to this. Some of the
challenges the industry faces are:

50

Regulatory obstacles
Lack of proper infrastructure
Lack of qualified professionals
Expensive research equipments
Lack of academic collaboration
Underdeveloped molecular discovery program
Divide between the industry and study curriculum

Over the past decade, pharmaceutical companies have entered a difficult period
where shareholders, the market, and regulators have created significant pressures
for change within the industry. The core issues for most of drug companies are
declining productivity of in-house R & D, patent expiration of number of block
buster drugs, increasing legal and regulatory concern, and pricing issue. As a result
larger pharmaceutical companies are shifting to new business model with greater
outsourcing of discovery services, clinical research and manufacturing. Current
global financial conditions and the threat of a broad recession accelerated the
timetable for implementing transformational changes in global organizations, as
the industry confronts lower corporate stock prices and an increasingly cost-averse
customer. Leaders of the largest global pharmaceutical companies recognize the
need for transformational change in their organizations, but will need to move
swiftly to ensure sustained growth.
Transformations in the business model of larger pharmaceutical industry
spell more opportunities for Indian pharmaceutical companies. Pharmaceutical
production costs are almost 50 percent lower in India than in western nations,
while overall R&D costs are about one-eighth and clinical trial expenses around
one-tenth of western levels.
The Indian stock market may be dreading a possible recession but Indian
pharma companies seem unfazed by slowdown fears. Riding on better sales in the
domestic and export markets, Indian pharmaceutical industry is expected to
continue with its good performance. Today Indian pharmaceutical Industry can
look forward to the years to come, with great expectations. There are opportunities
in expanding the range of generic products as more molecule come off patent,
outsourcing, and above all, in focusing into drug discovery as more profits come
from traditional plays. At the same time, the Indian pharma industry would have to
contend with several challenges, particularly the following

51

 Effects of new product patent

Drug price control
Regulatory reforms
Infrastructure development
Quality management and Conformance to global standards.

Future Growth
India will see the largest number of merger and acquisitions (M&A) in the
pharmaceutical and healthcare sector, according to consulting firm Grant Thornton.
A survey conducted across 100 companies has revealed that one- fourth of the
respondents were optimistic about acquisitions in the pharmaceutical sector.
The Indian pharmaceutical market is expected to grow at a CAGR of 15.3 per cent
during 2011-12 to 2013-14, according to a Barclays Capital Equity Research report
on India Healthcare & Pharmaceuticals. The growth of Indian pharma companies
will also be driven by the fastest growing molecules in the diabetes, skincare, and
eye care segment. In addition, the pharmaceutical companies such as Cipla,
Ranbaxy, Dr Reddy's Labs and Lupin might soon be part of the government's
ambitious 'Jan Aushadhi' project. In an attempt to commercialize the project, the
Government is likely to rope in the private sector to bulk-procure generic drugs
from them. There are 117 Jan Aushadhi stores across the country and the plan is to
expand to at least 600 in the next two years and 3,000 by 2016.

52

CONCLUSION

Sun Pharmaceutical Industries Ltd is buying Ranbaxy Laboratories Ltd through an

all-stock merger in which five shares of Ranbaxy will fetch four shares of Sun
Pharma. Based on their closing prices on Friday, a share of Ranbaxy valued at
Rs.460 will get four-fifths of a Sun Pharma share valued at Rs.458. It seems a fair
exchange ratio but Ranbaxys shares have risen sharply since 27 March. The
market appears to not only have got wind of the deal but the ratio as well, since the
share levels match the ratio so well. That is something for the market regulator to
investigate, if the rise in Ranbaxys share price was a mere coincidence or if
somebody had insider information on the deal and acted on it. If we consider the
closing prices as on 27 March, Ranbaxy shareholders would have got a 29.3%
premium, which seems fair.

53

WHO BENEFITS AND HOW

Daiichi Sankyo Co. Ltd: Daiichi is the parent company of Ranbaxy since it
bought the Indian drug maker from its earlier promoters. Daiichi faced criticism
after Ranbaxys plants came under the US Food and Drug Administrations
(FDAs) scanner shortly after the acquisition. Even after so many years, Ranbaxys
inability to overcome its FDA-related problems has put pressure on its promoters.
With Sun Pharma acquiring Ranbaxy, Daiichi is relieved of the burden of
managing Ranbaxys problems. It will hold a 9% stake in Sun Pharma, as a result
of its current stake in Ranbaxy, though one can expect it to sell that stake
eventually. On a conference call, however, Sun Pharmas management indicated
they plan to work together with Daiichi to grow the business. Ranbaxy
Along with the acquisition news, Ranbaxy announced that it received a
subpoena dated 13 March (why this was not disclosed earlier is something that
should bother shareholders) asking for information about its Toansa facility that
recently received an import alert from the US FDA. That this is material is evident
from the fact that Daiichi has agreed to indemnify Sun Pharma from any costs or
expenses that may arise from this subpoena. Eventually, this news would have
emerged in the public domain and may have further damaged investor sentiment.
But things change now for Ranbaxy. This is the end of the road for Ranbaxy as it
exists but it perhaps is the best outcome for the company and its shareholders,
given the circumstances.
Ranbaxy is a company with a very bright future in the US generics market, with a
sizeable drug pipeline and some big product launches in the waiting, but for
frequent run-ins with the US drug regulator. The fact that these glitches continued
even after a new management was in control was a big surprise for investors. It is
now up to the new owners to ensure that the plants become and remain compliant
with US FDA norms. Sun Pharma: Sun Pharmas managing director Dilip
Shanghvi has acquired a reputation for acquiring companies in trouble at a good
price, and then turning around their operations. Ranbaxy will certainly be a big
challenge. The merger will see Sun Pharmas revenue jump by a healthy 40% but
its operating profit will rise by a meagre 7.5%, based on pro forma 2013 financials.
Its operating profit margin will decline from 44.1% to 29.2%. Thus, the merger
will have a negative effect on its performance in the near term. Pro forma financial
statements are designed to reflect a proposed change, such as an acquisition, or to
emphasize some figures when a company issues an earnings announcement to the
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public. In terms of size, Sun Pharma will now have a pro forma 2013 revenue of
Rs.25,911 crore and an operating profit of Rs.7,577 crore, with a net profit of
Rs.1,710 crore. Ranbaxys profits have been hit by provisions related to inventory
write-offs and foreign exchange-related provisions.
So, what does Sun Pharma hope to gain from this acquisition? Sun Pharma has said
it expects to get $250 million, or Rs.1, 550 crore, in merger-related synergies by
the third year after the acquisition is completed. That is fairly significant and these
savings should be from sales growth, procurement and supply chain efficiencies.
But this merger is not really about scale and its benefits. In the Indian market, the
combined entitys portfolio becomes much larger, covering more therapeutic areas.
The challenge is that Ranbaxys margins have been relatively lower and that is
unlikely to satisfy Sun Pharma. The company management has said they will work
on improving its margins. In the US market, the priority will be to resolve all of
Ranbaxys FDA-related troubles to ensure that every major generic product in
Ranbaxys pipeline makes it to market. These are crucial factors, in addition to
their efforts to grow their combined business in Europe and emerging markets, to
ensure this acquisition works out in Sun Pharmas favor.
Shareholders Ranbaxys share is evenly placed based on the merger ratio
and no further gains are likely to accrue to its shareholders. Ranbaxys
shareholders will now become Sun Pharma shareholders. They can choose to stay
invested if they believe that Sun Pharma will be able to make a much bigger and
better combination, or exit at this point. Sun Pharmas shareholders may blink at
the immediate effect of equity dilution of 16.4% and the effect on its profitability
in the near term. This is reflected in the stock market reaction to the
announcement: On Monday, Ranbaxys shared declined by 3.1%, while Sun
Pharmas share faced some volatility but closed with a decent gain of 2.7%. There
is also the matter of uncertainty on what further lies ahead for Ranbaxys
regulatory troubles and how soon Sun Pharma can resolve them. Running counter
to these fears should be Sun Pharmas ability to make this acquisition work in the
long run. The companys successful track record in turning around acquired
companies should give investors some hope that it can pull off the same magic at
Ranbaxy as well.
The Transaction promises to bring some cheer to the Indian pharmaceutical
industry. However, post the consummation of the Transaction, Sun Pharma has
plans to gradually phase out the fifty-year old Ranbaxy brand, with Ranbaxy drugs
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sold in the United States being gradually rebranded as Sun Pharma treatments. The
brand is likely to continue to be present in other markets.
The interest of the pharmaceuticals industry in the Transaction is fueled by
two reasons the size and reach of the resulting entity which may lead to anti-trust
issues in India as well as abroad, and the strategy to be adopted by Sun Pharma to
turn around Ranbaxy. Mr. Dilip Shanghvi, the managing director of Sun Pharma is
well known for acquiring and turning around distressed companies. The industry
waits with bated breath to see whether Mr. Shanghvi will repeat his magic, this
time with Ranbaxy. Only time will tell whether Mr. Shanghvis magic will convert
Ranbaxy into a crown jewel or a white elephant for Sun Pharma.

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LIMITATION:
As merger and acquisition is a vast topic. I have tried to limit the scope to merger
and acquisition in Indian pharma industry
I have gone through in detail a case of sun pharma taken over Ranbaxy Laboratories
And the coverage of the discussion in topic have been useful in bringing out
certain highlight however due to time and resource constraint the study has only
confined to as describe above case.

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BIBLIOGRAPHY
Books:

Mergers, Acquisition & Corporate Restructuring

Magazines:

Journal of Pharmaceutical Industry

Websites:

www.google.com
www.managementparadise.com
www.healthlibrary.com
www.wikipedia.org
www.sunpharma.com

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