final thesis report- ravi

1

APPROVED E-MAIL FROM THESIS DEPARTMENT

Dear k. Ravi Babu,

This is to inform that the thesis topic "-WHAT MOTIVATES PHARMACEUTICAL

COMPANIES TO GO FOR MERGERS AND ACQUISITIONS" AT KRR DRUGS &

INTERMEDIATES PVT LTD (FORMERLY MEDEVA LABORATORIES PVT. LTD) ", as

proposed by you, has been approved. This email is an official confirmation that you would be

doing your thesis work under the guidance of Mr. -VAMSI KRISHNA. Make it a

comprehensive and complete work; the primary objective of a thesis should be value addition

to the existing knowledge base. Please ensure that the objectives as stated by you in your

synopsis are met using the appropriate research design and methodology.

Remember to register yourself at the library with Ms. Swarna Latha by giving details about

your specialization and batch details and get for yourself an Alumni ID Number. If you are

visiting the campus, you can as well take a print out of this mail and produce it in front of the

librarian for easier registration. You must always use the thesis title and id number as approved

and registered with us. DO not forget to attach this letter including the signature of any

departmental member or any other internal guide for eventual authentication of the final thesis.

You are required to correspond with us by sending at least six response sheets to

[email protected] (format attached along with this mail) at regular

intervals, before 31ST MAY 2009 (the last date for thesis submission). Fine for late submission

will be applicable in your case, as per the institutional norm. Lastly, also please do remember

to communicate with the thesis department and any and all other thesis related affairs at <only>

[email protected]. Please do disregard the earlier email ids that you have

corresponded with Regards

MNVVK Chaitanya

The IIPM Think Tank,

IIPM Tower, 6-3-252/2, Erramanjil,

Banjara Hills

Hyderabad – 500 082

Office: +91 040 30611221

Fax: +91 040 23300213

ID NO: HYD/FIN/FW04019 PGP/FW/07-09/FIN

mailto:[email protected]

mailto:[email protected]

http://upload.wikimedia.org/wikipedia/en/9/9a/Iipmlogo.jpg

2

Acknowledgement

The process of making this thesis has been a great learning experience for me and I would like

to thank all people who have give me their precious time, share their experience, knowledge

and helping me understand the “WHAT MOTIVATES PHARMACEUTICAL COMPANIES

TO GO FOR MERGERS AND ACQUISITIONS”

I am thankful to the Dean and the Management of IIPM for providing me with great pool of

resources through knowledge, encouragement, facilities and services throughout my MBA

course.

I am greatly indebted to my guide, Mr. V. VAMSI KRISHNA (M.S.), Executive Director for

giving me the opportunity to do the thesis and for this timely help and co-operation during the

completion of my study. It was my pleasure to be associated with such as esteemed person. I

am grateful to him for his co-operation and helping me in completion of the thesis.



3

DECLARATION

I hereby declare that all the information that have been collected, analyzed and Documented

for the project is authentic possession of me. I would like to categorically mention that the

work here has neither purchased nor acquired by any other unfair means. However for the

purpose of the project, information already compiled in many sources has been utilized

(K.RAVI BABU)



4

CONTENTS

Page No.

CHAPTER 1

THESIS SYNOPSIS............................................................................................... 07

1.1 Objective of the Study

1.2 Need of the study

1.3 Methodology of the Study

1.4 Scope of the Study

1.5 Justification for choosing a particular research proposal

CHAPTER 2

INTRODUCTION................................................................................................. 11

2.1 Definition of Mergers & Acquisition

2.2 Types of Mergers & Acquisition

2.3 Distinction between Mergers and Acquisitions

2.4 Indian Top Ten Mergers and Acquisition Deals

2.5 Different Types of Valuation Matters

CHAPTER 3

INDUSTRY PROFILE.......................................................................................... 29

3.1 Pharma Industry

3.2 The Key Players in the Pharma Industry

3.3 The Growth Scenario

3.4 Investment in the Industry

3.5 Profitability and Cost Structure

3.6 Exports

3.7 Larger Deals in the Pharma Industry

CHAPTER 4

COMPANY PROFILE.......................................................................................... 53

4.1 Introduction

4.2 Promoters Profile

4.3 Financial highlights



5

4.4 Associates of Group of companies

CHAPTER 5

REVIEW OF LITERATURE..................................................................................... 61

THEORETICAL APPROACH OF THE THESIS....................................................66

CHAPTER 6

THE MAIN MOTIVES OF MERGERS AND ACQUISITIONS............................73

CHAPTER 7

DATA ANALYSIS AND INTERPRETATION........................................................78

CHAPTER 8

FINDINGS AND SUGGESTIONS...............................................................................85

8.1 Findings

8.2 Suggestions

CHAPTER 9

CONCLUSION............................................................................................................. 88

BIBLIOGRAPHY......................................................................................................... 90

ANNEXURE..................................................................................................................91

Questioner

Response Sheets



6

CONTENTS

TABLES AND GRAPHS

LIST OF TABLES PAGE NO

1. The top 10 acquisitions made by Indian companies’ world wide...........................18

2. The key players in the Indian pharmaceutical industry...........................................33

3. Indian major players financial information.............................................................34

4. Major deals announced/ completed by Indian companies in 2007.........................35

5. R & d expenditure (2006-07)..................................................................................39

6. Market growth in acute and chronic segment.........................................................41

7. Capex in the Industry..............................................................................................43

8. FDI inflow in the Industry......................................................................................43

9. Projected Pharmaceutical Market (2004-2009).......................................................47

10. Major Foreign Acquisitions by Indian Companies (2006, 2007& 2008)...............50

11. Large Deals in the Pharma Industry.......................................................................50

12. The financial highlights of the company for the last 3 years..................................56

13. Steps Involved in an Acquisition Valuation...........................................................75

LIST OF CHARTS

1. Graphical Representation of Indian out bound deals since 2000.........................19

2. Concentration of Industry Turn over....................................................................32

3. Indian Pharmaceutical market..............................................................................32

4. FDA approved Manufacturing.............................................................................38

5. Formulation: Broad Segmentation.......................................................................40

6. Market share of top 10 players.............................................................................41

7. Pharma Industry: Growth breakup.......................................................................42

8. Profitability and cost structure..............................................................................43

9. Indian pharma- capex over 2002-05.....................................................................45

10. India has the most FDA – approved Mtg, sites outside the U S...........................45

11. Exports value (Rs bn)...........................................................................................46

12. Export to regulated Market (Rs bn)......................................................................46

13. Future Outlook......................................................................................................52

14. Theoretical Approach of the Thesis......................................................................66

15. The process view of Mergers and Acquisitions....................................................70

16. Financing Mergers................................................................................................76



7

CHAPTER 1

THESIS SYNOPSIS



8

SYNOPSIS

STATEMENT OF THE PROBLEM: “Will the companies really get the benefit out of Merges and Acquisitions”. If they really get

the benefit out of it, what kinds of advantages they have it and how? .This research mainly

focuses on the why companies prefer to go, and what benefits they got out of it.

OBJECTIVES OF THE STUDY:

1. To find the motives behind the Mergers and Acquisition concentrating on

pharmaceutical sector.

2. To analyze the factors that will influence the companies to go for Merges and

Acquisition.

3. To examine the relevance of M&A for the pharmaceutical companies.

4. To find the benefit of the pharmaceutical companies for going to this strategy of

M&A.

5. To identify the setbacks of M&A.

INTRODUCTION

The phrase Mergers and Acquisitions refers to the aspect of corporate strategy, corporate

finance and management dealing with the buying, selling and combining of different

companies that can aid, finance, or help a growing company in a given industry grow rapidly

without having to create another business entity.

In business or economics a merger is a combination of two companies into one larger

company. Such actions are commonly voluntary and involve stock swap or cash payment to the

target. Stock swap is often used as it allows the shareholders of the two companies to share the

risk involved in the deal. A merger can resemble a takeover but result in a new company name

(often combining the names of the original companies) and in new branding in some cases,

terming the combination a "merger" rather than an acquisition is done purely for political or

marketing reasons.



9

Need for the study:

The dominant rationale used to explain M&A activity is that acquiring firms seek improved

financial performance. The following motives are considered to improve financial

performance:

This refers to the fact that the combined company can often reduce its fixed costs by

removing duplicate departments or operations, lowering the costs of the company

relative to the same revenue stream, thus increasing profit margins.

Increased revenue increased market share: This assumes that the buyer will be

absorbing a major competitor and thus increase its market power (by capturing

increased market share) to set prices, cross selling, economies of sale, taxes,

geographical diversification etc.

Research Methodology and Data Base

RESEARCH DESIGN

Data Sources: The data will be collected for the study by using two broad sources viz.,

primary and secondary A major portion of the data needed for the study has been

collected through the secondary sources and that data has been thoroughly researched

and finally presenting the findings and conclusions to prove the research objectives set

in the study.

The primary data can be collected by using a structured questionnaire which helps the researcher to collect by direct interaction of the employees. The data can also be collected by interviewing the officials who are into pharmaceutical sector and their views on the sector and also the fact sheets and other literature available in the companies. The Interviews are with………

Mr. V. Venugopal Reddy

Mr. V. Vamsi Krishna

Mr. D. Venkateswara Reddy

For secondary data can be collected from the magazines of the related industry,

websites, and journals. The reason for selecting this mode of research for this type is

that it’s a probably quickest and most economical way for research to find possible

hypothesis and to take advantage of the work of to others and utilize their own earlier

efforts. Most large companies that have maintained marketing research programs over a



10

number of years have accumulated significant libraries of research organizations

furnishing continuing data.

2. Research Approach

This data has been collected through news papers, search engines, articles, bulletins etc.

SAMPLE:

The size of the research is about 50 questioners.

SCOPE OF THE THESIS WORK

The scope of the thesis work is extremely significant which finds the causes for Merges and

Acquisition. To identify the need for an organization to go for M&A, what motives them to go

for M&A.? The research is purely based on the M&A happened in Pharmaceutical industry and

Health Care industry. This research covers some of the M&A taken place during lost 5 to 10

years.

JUSTIFICATION FOR CHOOSING A PARTICULAR RESEARCH

PROPOSAL

In the field of business many changes have been taken place due to certain changes in all over

the country and as well in the world. Some companies which are not having sufficient resource

like man power, finance, marketing network etc, can plan to go for M&A. It is not only on

these areas but also some companies voluntarily going for this, because of long run survival

and continuity. Taken example of Sandoz and Cibagaiki they two merged and started a new

company under the brand name of Novartis. But in India M&A takes place because of R&D

problem or unable to concentrate on R&D etc., Many of the Private sector companies feel that

investing in R&D is an unproductive expenses if it fails so they are planning to buy the

manufacturing rights or imitating the existing products to add a new product in their existing

product lines.



11

CHAPTER 2: INTRODUCTION



12

Background

In business debate today, we could find that the frequency of M&As is sustainable

high and M&As seem to be a commonly used strategic tool for companies. It is said that

one of three employees will, during the course of their working life, undergo a merger or

acquisition (Hubbard, 1999). At the same time, we find from Rydén (1971) that M&As are

not a new phenomenon and many of the large firms owe their origin in whole or in part

to mergers that occurred long before. However, as the number of mergers and acquisitions

increases, statistics also show that approximately half of the acquisitions did not turn

out to be successful. Consequently, many of the accomplished M&A transactions do not meet

their expectations and do not produce expected results. Actually, research shows that M&As

rarely result in more positive economic effects than other strategic investments in firms

(Rydén, 1971). Hence, there seems to be a paradox situation, where M&As are used as a

strategic alternative for creating positive economic effects for the company, but it is

hardly ever that the outcomes are in line with the expected benefits.

Parallel to M&A transactions conducted in traditional industries, which often have been

subjects for prior research, we can see that M&As becomes more and more frequent in

emerging industries. Today, M&As also seem to become a common strategic tool for

companies in new lines of business. The question therefore arises, if there are other conditions

for these companies to be successful with M&A activities. For instance, if there, for

companies in this environment, are new threats and possibilities that will change the conditions

for achieving wanted results. Furthermore, if this will result in new drivers and ways of

managing the process by these companies.

2.1 Defining M&A

The Main Idea one plus one makes three: this equation is the special alchemy of a merger or

an acquisition. The key principle behind buying a company is to create shareholder value over

and above that of the sum of the two companies. Two companies together are more valuable

than two separate companies - at least, that's the reasoning behind M&A. This rationale is

particularly alluring to companies when times are tough. Strong companies will act to buy

other companies to create a more competitive, cost-efficient company. The companies will

come together hoping to gain a greater market share or to achieve greater efficiency. Because



13

of these potential benefits, target companies will often agree to be purchased when they know

they cannot survive alone.

Acquisitions

An acquisition may be only slightly different from a merger. In fact, it may be different in

name only. Like mergers, acquisitions are actions through which companies seek economies of

scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve

one firm purchasing another - there is no exchange of stock or consolidation as a new

company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other

times, acquisitions are more hostile. In an acquisition, as in some of the merger deals we

discuss above, a company can buy another company with cash, stock or a combination of the

two.

Another possibility, which is common in smaller deals, is for one company to acquire all the

assets of another company. Company X buys all of Company Y's assets for cash, which means

that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y

becomes merely a shell and will eventually liquidate or enter another area of business. Another

type of acquisition is a reverse merger, a deal that enables a private company to get publicly-

listed in a relatively short time period. A reverse merger occurs when a private company that

has strong prospects and is eager to raise financing buys a publicly-listed shell company,



14

usually one with no business and limited assets. The private company reverse merges into the

public company, and together they become an entirely new public corporation with tradable

shares. Regardless of their category or structure, all mergers and acquisitions have one

common goal: they are all meant to create synergy that makes the value of the combined

companies greater than the sum of the two parts. The success of a merger or acquisition

depends on whether this synergy is achieved.

2.2 Types of Mergers

From the perspective of business structures, there is a whole host of different

mergers. Here are a few types, distinguished by the relationship between the two companies

that are merging:

Horizontal merger - Two companies that are in direct competition and share the same

product lines and markets.

Vertical merger - A customer and company or a supplier and company. Think of a cone

supplier merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in different

markets.

Product-extension merger - Two companies selling different but related products in the

same market.

Conglomeration - Two companies that have no common business areas. There are two

types of mergers that are distinguished by how the merger is financed. Each has certain

implications for the companies involved and for investors:

Purchase Mergers - As the name suggests, this kind of merger occurs when one company

purchases another. The purchase is made with cash or through the issue of some kind of

debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger

because it can provide them with a tax benefit. Acquired assets can be written-up to the

actual purchase price, and the difference between the book value and the purchase price of

the assets can depreciate annually, reducing taxes payable by the acquiring company. We

will discuss this further in part four of this tutorial.

Consolidation Mergers - With this merger, a brand new company is formed and both

companies are bought and combined under the new entity. The tax terms are the same as

those of a purchase merger.



15

2.2 Types of acquisition

The buyer buys the shares, and therefore control, of the target company being

purchased. Ownership control of the company in turn conveys effective control over the

assets of the company, but since the company is acquired intact as a going business, this

form of transaction carries with it all of the liabilities accrued by that business over its

past and all of the risks that company faces in its commercial environment.

The buyer buys the assets of the target company. The cash the target receives from the

sell-off is paid back to its shareholders by dividend or through liquidation. This type of

transaction leaves the target company as an empty shell, if the buyer buys out the entire

assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the

assets that it wants and leave out the assets and liabilities that it does not. This can be

particularly important where foreseeable liabilities may include future; un quantified

damage awards such as those that could arise from litigation over defective products,

employee benefits or terminations, or environmental damage. A disadvantage of this

structure is the tax that many jurisdictions, particularly outside the United States,

impose on transfers of the individual assets, whereas stock transactions can frequently

be structured as like-kind exchanges or other arrangements that are tax-free or tax-

neutral, both to the buyer and to the seller's shareholders.

2.3 Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous,

the terms merger and acquisition mean slightly different things. When one company takes over

another and clearly established itself as the new owner, the purchase is called an acquisition.

From a legal point of view, the target company ceases to exist, the buyer "swallows" the

business and the buyer's stock continues to be traded. In the pure sense of the term, a merger

happens when two firms, often of about the same size, agree to go forward as a single new

company rather than remain separately owned and operated. This kind of action is more

precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new

company stock is issued in its place. For example, both Daimler-Benz and Chrysler or Arcellor

and Mittal ceased to exist when the two firms merged, and a new company, DaimlerChrysler

and Arcellor-Mittal, was created. In practice, however, actual mergers of equals don't happen

very often. Usually, one company will buy another and, as part of the deal's terms, simply



16

allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically

an acquisition. Being bought out often carries negative connotations, therefore, by describing

the deal as a merger, deal makers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is

in the best interest of both of their companies. But when the deal is unfriendly - that is, when

the target company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the

purchase is friendly or hostile and how it is announced. In other words, the real difference lies

in how the purchase is communicated to and received by the target company's board of

directors, employees and shareholders.

Synergy

Synergy is the magic force that allows for enhanced cost efficiencies of the

new business. Synergy takes the form of revenue enhancement and cost savings. By merging,

the companies hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider

all the money saved from reducing the number of staff members from accounting,

marketing and other departments. Job cuts will also include the former CEO, who typically

leaves with a compensation package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new

corporate IT system, a bigger company placing the orders can save more on costs. Mergers

also translate into improved purchasing power to buy equipment or office supplies - when

placing larger orders, companies have a greater ability to negotiate prices with their

suppliers.

Acquiring new technology - To stay competitive, companies need to stay on top of

technological developments and their business applications. By buying a smaller company

with unique technologies, a large company can maintain or develop a competitive edge.

Improved market reach and industry visibility - Companies buy companies to reach

new markets and grow revenues and earnings. A merge may expand two companies'

marketing and distribution, giving them new sales opportunities. A merger can also



17

improve a company's standing in the investment community: bigger firms often have an

easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two

companies merge. Sure, there ought to be economies of scale when two businesses are

combined, but sometimes a merger does just the opposite. In many cases, one and one add up

to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate

leaders and the deal makers. Where there is no value to be created, the CEO and investment

bankers - who have much to gain from a successful M&A deal - will try to create an image of

enhanced value. The market, however, eventually sees through this and penalizes the company

by assigning it a discounted share price. We'll talk more about why M&A may fail in a later

section of this tutorial.

2.4 INDIAN MERGERS AND ACQUISITIONS – TOP TEN DEALS

Until up to a couple of years back, the news that Indian companies having acquired American-

European entities was very rare. However, this scenario has taken a sudden U turn. Nowadays,

news of Indian Companies acquiring a foreign business is more common than other way round.

Buoyant Indian Economy, extra cash with Indian corporate, Government policies and newly

found dynamism in Indian businessmen have all contributed to this new acquisition trend.

Indian companies are now aggressively looking at North American and European markets to

spread their wings and become the global players.

The Indian IT and ITES companies already have a strong presence in foreign markets;

however, other sectors are also now growing rapidly. The increasing engagement of the Indian

companies in the world markets, and particularly in the US, is not only an indication of the

maturity reached by Indian Industry but also the extent of their participation in the overall

globalization process.



18

Here are the top 10 acquisitions made by Indian companies worldwide:

Acquirer Target CompanyCountry

targeted

Deal value ($

ml)Industry

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel

VideoconDaewoo Electronics

Corp.Korea 729 Electronics

Dr. Reddy’s

LabsBetapharm Germany 597 Pharmaceutical

Suzlon Energy Hansen Group Belgium565

Energy

HPCLKenya Petroleum

Refinery Ltd.Kenya 500 Oil and Gas

Ranbaxy Labs Terapia SA Romania324

Pharmaceutical

Tata Steel NatSteel Singapore 293 Steel

Videocon Thomson SA France 290 Electronics

VSNL Teleglobe Canada239

Telecom

If you calculate top 10 deals it self account for nearly US $ 21,500 million. This is more than

double the amount involved in US companies’ acquisition of Indian counterparts.



19

Graphical representation of Indian out bound deals since 2000.

Have a look at some of the highlights of Indian Mergers and Acquisitions scenario as it

stands (Source: http://ibef.org)

Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3

billion in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be

remembered in India’s corporate history as a year when Indian companies covered a lot of new

ground. They went shopping across the globe and acquired a number of strategically significant

companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in

India in 2006. And almost 99 per cent of acquisitions were made with cash payments.

Mergers and Acquisitions

The total M&A deals for the year during January-May 2007 have been 287 with a value of

US$ 47.37 billion. Of these, the total outbound cross border deals have been 102 with a

value of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India.

The total M&A deals for the period January-February 2007 have been 102 with a value

of US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value

of US$ 21 billion. There were 111 M&A deals with a total value of about US$ 6.12 billion in



20

March and April 2007. Of these, the number of outbound cross border deals was 32 with a

value of US$ 3.41 billion. There were 74 M&A deals with a total value of about US$ 4.37

billion in May 2007. Of these, the number of outbound cross border deals was 30 with a value

of US$ 3.79 billion.

The sectors attracting investments by Corporate India include metals, pharmaceuticals,

industrial goods, automotive components, beverages, cosmetics and energy in manufacturing;

and mobile communications, software and financial services in services, with pharmaceuticals,

IT and energy being the prominent ones among these.

2.5 Different Types of Valuation Matters

Investors in a company that is aiming to take over another one must determine whether the

purchase will be beneficial to them. In order to do so, they must ask themselves how much the

company being acquired is really worth.

Naturally, both sides of an M&A deal will have different ideas about

the worth of a target company: its seller will tend to value the company at as high of a price as

possible, while the buyer will try to get the lowest price that he can. There are, however, many

legitimate ways to value companies. The most common method is to look at comparable

companies in an industry, but deal makers employ a variety of other methods and tools when

assessing a target company. Here are just a few of them:

1. Comparative Ratios - The following are two examples of the many comparative metrics on

which acquiring companies may base their offers:

Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes

an offer that is a multiple of the earnings of the target company. Looking at the P/E for all

the stocks within the same industry group will give the acquiring company good guidance

for what the target's P/E multiple should be.

Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes

an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of

other companies in the industry.

2. Replacement Cost



21

In a few cases, acquisitions are based on the cost of replacing the target

company. For simplicity's sake, suppose the value of a company is simply the sum of all its

equipment and staffing costs. The acquiring company can literally order the target to sell at that

price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble

good management, acquire property and get the right equipment. This method of establishing a

price certainly wouldn't make much sense in a service industry where the key assets - people

and ideas - are hard to value and develop.

3. Discounted Cash Flow (DCF)

A key valuation tool in M&A, discounted cash flow analysis

determines a company's current value according to its estimated future cash flows. Forecasted

free cash flows (operating profit + depreciation + amortization of goodwill – capital

expenditures – cash taxes - change in working capital) are discounted to a present value using

the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get

right, but few tools can rival this valuation method.

Synergy: The Premium for Potential Success

For the most part, acquiring companies nearly always pay a substantial

premium on the stock market value of the companies they buy. The justification for doing so

nearly always boils down to the notion of synergy; a merger benefits shareholders when a

company's post-merger share price increases by the value of potential synergy. Let's face it; it

would be highly unlikely for rational owners to sell if they would benefit more by not selling.

That means buyers will need to pay a premium if they hope to acquire the company, regardless

of what pre-merger valuation tells them. For sellers, that premium represents their company's

Future prospects. For buyers, the premium represents part of the post-merger synergy they

expect can be achieved. The following equation offers a good way to think about synergy and

how to determine whether a deal makes sense. The equation solves for the minimum required

synergy:



22

In other words, the success of a merger is measured by whether the value of the buyer is

enhanced by the action. However, the practical constraints of mergers, which discussed often,

prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal

makers might just fall short.

What to Look For - It's hard for investors to know when a deal is worthwhile. The burden of

proof should fall on the acquiring company. To find mergers that have a chance of success,

investors should start by looking for some of these simple criteria given as below.

A reasonable purchase price - A premium of, say, 10% above the market price seems

within the bounds of level-headedness. A premium of 50%, on the other hand, requires

synergy of stellar proportions for the deal to make sense. Stay away from companies that

participate in such contests.

Cash transactions - Companies that pay in cash tend to be more careful when calculating

bids and valuations come closer to target. When stock is used as the currency for

acquisition, discipline can go by the wayside.

Sensible appetite – An acquiring company should be targeting a company that is smaller

and in businesses that the acquiring company knows intimately. Synergy is hard to create

from companies in disparate business areas. Sadly, companies have a bad habit of biting off

more than they can chew in mergers.

Mergers are awfully hard to get right, so investors should look for acquiring companies with a

healthy grasp of reality.

Doing the Deal

Start with an Offer When the CEO and top managers of a company decide that they want to

do a merger or acquisition, they start with a tender offer. The process typically begins with the

acquiring company carefully and discreetly buying up shares in the target company, or building

a position. Once the acquiring company starts to purchase shares in the open market, it is

restricted to buying 5% of the total outstanding shares before it must file with the SEC. In the

filing, the company must formally declare how many shares it owns and whether it intends to

buy the company or keep the shares purely as an investment.

Working with financial advisors and investment bankers, the acquiring

company will arrive at an overall price that it's willing to pay for its target in cash, shares or



23

both. The tender offer is then frequently advertised in the business press, stating the offer price

and the deadline by which the shareholders in the target company must accept (or reject) it.

The Target's Response

Once the tender offer has been made, the target company can do one of

several things:

Accept the Terms of the Offer - If the target firm's top managers and shareholders are

happy with the terms of the transaction, they will go ahead with the deal.

Attempt to Negotiate - The tender offer price may not be high enough for the target

company's shareholders to accept, or the specific terms of the deal may not be attractive. In

a merger, there may be much at stake for the management of the target - their jobs, in

particular. If they're not satisfied with the terms laid out in the tender offer, the target's

management may try to work out more agreeable terms that let them keep their jobs or,

even better, send them off with a nice, big compensation package. Not surprisingly, highly

sought-after target companies that are the object of several bidders will have greater

latitude for negotiation. Furthermore, managers have more negotiating power if they can

show that they are crucial to the merger's future success.

Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme

can be triggered by a target company when a hostile suitor acquires a predetermined

percentage of company stock. To execute its defense, the target company grants all

shareholders - except the acquiring company - options to buy additional stock at a dramatic

discount. This dilutes the acquiring company's share and intercepts its control of the

company.

Find a White Knight - As an alternative, the target company's management may seek out

a friendlier potential acquiring company, or white knight. If a white knight is found, it will

offer an equal or higher price for the shares than the hostile bidder.

Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two

biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal

would require approval from the Federal Communications Commission (FCC). The FCC

would probably regard a merger of the two giants as the creation of a monopoly or, at the very

least, a threat to competition in the industry.

Closing the Deal



24

Finally, once the target company agrees to the tender offer and

regulatory requirements are met, the merger deal will be executed by means of some

transaction. In a merger in which one company buys another, the acquiring company will pay

for the target company's shares with cash, stock or both. A cash-for-stock transaction is fairly

straightforward: target company shareholders receive a cash payment for each share purchased.

This transaction is treated as a taxable sale of the shares of the target company. If the

transaction is made with stock instead of cash, then it's not taxable. There is simply an

exchange of share certificates. The desire to steer clear of the tax man explains why so many

M&A deals are carried out as stock-for-stock transactions. When a company is purchased with

stock, new shares from the acquiring company's stock are issued directly to the target

company's shareholders, or the new shares are sent to a broker who manages them for target

company shareholders. The shareholders of the target company are only taxed when they sell

their new shares. When the deal is closed, investors usually receive a new stock in their

portfolios - the acquiring company's expanded stock. Sometimes investors will get new stock

identifying a new corporate entity that is created by the M&A deal.

Break Ups

As mergers capture the imagination of many investors and companies, the idea of getting

smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very

attractive options for companies and their shareholders.

Restructuring Methods

There are several restructuring methods: doing an outright sell-off, doing an

equity carve-out, spinning off a unit to existing shareholders or issuing tracking stock. Each has

advantages and disadvantages for companies and investors. All of these deals are quite

complex.

Sell-Offs

A sell-off, also known as a divestiture, is the outright sale of a company

subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into the parent

company's core strategy. The market may be undervaluing the combined businesses due to a

lack of synergy between the parent and subsidiary. As a result, management and the board

decide that the subsidiary is better off under different ownership. (IPO) of shares, amounting to



25

a partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling

stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take

when one of its subsidiaries is growing faster and carrying higher valuations than other

businesses owned by the parent. A carve-out generates cash because shares in the subsidiary

are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances

the parent's shareholder value. The new legal entity of a carve-out has a separate board, but in

most carve-outs, the parent retains some control. In these cases, some portion of the parent

firm's board of directors may be shared. Since the parent has a controlling stake, meaning both

firms have common shareholders, the connection between the two will likely be strong.

That said, sometimes companies carve-out a subsidiary not because it's doing well, but because

it is a burden. Such an intention won't lead to a successful result, especially if a carved-out

subsidiary is too loaded with debt, nor had trouble even when it was a part of the parent and is

lacking an established track record for growing revenues and profits. Carve-outs can also create

unexpected friction between the parent and subsidiary. Problems can arise as managers of the

carved-out company must be accountable to their public shareholders as well as the owners of

the parent company. This can create divided loyalties.

Spin-offs

A spin-off occurs when a subsidiary becomes an independent entity.

The parent firm distributes shares of the subsidiary to its shareholders through a. Since this

transaction is a dividend distribution, no cash is generated. Thus, spin-offs are unlikely to be

used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes

a separate legal entity with a distinct management and board. Besides getting rid of an

unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late

1980s and early 1990s, corporate would use debt to finance acquisitions. Then, after making a

purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders'

method certainly makes sense if the sum of the parts is greater than the whole. When it isn't,

deals are unsuccessful.

Equity Carve-Outs



26

More and more companies are using equity carve-outs to boost shareholder value. A

parent firm makes a subsidiary public through a raider’s initial public offering stock dividend

meaning they don't grant shareholders the same voting rights as those of the main stock. Each

share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of

tracking stock have no vote at all. Like carve-outs, spin-offs are usually about separating a

healthy operation. In most cases, spin-offs unlock hidden shareholder value. For the parent

company, it sharpens management focus. For the spin-off company, management doesn't have

to compete for the parent's attention and capital. Once they are set free, managers can explore

new opportunities. Investors, however, should beware of throw-away subsidiaries the parent

created to separate legal liability or to off-load debt. Once spin-off shares are issued to parent

company shareholders, some shareholders may be tempted to quickly dump these shares on the

market, depressing the share valuation.

Tracking Stock

A tracking stock is a special type of stock issued by a publicly held company to track

the value of one segment of that company. The stock allows the different segments of the

company to be valued differently by investors. Let's say a slow-growth company trading at a

low (P/E ratio) happens to have a fast growing business unit. The company might issue a

tracking stock so the market can value the new business separately from the old one and at a

significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-

off or carving-out its fast growth business for shareholders? The company retains control over

the subsidiary; the two businesses can continue to enjoy synergies and share marketing,

administrative support functions, a headquarters and so on. Finally, and most importantly, if

the tracking stock climbs in value, the parent company can use the tracking stock it owns to

make acquisitions. Still, shareholders need to remember that tracking stocks are price-earnings

ratio class B

Why They Can Fail

It's no secret that plenty of mergers don't work. Those who advocate mergers will

argue that the merger will cut costs or boost revenues by more than enough to justify the price

premium. It can sound so simple: just combine computer systems, merge a few departments,

use sheer size to force down the price of supplies and the merged giant should be more

profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.



27

Historical trends show that roughly two thirds of big mergers will disappoint

on their own terms, which means they will lose value on the stock market. The motivations that

drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In

many cases, the problems associated with trying to make merged companies work are all too

concrete.

Flawed Intentions

For starters, a booming stock market encourages mergers, which can spell

trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic

thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate:

somebody else has done a big merger, which prompts other top executives to follow suit. A

merger may often have more to do with glory-seeking than business strategy. The executive

ego, which is boosted by buying the competition, is a major force in M&A, especially when

combined with the influences from the bankers, lawyers and other assorted advisers who can

earn big fees from clients engaged in mergers.

Most CEOs get to where they are because they want to be the biggest and the best, and many

top executives get a big bonus for merger deals, no matter what happens to the share price

later. On the other side of the coin, mergers can be driven by generalized fear. Globalization,

the arrival of new technological developments or a fast-changing economic landscape that

makes the outlook uncertain are all factors that can create a strong incentive for defensive

mergers. Sometimes the management team feels they have no choice and must acquire a rival

before being acquired. The idea is that only big players will survive a more competitive world.

The Obstacles to making it Work

Coping with a merger can make top managers spread their time too thinly and

neglect their core business, spelling doom. Too often, potential difficulties seem trivial to

managers caught up in the thrill of the big deal. The chances for success are further hampered

if the corporate cultures of the companies are very different. When a company is acquired, the

decision is typically based on product or market synergies, but cultural differences are often

ignored. It's a mistake to assume that personnel issues are easily overcome. For example,

employees at a target company might be accustomed to easy access to top management,



28

flexible work schedules or even a relaxed dress code. These aspects of a working environment

may not seem significant, but if new management removes them, the result can be resentment

and shrinking productivity. More insight into the failure of mergers is found in the highly

acclaimed study from McKinsey, a global consultancy. The study concludes that companies

often focus too intently on cutting costs following mergers, while revenues, and ultimately,

profits, suffer. Merging companies can focus on integration and cost-cutting so much that they

neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue

momentum is one reason so many mergers fail to create value for shareholders. But remember,

not all mergers fail.



29

CHAPTER 3 PHARMACEUTICAL INDUSTRY

3.1 PHARMA INDUSTRY



30

The pharmaceutical industry is the world’s largest industry due to worldwide

revenues of approximately US$2.8 trillion. Pharma industry has seen major changes in the

recent years that place new demands on payers, providers and manufacturers. Customers now

demand the same choice and convenience from Pharma industry that they find in other

segment. Indian Pharmaceutical Industry is poised for high consistent growth over the next

few years, driven by a multitude of factors.

Top Indian Companies like Ranbaxy, Arbindo Pharma, Sun Pharma, CIPLA and Dabur

have already established their presence. The pharmaceutical Industry is a knowledge driven

industry and is heavily dependent on Research and Development for new products and growth.

However, basic research (discovering new molecules) is a time consuming and expensive

process and is thus, dominated by large global multinationals. Indian companies have only

recently entered the area. The Indian pharmaceutical industry came into existence in 1901,

when Bengal Chemical & Pharmaceutical Company started its maiden operation in Calcutta.

The next few decades saw the pharmaceutical industry moving through several phases,

largely in accordance with government policies. Commencing with repackaging and

preparation of formulations from imported bulk drugs, the Indian industry has moved on to

become a net foreign exchange earner, and has been able to underline its presence in the global

pharmaceutical arena as one of the top 35 drug producers worldwide. Currently, there are more

than 2,400 registered pharmaceutical producers in India. There are 24,000 licensed

pharmaceutical companies. Of the 465 bulk drugs used in India, approximately 425 are



31

manufactured here. India has more drug-manufacturing facilities that have been approved by

the U.S. Food and Drug Administration than any country other than the US. Indian generics

companies supply 84% of the AIDS drugs that Doctors without Borders uses to treat 60,000

patients in more than 30 countries.

India’s pharmaceutical industry is one of the fastest growing sectors in the Indian economy

with the growth rate (CAGR) of 11.9 per cent during 2004-2008. The industry has emerged as

one of the strongest and most successful examples of knowledge-based industries in the world

and it has made tremendous progress in terms of development of technology, products and

infrastructure. Its large pool of skilled technical workforce, low production costs and

government support has enabled its transformation from an import-dependent country to a

major exporting country.

The domestic turnover of the industry stood at Rs 525.6 billion in 2008, accounting for 1.6

percent of GDP. Out of this turnover, domestic branded formulations sales were worth Rs

327.7 billion (as per ORG IMS June 08 retail sales data). The remaining portion is estimated to

have come from unorganized players & their contribution is estimated at 25 per cent of the

domestic industry’s turnover. The Indian pharmaceutical industry ranks fourth in the world in

terms of volume (8 per cent global share) and fourteenth in terms of value (1.9 per cent global

share).

Industry Overview

As per the Organization of Pharmaceutical Producers of India (OPPI) estimates, currently there

are around 10,000 pharmaceutical units in India that produce around 400 bulk drugs and more

than 60,000 formulations (falling under 60 therapeutic categories). Despite high fragmentation

in the industry, a substantial portion of the industry’s turnover is contributed by few players.

As per ORG-IMS (MAT June 2008), of the 451 companies, the top 20 companies constitute

around 56.6 per cent of the industry’s retail sales (of 451 companies), the next 20 companies

have a 20 per cent share and the remaining 411 companies have a 24 per cent share.



32

Chart: Concentration of industry turnover

The pharmaceutical products can be broadly classified into bulk drugs and formulations. The

formulations can be categorized under various therapeutic groups. Indian pharmaceutical

market accounts for 1-2% of the global pharmaceutical market in value terms and 8% in

volume terms. In 2007 it has grown by 12.9% to reach USD8.16 billion. Market growth during

2007 was driven by a number of new product launches by both Indian and foreign companies.

The pharmaceutical market has grown at a compounded annual growth rate (CAGR) of 13%

during the last five years. The market size comprises of domestic consumption of bulk drugs

and formulations and does not include exports of the same.



33

3.2 THE KEY PLAYERS IN THE INDIAN PHARMACEUTICAL INDUSTRY

Dr. Reddy Ranbaxy

Cipla Sun Pharma

Glaxo SmithKline Nicholas Piramal

Aurobindo Pharma Torrent Pharma

Aventis Pharma Lupin

Cadila Health Novartis

Alembic Pfizer

Aarti Drugs Wockhardt

Elder Pharma Wyeth Ltd

Ajanta Pharma Sterling Biotech

Abbott India Ipca Laboratories

Astrazeneca Pharma Unichem Lab

Ind Swift Lab Panacea Biotech

Strides Arcolab Orchid Chemicals

Major players

India's top ten pharmaceutical companies have reported a record of 24.57% growth in their net

profits during 2007-08 where as their bottom-line grew by 14.68% over 2006-07. The top ten

listed companies based on consolidated net sales include Ranbaxy Laboratories, Dr Reddy's

Laboratories Cipla, Sun Pharma Piramal health care, Lupin, Wockhardt, Jubilant Organosys,

Aurobindo Pharma, Cadila Healthcare; posted strong growth during 2007-08 (Table 3).The

consolidated sales of the top ten companies rose to Rs349.01bn in 2007-08 from Rs304.34bn

reported in the previous year where as the net profit was Rs54.87bn in 2007-08 as compared to

Rs44.05bn in 2006-07. Ranbaxy occupied the first place with Rs69.82bn followed by Dr

Reddy with Rs 49.14bn.



34

Growth drivers

1. Mergers & Acquisitions

The year 2006-07 saw only a few outbound acquisitions and instead of bigwigs like Ranbaxy,

mid-size firms like Sun Pharma and oncology drug maker Dabur Pharma hogged the limelight.

Sun Pharma acquired Israel's Taro Pharmaceutical Industries, a multinational generic

manufacturer for about INR18 billion in the year's biggest in the sector. Sun Pharma, Jubilant

Organosys, Ranbaxy and Zydus Cadila are the major firms that came out with high valued

acquisitions. (See table)



35

Sun Pharma acquired Israel's generic manufacturer Taro Pharma for USD 454m

(approximately INR18, 370m). This is the second largest overseas acquisition by an

Indian drug company after Betapharm acquisition by Dr Reddy's for USD572m.

Jubilant Organosys Ltd acquired the US-based Hollister-Stier Laboratories for

USD122.5m. The acquisition would provide Jubilant with fast growing contract

injectables manufacturing business and also a stable and profitable allergy business.

Ranbaxy has acquired Be-Tabs for USD70m, which will make it the fifth-largest

generic pharma company in South Africa. Ranbaxy acquired 14.9% stake in Jupiter

Biosciences, a Hyderabad-based company.

Zydus Cadila bought Brazilian company, Quimica e Pharmaceutical Nikkho do Brasil

Ltd (Nikkho), which is purely into the market of 'branded generics', for USD26m after



36

signing an agreement to acquire 100% stake. With this acquisition, the companies will

basket generic products across various therapeutic segments such as general medicine,

paediatrics, gynecology, neurology, gastroenterology, otolaryngology, dermatology

and others. Zydus Cadila will strengthen its base in Japan and be accessible to the

USD3 billion Japan's generics market from its acquired Nippon Universal

Pharmaceuticals Ltd.

Ranbaxy Laboratories Inc, the wholly-owned US subsidiary of the Indian pharma

major, acquired the rights to 13 dermatology products from Bristol-Myers Squibb

(BMS) for a value of USD26m (INR1,050m). These 13 products totalled USD15m

(INR600m) in 2006 and are used in the treatment of dermatitis, psoriasis, fungal

infections, scabies and acne. This acquisition will strengthen Ranbaxy's franchise in

dermatology arena.

Lupin Limited acquired a majority stake in Japanese generic drug maker Kyowa

Pharmaceutical Industry Co Ltd. Lupin Limited acquired Rubamin Laboratories Ltd

(RLL), part of the Baroda-based Rubamin group, for an undisclosed amount. The

pharmaceutical business of the Rubamin group, RLL focuses largely on advanced

intermediates for active pharmaceutical ingredients under the contract research and

manufacturing model.

The year 2007 witnessed only 25 M&As with 15 cross border transactions with an

estimated value of about USD600-700m in the Indian pharmaceutical sector. The

industry restricted itself to consolidation on the domestic turf rather than looking for

acquisitions abroad.

2. CRAMS

The Indian pharmaceutical outsourcing market was valued at USD1.27 billion in 2007 and is

expected to reach USD3.33 billion by 2010, growing at a CAGR of 37.6%. The Indian

CRAMS market stood at USD1.21 billion in 2007 and is estimated to reach USD3.16 billion

by 2010. The Indian contract research industry has grown tremendously over the past few

years. It has witnessed the emergence of several CROs in the area of drug discovery and

development over the last decade. Contract research in India is estimated to be USD345m in

2007 and is likely to grow at a CAGR of 22.7%. In 2006, clinical trials accounted for 52% of

the total outsourcing market of CROs in India, followed by pre-clinical trials, which

constituted about 30%. Research chemistry and research biology together constituted 18%.



37

The Indian CMO market stood at USD869m in 2007. It is expected to see a CAGR of 41.7%

to reach USD2.4 billion by 2010. Chemical synthesis constituted 60% of the total outsourcing

market by CMOs in India, followed by formulation and packaging which constituted about

40%. India is emerging as one of the most competitive CRO markets with more than 70

clinical research organizations and central labs available. Local CROs providing the full

spectrum of services are Vimta Labs, which is India's largest provider, Asian Clinical Trials

(ACT) and ClinInvent Research, headquartered in Mumbai. Clinigene International in

Bangalore is a Biocon subsidiary and specialises in clinical trial, regulatory and accredited

central reference laboratory services. Siro Clinpharm, Mumbai offers clinical services, data

management, clinical quality assurance and regulatory consultation.

3. USFDA Plants

India has the highest number of USFDA approved manufacturing facility outside the US.

Therefore it is in a good position to manufacture bulk drugs and export to regulated markets in

the coming years. There are over 80 USFDA-approved manufacturing facilities in India

(2007) and the number is estimated to grow at the rate of 30% by the end of 2008. This would

make India the only country having the largest number of such plants outside the US. As per

2006 figures, even China, supposedly the biggest threat to Indian business in CRAMS, had 27

FDA-approved manufacturing sites. India has almost three times the number of FDA-

approved plants than China has. This is one of the most vital factors for outsourcing

manufacturing services to India by the multinationals and global pharmaceutical companies.

Indian companies have been at the forefront, both in terms of DMF and ANDA filings with

approximately 35% share in DMFs and about 25% share in ANDAs. Over the last two to three

years, several second/third tier Indian companies have aggressively scaled up their

ANDA/DMF filings in the US market. India is also leading in terms of the number of DMF

filings. While India has filed 1,155 DMFs between January 2000 and June 2007, China filed

only 329. In 2007 itself, India has filed 110 DMFs, which is almost three times that of China's

38 filings.



38

4. High Growth of Generics / Patent expiries

The Indian pharma industry is well positioned to capture much of the USD65 billion new

businesses expected to open up globally in coming years. Indian pharma industry accounts for

22% of the global generics market. Bearing in mind that USD65 billion of prescription

medicines in Europe (USD25billion) and the US (USD40billion) are to lose their patents in

2007-08; India is ideally positioned to sweep up much of that new business. Indian firms are

likely to take around 30% of the increasing global generics market in the coming years. The

generics market is taking on increasing importance globally, in contrast with the branded

pharmaceutical market which has got stagnated in the last few years. The loss of patent

protection by 2009 of almost USD80 billion worth of top selling drugs will be the main driver

of this growth. Low production costs give India an edge over other generics-producing

nations, especially China and Israel.



39

R&D

With a number of blockbuster drugs getting off patent in the coming years and increasing R&D

costs coupled with low R&D productivity, major pharmaceutical companies worldwide are

finding it difficult to maintain their bottom lines. The major pharmaceutical companies in India

are the main R&D investor in the country. The R&D expenditure of these 15 major companies

has grown up by 8.9% to INR21.01 billion in 2006-07 from INR19.27 billion in 2005-06.

Moreover the top Indian pharmaceutical companies have started the new business strategy of

de-merging of their R&D activities into a separate company. So now companies can focus



40

more on NCEs and NDDS. The model of R&D investment by Indian companies is shifting

from core process research to new drug development and novel drug delivery systems

(NDDS).The number of Drug Master File (DMF) filings made by Indian firms has increased

considerably from 14% in 2000 to 50% in 2007 (Jan- Jun). In 2007, the pharmaceutical

company Cadila Healthcare Pharma has topped the table by 25 DMF filings followed by Dr

Reddy with 20, Aurobindo at 15, and Sun Pharmaceutical with 15 DMFs.

Formulations: Broad segmentation

In India, the chronic segment, which constitutes only 28 per cent of the market, is considered a

high value segment and market growth is mostly related to value growth; whereas the acute

segment which constitutes as much as 72 per cent of the market is low value segment in which

growth is driven by volumes.

Chronic diseases relate to long-term illnesses that require long-term medical care. Most of

these diseases are caused by lifestyles changes, eating habits and rise in stress. In recent years,

India has witnessed a rise in lifestyle related diseases such as cardiovascular diseases and

central nervous system diseases. Acute diseases, on the other hand, are related to short-term

illnesses and require short-term care. Diseases caused by infections, parasitic attacks,



41

gastrointestinal disorders, etc fall under this category. As medicines in acute segment are of

mass consumption, most of them qualify for price control.

Table: Market growth in acute & chronic segment

Value represents retail sales of formulations in domestic market during 12 months

ended June 2008 Due to high level of fragmentation none of the players had a market

share of more than 6 % (even the top players Cipla & Ranbaxy commands only 5.24 &

5.09 per cent market share on the basis of retail sales respectively).

Chart: Market share of top players



42

3.3 THE GROWTH SCENARIO

The Industry is a largely fragmented and highly competitive with a large number of players

having interest in it. The following chart shows the breakup of the growth (YoY) of Indian

pharmaceutical industry in last six years ending 2003.

* Vol. growth of existing products

Indian contract research industry growing at 40-50 per cent

The Indian contract research Industry has grown tremendously over the past few years. It has

witnessed the emergence of several CROs in the area of drug discovery & development over

the last decade.

India to capture US$ 250-300 million or 10 per cent of global clinical trials by 2010.

India is emerging as a favored global destination for global drug development companies.

Recent changes in India’s healthcare policies and a maturing regulatory environment have

significantly brought down the risk of shifting more clinical research from the developed

countries to India. The clinical research industry in India is presently estimated at over US$

100 million.

3.4 INVESTMENT IN THE SECTOR

Most of the capital investment plans announced by the domestic players relate to expansion or

setting up of formulations projects, followed by new bulk drug manufacturing projects.

Moreover, a considerable amount of investments are expected to be utilized for setting up

R&D centers, SEZs and pharma parks. In June 2008, project under implementation were 272

with the project cost of Rs 165.2 bn.



43

Table: Capex in the sector

During April 07- Feb 08, FDI worth Rs 93 bn infused in the domestic industry. In December

2007 alone, FDI infused was Rs 5.3 bn.

Table: FDI Inflow in the sector

Demand drivers

India’s per capita drug expenditure has been growing at a CAGR of 12.1 per cent during 1981 -

2006. The key drivers in demand in pharma sector are:

Rise in population accompanied with favorable change in age structure

Emerging middle class and growing urbanization will create strong demand

Improving healthcare infrastructure

Growing healthcare insurance market

Growing health awareness

3.5 PROFITABILITY AND COST STRUCTURE



44

Source: Business Today

Mar – 05 Mar – 04 YoY% Change

Name Net Sales(Rs Millions)

PAT (Rs Millions)

Net Sales(Rs Millions)

PAT (Rs Millions)

Net Sales (%)

PAT (%)

Ranbaxy 7735 677 8125 1485 -4.80% -54.4 %

Cipla 5350 1056 5994 1017 -10.70% 3.80%

Dr.Reddy’s 3560 -88 3969 -351 -10.30% NA

Sun Pharma 3048 921 2349 887 29.80% 3.80%

Wockhardt 2015 380 1943 411 3.70% -7.50%

Divis Lab 1095 230 983 220 11.40% 4.50%

E Merck 733 93 828 144 -11.50% 35.40%

Novartis 791 4 1023 209 -22.70% -98.10%

Overall results of most pharma companies fell below expectations. Uncertainties over

VAT, increasing operating expenses, product patent issues and pricing pressures in US

and Europe hit the bottom lines of most companies.

Indian pharma companies have undertaken combined total capex of over US$ 1 billion

between FY05 and FY05, and the net fixed assets of Indian pharma companies have

grown by 50 per cent to US$ 1.6 billion during this period.



45

Most of the capex has been in USFDA-approved plants in anticipation of the large

wave of patent expiries in 2006. There has also been a surge in the number of plants

receiving USFDA approval in India.

Source Company Annual Reports; Citigroup Investment research.This includes - Ranbaxy, Reddy, Cipla, Sun Pharma, Wockhardt, Cadila, Jubilant, Matrix, Glenmark, Aurobindo, Nicholas and Biocon.

3.6 EXPORTS



46

Exports of pharmaceutical products from India have grown at a CAGR of 17.62 per cent during

the last 5 years ended FY 08 at Rs 291 billion. Sharp rise in exports can be attributed to

changes in the industry market dynamics both at the domestic as well as the international level.

Chart: Export Value (Rs bn)

Indian pharmaceutical exports are increasingly being directed to developed and highly

regulated markets, which is growing at 7-8 per cent during past few years. The proportion of

exports to developed and highly-regulated markets (USA, Germany, and UK) to India’s total

pharmaceutical exports has risen from 24.5 per cent in FY 04 to 27.4 per cent during FY 08.

Chart: Export to regulated market



47

In addition, Indian pharmaceutical companies are also catering to developing markets, which

are recording high growth during the past few years. In comparison to 7-8 per cent growth in

regulated markets, developing countries in the Latin American region recorded a growth rate of

11 per cent during 2007 in terms of domestic sales value.

Challenges faced by the Indian pharmaceuticals industry:

Government policies regarding range of price increase

Increase in prices of raw materials

Increasing competition

Over the next few years, the industry is expected to continue its robust growth. Industry

research services estimate the Indian pharmaceutical industry to grow at over 18 per cent in FY

09 to reach at Rs 888 billion due to fast rise in revenues from exports and CRAMS. Industry

research services also estimate the CRAMS revenue of the Indian pharmaceutical industry to

grow at CAGR of 40 per cent per annum during the next 2 years. This will give way for

expansion of the generic market and will also boost outsourcing activities. The Indian CRAMS

business is set to grow given the sizeable amount of drugs going off patent. The increase in

generics market worldwide will lead to increased outsourcing activities.

Estimates suggest that the domestic market in acute & chronic segments will grow over 14 per

cent till FY 09 to reach near Rs 486 billion. Of this, chronic segment (CVS, CNS and Diabetes)

is likely to witness faster growth at 19 per cent while acute segment would witness near 13 per

cent growth during this period. Domestic demand for medicines is set to rise substantially in

the years to come. Rising population, expanding economy, favorable economic policies,

changing pattern of diseases, increased spending on healthcare and better health infrastructure

are likely to provide the required impetus to the Indian pharmaceutical industry to sustain its

growth at double digit rates over the next few years.

Projected Pharmaceutical Market, 2004-2009

YearMarket (US$

millions)2004 8,2002005 8,790



48

2006 9,4232007 10,1022008 10,8292009 11,609

Source: Epsicom A new development in the area of outsourcing is that the outsourcing activities are

progressively moving out of U.S. and Europe to others, notably, China, India, Korea, Russia

and Taiwan. Over the years some of the premier companies in the U.S. such as Albany

Molecular research Inc, J-Star Research of New Jersey and many others have seen a decline in

revenues due to more companies going off-shore primarily due to lower costs. For example,

it has been reported that while the cost to a company of a Ph.D. scientist in a CRO is $ 250,000

in U.S. the corresponding figures in these countries will be between $ 45000 to 70,000.

Indian pharmaceutical industry does not figure among the top markets in the world although it

has the second largest population in the world. Indian pharmaceutical industry has not lived up

to its potential due to economic and regulatory reasons. In fact, the list of problems is endless.

Health insurance sector is in its infancy. The consumption rates are too low. Large parts of

population do not have access to health care facilities. Yet no other market holds as much

promise as India does. There are several reasons behind this optimism. GDP growth of Indian

economy has been consistently been above 5.5 per cent in the past five years. Indian economy

is expected to grow at a fast rate in the coming years leading to a rise in real incomes. Higher

incomes will improve demand for medical products and services.

Indian market may also see new concepts such as pharmaceutical benefit management or

healthcare solutions. Market growth will be accompanied by structural changes. The ageing of

Indian population presents a unique set of opportunities to pharmaceutical companies.

Research is an area calling for big decisions. Indian companies have been so far concentrating

on process research plundering molecules invented by others at will. But introduction of

product patents will curb such piracy. Now Indian companies have to figure out ways of lying

their hands on new chemical entities. Some Indian companies have forayed into basic research

and met with mixed success. A big market is opening up in contract production and contract

research. Multinationals are looking at outsourcing as a way of cutting costs.



49

With strengths in low cost production and a large pool of technical and scientific

personnel, India could develop as a manufacturing base for global pharmaceutical

industry.

Contract research is another area offering plenty of opportunities. Indian players will also

have to decide on their export strategy. Indian companies have made money by exporting

products to countries where product patents were not in force.

But this market will progressively shrink with more and more countries embracing product

patents. With India embracing product patents, production of patented drugs will cease. This

leaves Indian players with export markets in either generic markets or outsourcing. Once in a

lifetime opportunity is set to unfold in the generic markets in the next few years. Patented

products worth US$40-50 billion will lose patent protection in the couple of years.

But exploiting this opportunity will mean sizeable commitment of funds in terms of filing

Abbreviated New Drugs Applications (ANDAs). Rising health care expenditures all over the

world are also forcing substitution of prescription drugs with cheaper generics. Global generic

markets definitely hold a lot of promise, but the competition will be intense and the margins

are thin. Indian companies have the capability to succeed in this space.

Mergers and Acquisition

Currently, as the generics business is weighed down by stiff competition and declining R&D

productivity, alliances and partnerships is the need of the hour for the pharmaceutical industry

rather than the preference. In recent times, most of the leading players have inked M&A deals

across the globe. In 2006, the domestic pharma sector executed more than 40 deals with 32



50

cross border transaction worth US$ 2000 mn and it includes deals like Dr Reddy’s acquisition

of Betapharm of Germany for Euro 480 mn (Rs 2550 cr) and Ranbaxy Terapia buy in Romania

for US$ 324 mn (Rs 1250 cr approx). In 2007, Indian pharma sector witnessed 25 Mergers &

acquisition deals, with 15 cross border transaction worth US$ 600-700 mn. There were a total

of eight acquisitions in the Jan-March period of 2008 with a total announced valuation of $152

million; while in April 2008; Indian drug firms acquired six overseas companies, including the

$255 million acquisition of US-based Draxis Health Inc by Jubilant Organosys. Hyderabad-

based Dr Reddy's Laboratories was the most aggressive company during the four-month

period, buying three companies in Europe and the US.

Table: Major Foreign Acquisitions by Indian Companies (2006, 2007 & 2008)

Thus, mergers and acquisitions has proven tool to seize growth opportunities and is widely

resorted to by players by either moving up the value chain or by integrating downstream

production. More mergers & acquisitions and consolidation activity in near future is expected

which is driven in the medium term by implementation of the new patent regime and generic

companies looking to establish a low-cost base out of the country.

3.7 LARGE DEALS IN THE PHARMA SECTOR ID NO: HYD/FIN/FW04019 PGP/FW/07-09/FIN


51

Target Buyer Value ($ million)

Betapharm Dr Reddy’s 570

Doc Pharma Matrix 400

Terapia Ranbaxy 324

Solutia’s Pharma Business Dishman Pharma 74.5

Pfizer’s Morpeth Facility Nicholas Piramal 50

Further, companies also entered into marketing tie-ups with foreign companies or set up their

subsidiaries. The acquisition is not only in the other parts, but these companies are spreading

their business by acquiring domestic companies also. According to analysts the acquisition root

is saving tremendous efforts and time of these companies and M&A activity will increase in

the near future. The Indian pharma companies have entered very aggressively into international

market giving tough competition to international giants. Major players are concentrating on

advanced profitable markets like USA and Europe.

Indian pharma companies, of late, are spending heavily on R&D to meet the new challenges

and overcome competition. Ranbaxy is spending over $ 100 million for capacity expansion in

the current year. Nicholas Piramal planning investment of Rs 200 crore on R&D and up

gradation. Lupin is investing Rs 20 crore in Aurangabad for manufacturing anti-TB products.

Ranbaxy is set to launch 20 new products and Lupin is launching herbal products. Dr Reddy

launched Ibuprofen and Nefazodone in North America. Ranbaxy's US subsidiary received

tentative approval from USFDA for manufacture of Auinapril Hydrochloride tablets for

hypertension drugs.

The future of the pharma companies, however, to a great extend depend on the government

policies such as DPCO, VAT and implementation of new patent law. Thus with Mergers and

Acquisitions and the spending on R&D would lead to change in the market structure of

the pharmaceutical industry. Taking into account the scenario of the pharmaceutical industry

in the global market, we would take short and long term planning to overcome the crisis in the

industry brought about by increasing cost, reduced productivity in R&D, dropping net selling

prices. It’s been seen that new revenue equations will favor the pharma industry in the coming

five years.



52

We will focus on targeted treatment solutions with health care kiosk, integrated network

approach. The kiosk will aim at the managed care model along with personalized drugs. New

revenue models are favoring pharma companies despite the fall of block busters. We need to

significantly cut down costs, by as much as 13.5% of the revenues, and offset future loss of

revenues caused by withdrawing block busters. The winning proposition will come in the form

of short and long term strategies. Short term strategies are mainly geared towards pre and post

patent expiry directives and the launch of semi block busters. Long term strategies revolve

around owned health care kiosks and consistent improvement in efficiency and cost reduction

with the help of the integrated network model.

The deciding factors for profitable growth and survival of this industry will be

Efficient use of Knowledge engineering techniques

Structured management of innovation

Setting up systems to enforce the acquired rights and

At the same time evolving creative process of cooperative working and sharing of benefits

Outlook

India has had a strong domestic pharmaceutical industry and a rapidly expanding market with

a population of over a billion and a rapidly expanding economy. Prevalence values of many

diseases are likely to increase with expansion of population, urbanization and with higher

identification rates in the coming decade. As per the Cygnus estimates the Indian (in the

figure) pharmaceutical industry is likely to double its value to USD14.70billion in 2011. The

investment in R&D, filling of higher number of ANDAs and DMFs in highly regulated

market, mergers & acquisitions, in-licensing, skilled labour force, high standard scientific base

and revenues from CRAMS will give necessary edge to Indian companies in the coming years.

India has over 80 FDA-approved manufacturing facilities in 2007, which is estimated to grow

at the rate of 30% by the end of 2008.



53

CHAPTER 4 COMPANY PROFILE

KRR DRUGS & INTERMEDIATES PVT LTD.

(FORMERLY MEDEVA LABORATORIES PVT LTD)



54

Name of the Company : KRR DRUGS & INTERMEDIATES PVT. LTD.

Constitution : Private Limited Company

Date of Incorporation : 30th January,2002

Registered Office : 406, Aditya Trade Centre,Maitri Vihar, Ameerpet,Hyderabad-500 038

Manufacturing Facilities : Unit –I (Existing)Kazipally, Jinnaram MandalMedak DistAndhra Pradesh

Unit II( Proposed )Plot No 78, survey No 37p,46p & 40p, Thanam Village, Jawaharlal Nehru Pharma City, Parawada, VisakhapatnamAndhra Pradesh



55

Proposed Capacity (Per Annum) :Mebeverin - 36840 KGS

Entacapone - 18420 KGS

Fluconazole - 36840 KGS

Tramadol - 90840 KGS

Citerazine - 90840 KGS

Biperiden HCI - 324 KGS

Cefdinir & Cefexime Side Chains – 36840 KGS

Nature of Industry : Manufacturing of Bulk Drugs & Bulk Drugs Intermediates

Promoters : Mr. V. Venugopal ReddyMr. V. Vamsi KrishnaMr. D. Venkateswara Reddy

4.1 INTRODUCTION

KRR Drugs & Intermediates Pvt. Ltd. (formerly known as MEDEVA Laboratories Pvt. Ltd.) is a part of

FINE GROUP OF COMPANIES, a group involved in diversified fields of business. KRR Drugs is in

the activity of manufacturing Bulk Drugs and Bulk Drug intermediates. Initially it was manufacturing

Omeprozole, which is an active pharmaceutical ingredient (API). The company has entered into an

agreement with M/s. Orchid Chemicals & Pharmaceuticals Ltd. which is a 100% Export Oriented

Unit (EOU) and is one of the leading Pharmaceutical companies in India. Orchid Chemicals is a well

known company engaged in the manufacture of tablet, capsule and injectibles in a huge way. The

understanding with Orchid Chemicals is to manufacturing certain products on a conversion basis

initially for a certain period of time and then gradually changes to total sales of the same products. The

company is now proposing to start producing the products on a sale basis which will enable the

company to take off in the growth path.

1. Promoters

The promoters are Mr. V. Venugopal Reddy, Mr. V. Vamsi Krishna and Mr. D. Venkateswara Reddy.

The promoters are dynamic and have rich experience in the business and are men of means. They have



56

proven track record of establishing and profitably managing Bulk Drugs and Bulk Drug intermediates

businesses.

3. General Commercial Capability

With over 15 years of experience in the industry, Fine Group has exhibited sound commercial

capabilities in terms of manufacturing of Bulk Drugs and Bulk Drug intermediates. Successfully

running and making continuous profit indicates a sound commercial capability and soundness of

business operations sustained over the period.

4. Credibility

Good Commercial capability and also longevity of relationships with Pharma Majors and other

Industries indicates a healthy market credibility and soundness of business operations.

5. Financial Strength

Credit Facilities and timely repayment and continued financial support indicate excellent financial

strength of the Company. The promoters are men of means and are capable of mobilizing the required

resources.

6. Track Record

The promoters of KRR Drugs have a successful track record of manufacturing Bulk Drugs and Bulk

Drug intermediates for over 10 years.

7. Products

The existing products are production and conversion of Cephalosporin-G, Vinyl Ester, and TP-Acid.

The company intends to manufacture the proposed products:

Mebeverin - 36840 KGS

Entacapone - 18420 KGS

Fluconazole - 36840 KGS

Tramadol - 90840 KGS

Citerazine - 90840 KGS

Biperiden HCI - 324 KGS

Cefdinir & Cefexime Side Chains - 36840 KGS

8. Risk Analysis and Mitigation



57

The parameters, which significantly influence the project viability, are identified as:

Raw Material Price and

Selling price of the drugs.

4.2 THE FINANCIAL HIGHLIGHTS OF THE COMPANY FOR THE LAST THREE

YEARS ARE AS BELOW:-.

(Rs. In Lakhs) 2005-06 2006-07 2007-08

Particulars Aud. Aud. Prov.

Gross Sales 292.49 463.02 543.73

Operating profit -26.79 22.10 39.33

Interest 45.59 65.75 45.59

Depreciation 35.63 41.33 -26.79

Profit Before Tax -26.79 10.12 39.33

Profit After Tax -17.16 4.19 30.56

4.4 PROMOTERS BACKGROUND

The Company is managed by a Board of Directors consisting of the following members:

Mr. V. Venugopal Reddy

Mr. V. Vamsi Krishna

Mr. D. Venkateswara Reddy

PROMOTERS

1. V.VENUGOPAL REDDY, (M.Tech), Managing Director: Mr. Venugopal Reddy is a

postgraduate from REC-WARANGAL, in the field of power systems. He has over 30 years of

experience in various fields and is also a class-A civil contractor. He enjoys a huge goodwill

among his peers and is well known for his social endeavors. He is a true entrepreneur and has

successfully executed various projects. He was also a well renowned sportsman during his

academic years. He is also Managing Director in Fine Fab Pvt. Ltd.



58

2. V.VAMSI KRISHNA, (M.S.), Executive Director: Mr. Vamsi Krishna has completed his

graduation as a bachelor of engineer in the field of electronics and communication. He has also

completed his masters’ degree in the field of computer science, in Northern Illinois University,

Chicago, U.S.A. He has also worked in the U.S.A. for over 2 years in one of the most reputed

companies in the U.S.A., before returning back to India. He has since been instrumental in

developing the various companies & firms in the group. He is also Executive Director in Fine

Fab Pvt. Ltd and Managing Director of Hexagon Constructions, Indira Dairy Pvt. Ltd.

3. D.VENKATESWARA REDDY (B.E.), Director: Mr. Venkateswara Reddy has completed

his graduation as a bachelor of engineer in the field of Mechanical Engineering. He has over

17 years of experience in the field of steel fabrication and is known to lead by example with

respect to work ethics. He is also Director in Fine Fab Pvt. Ltd and Managing Director of Fine

Alloy Castings Pvt. Ltd.

4.5 ASSOCIATES

Hexagon Constructions is in the field of quality construction for about one year and has already

completed many buildings. More projects are in the offing. Some of the prestigious projects

taken up in the recent past include:

Several blocks at the Orchid Research Laboratotries Ltd. At Shollinganallur, Chennai

Several blocks in the M/s. Orchid Health Care, formulation campus at Irrungatukotai,

Tamil Nadu.



59

Several blocks at the Aurangabad campus of M/s. Orchid Chemicals & Pharmaceuticals

Ltd. ,

Entire campus of Parle Agro products Ltd. At Pashamailaram, Hyderabad.

Financial Highlights

Rs in Lakhs

PARTICULARS 2005-06

(Audited)

2006-07

(Audited)

2007-2008

(Prov)

Sales 1073.54 2077.95 2654.86

Operating Profit (PBDIT) 115.40 192.16 276.08

Interest 25.55 30.14 27.39

Profit before Depreciation 89.85 162.02 248.69

Depreciation 12.66 19.66 20.70

Profit Before Tax (PBT) 77.19 142.35 227.99

Profit After Tax (PAT) 77.19 142.35 227.99

The company is engaged in the activity of manufacturing stainless steel, mild steel and ferrous

aluminum castings. The plant is currently producing around 1700 metric tonnes of castings per

annum. The plant is ISO 9001:200 certified. The company has been rated SE-3B by CRISIL.

Summarized Financial Position Rs in Lakhs

PARTICULARS 2005-06

(Audited)

2006-07

(Audited)

2007-2008

(Prov)

Sales 99.79 495.66 677.08

Operating Profit (PBDIT) -5.86 47.10 79.59

Interest 12.19 31.01 38.55

Profit before Depreciation -18.05 16.09 41.04


Profit Before Tax (PBT) -23.94 5.07 29.63



60

Profit After Tax (PAT) -15.97 2.03 16.72

A milk chilling plant near Kavali town is set up... The plant has started production in the FY

2006-07. The plant has a capacity to chill about 20,000 liters of milk per day. A marketing tie-

up has been made with M/s. Vyshnavi Foods Pvt. Ltd. Another unit is being at up at Kaligiri,

Nellore Dist. This is slated for production in the first haly of the current year having a capacity

of 15,000 litres per day The Company has been rated SE-2B by CRISIL.

Summarized Financial Position (Rs. In lacs)

PARTICULARS 2006-2007

(Audited)

2007-2008

(Provisional)

Sales 354.21 775.57

Operating Profit (PBDIT) 21.92 55.88

Interest 13.50 17.47

Profit before Depreciation 8.42 38.42

Depreciation 7.08 7.47

Profit Before Tax (PBT) 1.34 30.94

Profit After Tax (PAT) 0.34 20.86

Fine Fab Pvt. Ltd., an ISO 9001:2000 certified company, is primarily into steel fabrication of

primarily chemical equipment which are used in bulk drugs and pharmaceutical companies,

like Chemical Reactors, Heat Exchangers, Receivers, Storage Tanks, Nutch Filters, and Driers

etc. Other equipments which are manufactured include Radial gates, hot mix plants etc. The

equipments are also exported to Middle East and East Asia. Finefab has also received the

excellence award for best exporter by the All India Small scale industries counsel during the

year 1997. The company has been credit-rated SE-2B by CRISIL.

Summarized Financial Position

(Rs. in Lakhs)

PARTICULARS 2005-06

(Audited)

2006-2007

(Audited)

2007-2008

(Provisional)



61

Sales 507.40 648.30 787.95

Operating Profit (PBDIT) 12.76 16.17 38.02

Interest 5.47 17.10 38.55


Profit Before Tax (PBT) 7.03 10.10 31.88

Profit After Tax (PAT) 2.87 5.03 20.72

CHAPTER 5



62

REVIEW OF LITERATURE

“The new economy”, “the information economy”, “the digital economy”, “and The network

economy” The list of different names of the business environment, or economy that is

emerging today could be very long. But, what is really new with this economy? From

literature, it is possible to identify at least three different areas that drive and shape new

conditions in business today. These areas are knowledge, globalization and technology.

According to Blomgren & Kuikka (1998), the new economy is described as knowledge-

intensive, where the focus has shifted from physical assets to brain capacity. The most

valuable asset within knowledge companies is the intellectual capital, which gives the

power to the employees. These companies are evaluated according to the intellectual

capital rather than physical investments. The major goal within these companies

becomes to generate, develop and spread knowledge and innovations. Tapscott (1996)

argues that brain rather than muscles will create more of the economy’s value and



63

knowledge work becomes the basis of value, revenue and profit. Companies have to add

knowledge through the whole value chain. Additionally, Bohlin (1992) states that, besides

experience, humbleness and power of initiative, knowledge becomes one of the

crucial factors for creating competitive advantage.

Tapscott (1996) further argues that, since knowledge and technology know no boundaries,

globalization becomes even more important in the new economy. New economic and

political regions and structures will lead to a decline in the importance of national borders

and increase the interdependencies among countries. Blomgren & Kuikka (1998) mean

that different regions will be more important than national borders. In addition, Kelly (1998)

also points out that the new economy is extremely world-wide, meaning that

companies are competing in an open market without any national borders. Furthermore,

also Blomgren & Kuikka constitute that the key success factor for companies in this economy

is, in the end, to act globally.

Finally, Tapscott (1996) points out that the main characteristic of the new economy is

technological changes. In the traditional economy, information flows w e r e p h y s i c a l . Cash,

i n v o i c e s a n d face-to-face m e e t i n g s w e r e t h e dominating ways of doing business.

Today, however, more or less all information is transferred digitally and information

becomes reduced to bits stored in computers, racing at the speed of light. In addition,

Blomgren & Kuikka (1998) conclude that modern information technologies will become

critical strategic tools in the future. Information technology will result in new drivers and

possibilities when it comes to doing business in the new economy.

I believe that the characteristics discussed are not new phenomena, which are not highlighted

before in business debates. Some of them have been discussed for several years, also in

traditional industries. However, in the context of the new economy, they seem to become

even more important and the reasons for changed market conditions, which set the rules for

companies today. Therefore, the next question is what consequences the changes will have

for companies competing in this new environment.

From Downes & Mui (1998), we find that one important implication of the changes is

the occurrence of ‘killer applications’. Killer applications are new products and services



64

that dramatically change the power balance between the actors of the market. For instance,

Blomgren & Kuikka (1998) mean that one of the major differences to the traditional

industry is low barriers to entry. Therefore, it is very important, in an early stage, to

identify and react to changes in the market, such as new technologies within services and

products.

Because of technological development and globalization, new competitors are born every

where and in a very short time. The new conditions make new demands on managers, to

be extremely future-oriented and innovative. Low barriers to entry give organizations

high margins very fast, but can also dramatically change the profit to loss. In comparison,

Shapiro & Varian (1999) state that the industrial economy is populated with oligopolies, where a

few large firms dominate the market and where market shares will fall only gradually. In

contrast, the new economy is populated by temporary monopolies, which increase the

importance of speed and future orientation. Blomgren & Kuikka (1998) and Tapscott (1996)

mean that successful companies within this economy must change constantly to be able to

stay ahead. New products and services are born and product life cycles are counted in days or

weeks rather than years.

From literature, we find that timing and speed have become a business competitive

strategy. Time has been a competitive advantage comparable to technological products and services.

Time to market, time to volume, time to cash flows will decide who will set the standard

and the structure and get access to attractive and strategic market shares.(Blomgren &

Kuikka, 1998, Tapscott, 1996). Furthermore, Shapiro & Varian (1999) mean that the old

industrial economy was driven by economies of scale while the new economy is

driven by economies of networks. Since new ideas are born continuously, former

competitors may become potential partners. Today, companies need partners and alliances in order to

get access to technology and market shares.

Networks become crucial for reducing risk and time for development, lowering the costs and

increasing flexibility. Constant innovation is similar to constant consumption of new ideas,

which lead to that organizations are living on the edge of constant chaos. The speed and the

time may decide who will be eaten and who will not.



65

Shapiro & Varian (1999) conclude that the critical success factor lies in the computer

network, if we can share the same software and the same files. It becomes very

dangerous to fall below the critical mass. Shapiro & Varian call this the network effect,

meaning that companies connected to the bigger network will be stronger while

companies that are not connected will be weaker. There appears a win-win game for all

parties involved. The network economies and network effect make co-operation more important than

ever. The success lies in finding the right partners instead of fighting with each other.

Consequently, they mean that the competitive strategy for the new economy is to combine

different solutions into integrated networks in order to achieve the critical mass of users.

It follows from this discussion that a set of new conditions seems to have arisen, which

may affect the business environment and the market conditions for companies. One

consequence of the described changes in the business environment is that strategic

alliances between firms seem to become more important due to increased importance of

networks, speed and timing. Hence, we believe, in the context of these new conditions there

may be new reasons for why companies conduct M&As in the new economy and how the process is

managed in comparison to traditional industries.

From a theoretical point of view, M&A research can be divided into two basic approaches.

The first approach of research sees the outcomes of M&As as results of individuals’

actions and behavior in the company. This approach focuses on the transaction as an

internal process where proper planning and integration are stressed. Failures are often

explained by managers’ inability and lack of knowledge of handling internal issues in the

process. Thus, the internal approach is based on the assumptions that companies'

conduct changes in response to internal demands. From this point of view, M&As are

conducted in order to increase the internal efficiency. (Jemison & Sitkin, 1986)

In addition to this internal approach, other researchers adopt an environmental perspective of

what drives M&As. The main assumption of this approach is that organizational transformations

often take place in response to environmental demands. Buono & Bowditch (1989) argued

that, although companies tend to behave and act in response to internal demands, most

major organizational changes occur in accordance to the organizations’ interplay with its



66

environment. Companies that are acting in a stable and predictable environment are

more likely to keep old routines and structures.

Buono & Bowditch (1989) propose that when companies’ external environments meet

fundamental changes, companies tend to respond by changing their structures.

Uncertainties and ambiguities tend to emerge when companies try to understand and respond

to new conditions in their environment. Additionally, Meyer & Rowan (1977) argue that

companies are open systems that interplay with their environments. They also mean that

external forces will influence companies to change their structures. Hence, according to the

characteristics of the new economy, companies seem to be affected by a set of new

environmental factors, such as increased momentum in technology changes and increased

importance of global networks. With the environmental approach in mind, it is reasonable

to suggest that changed conditions may influence the way managers are carrying out M&As.

5.2 THEORETICAL APPROACH OF THE THESIS

In figure 1 below, the study presents a schematic illustration of essential concepts of our

study and how they are related. The figure makes no demand to be a causal model but should

rather be seen as a conceptual scheme. The model serves as a tool for the collection of data

and theoretical and empirical analyses. As shown in the model, the study divide the

internal M&A process into three different phases. The idea phase, which includes the

initial idea to merge and the motives behind. The decision-making phase, where the idea to merge is

evaluated and decision is taken. The integration phase, including how managers

look upon and plan for integration issues.



67

Furthermore, as the study proposed in the problem discussion, it is not enough to look upon

M&As as an in terna l process . Instead, in order to unders tand the transaction one

must take into account environmental factors that may influence and restrain the

process. Hence, we suggest that institutionalization of behavior, environmental pressures and

environmental dependency are factors that affect the whole M&A process through the

idea, decision-making and integration phase. In the next chapter, we will deepen the

discussion about our theoretical approach. We will start by presenting a broad overview of the

M&A research field and then separately describe each part of the model proposed.

Figure. Theoretical Approach of the Thesis

Overview of the M&A Research Field

From M&A literature, it is possible to distinguish several different schools or fields of

research; the strategic, organizational, financial and economic school. Each school of thought

addresses its own perspective of M&As, with different methodologies and different

objectives. Consequently, the different approaches have divergent theoretical understanding

of what accounts for the M&As success and failure. (Larsson, 1989, Haspeslagh &

Jemison, 1991, Gaughan, 1991, Bouno & Bowditch, 1989). In order to broadening our

understanding of what really drives M&As, we will here briefly examine the different schools.

The strategic perspective seems to be well explored by researchers, where the focus is on

M&As as a strategy to growth in firms. Barney (1997) and Porter (1980) are examining


Institutionalization of Behavior

Environmental Pressures

Environmental Dependency

Factors Influencing and Restraining the M & A Process

IDEA PHASE

DECISION MAKING PHASE

INTEGRATION PHASE

M & A PROCESS


68

different business strategies and strategic relatedness of M&As. They discuss different

diversification and combination possibilities depending on the strategic position of the specific

firm. In addition, Ansoff’s et al (1971) have conducted studies where acquisition

strategies are evaluated through performance measurements and how firms plan and

manage M&As. Hence, Haspeslagh & Jemison (1991) distinguish between two

subgroups of strategy researches, the acquisition performance group and the acquisition

planning group. The first group shares the financial economists’ interest in performance and focuses

on identifying the success factors for different M&As combinations. The second is more focused

on developing strategic analysis concepts to improve the performance.

A second school of thought in the M&A research are the economic and financial

perspectives, which are focused on the explicit economic outcomes of M&As. The

economic school highlights production efficiency through economies of scale

and scope . The financial school includes accounting motives, stockholder value and

gains from tax advantages are explored. Researchers have generally relied on the stock

market value to obtain the best estimate of future M&A performance. (Ravenscraft & Scherer

1987, Rydén 1971, Steiner, 1975).

In the organizational perspective, researchers focus on the human side of the M&A

process, how M&As affect the individuals in the firm. For instance, Risberg (1999)

addresses the problem of how various employees interpret objectives, corporate identity

and other meanings associated with the post- acquisition process. Additionally, also

Buono & Bowditch (1989), investigate the human side and the interrelationship between M&As and

the employees. The organizational approach of M&As is also highlighted in the perspective

of corporate cultures (Kleppesto, 1993).

From this brief overview of literature, we see that M&A activities have fascinated

researchers and practitioners for decades. Traditionally, these seem to have been a clear

distinction between the different approaches, each focusing on different aspects. We think this

is important to realize since the explanations of why M&As are undertaken and how the

processes are managed are driven by the different schools.

The Emergence of a Process Perspective



69

As discussed, there are different perspectives on M&A activities and research has been

more single-voiced than multi-voiced. However, many strategic and organizational

researchers combine several approaches in order to decrease the gap between the different

perspectives (Haspeslagh & Jemison, 1991, Bouno & Bowditch, 1989). The reason for this is

that the intended benefits of M&As are often not realized, which have led both strategic and

organizational literature to start emphasizing the connection between hard and soft issues. For instance,

one of the most famous approaches is Haspeslagh and Jemison’s (1991),

process perspective, which is different from the traditional view of how M&As are conducted.

The traditional perspective of M&As seems to be based on a neo-classic view of how

decisions are taken. The neo-classicists suppose that managers behave rationally and make

their decisions on economic efficiency. The rational perspective stems from general

strategic research, such as Porter (1980), Ansoff, (1965). The rational approach is built

upon a deterministic view, where the world is seen as rational and where reality is concrete. In

accordance to the conventional view, Porter and Ansoff suggest a rational model for

decision- making in strategy planning. In their models, objectives are clear and facts are

gathered and evaluated in an orderly way with explicit purposes. A certain cause would lead to a

certain effect since all people will respond in a shared rational way.

In accordance to the neo-classical view, the conventional view sees M&As as a result of a

sequential process of rational planning. The transaction is evaluated by quantitative measures

and the outcome is determined when the transaction is assured. The M&A justification are

articulated in terms of strategic goals and how well the transaction will serve these goals. This view

presumes that it is possible to understand and predict the value of the deal already in the

planning phase. (Haspeslagh & Jemison, 1991)

The process perspective differs from the conventional view since it considers the M&A

transaction as a coherent process where all sequences affect each other and together

determine the outcome. In comparison to general strategic theory, we think that the process

view is similar to the voluntarism perspective, where the world is seen as subjective and

should be experienced. Mintzberg (1979), who supports this view, means that



70

formulations and realizations of strategies are not distinct. Instead, strategies and plans are

emerging from a process of continuous learning.

The process view suggests that strategic decisions are not comprehensive rational

choices, but outcomes of processes governed by one or several influences.

Furthermore, M&As could not be seen as independent on-off deals. Instead, they should be

viewed as means, which will help the company to create value in the end. All the actions

and activities through the whole process will determine the outcome. Haspeslagh & Jemison

(1991) argue that it is not enough to look upon fragments of the process. One must

consider the whole process to be able to understand the different parts. The process perspective emphasizes

that the acquisition process itself is a factor, in addition to strategic and organizational fit, that

affects the outcome.

We have chosen to partly build our theoretical approach upon Haspeslagh & Jemison’s

(1991) process view. In accordance to our purpose, we are adopting a broad perspective and

we find the process view suitable since it considers the whole M&A process itself as a factor

determining the outcome. The view will be a supporting tool for understanding how

companies are managing their M&A processes in the new economy. For instance, if the

case companies are acting in accordance to the process view or the conventional view.

The Process Perspective

A common way to describe the M&A as a process is to divide it into different phases. In

contrast to the conventional view, the process view sees the phases as highly integrated.

Haspeslagh & Jemison’s (1991) propose four phases; idea, acquisition justification, acquisition

integration and results, see

Figure 2 – THE PROCESS VIEW OF MERGERS & ACQUISITION



71

Source: Haspeslagh & Jemison (1991), p. 12.

According to Haspeslagh & Jemison (1991), in the idea phase, potential M&As are suggested

and suitable partners are evaluated. In this phase, strategic and organizational fit is

emphasized even if they only determine the value potential. They mean that most acquisitions

are a combination between a formal planning process and opportunism. For instance, if the

company has formally identified a “growth gap” or if the acquisition is triggered by an

opportunity. Furthermore, in the acquisition justification, the transaction is evaluated

and the final decision is made. In this stage companies should not only evaluate the potential

outcome, but also plan for how value is to be created. For instance, plan for how

integration issues can be carried out. Important to consider is how people from the two

organizations can co-operate in order to create value from the transaction. The

integration stage is about transfer of strategic capabilities where people from the two

organizations learn to work together.

During the different phases in the process, a set of problems appears that need to be carried

out before the desired results finally can be achieved. Haspeslagh & Jemison, (1991) argue

that the phases are interactive and that they must be considered together. In the next

section, when we are explaining the specific phases in our theoretical approach, we will

extend the discussion about important issues and problems.


IDEA ACQUISITION JUSTIFICATION

ACQUISITIONINTEGRATION

RESULTS

Decision Making Process Problems Integration Process Problems


72

Buono & Bowditch (1989) also propose a process perspective, where they identify

different stages in the M&A process. In contrast to Haspeslagh & Jemison (1991), they

describe the M&A transaction as not only an internal process. They discuss how ambiguities

and uncertainties in the environment will affect the actions in the different phases.

Buono & Bowditch (1989) state that, although companies conduct changes in response to

internal demands, most major organizational changes take place in response to environmental

demands. When the environment of the companies is relatively stable and predictable, the

company is more or likely to keep old routines and structures. On the other hand, when

companies face environmental changes they tend to respond by transforming their structures.

Furthermore, Bouno & Bowditch (1989) argue that ambiguities tend to emerge when the

organization tries to understand, make sense of and respond to conditions in their

external environment. Ambiguities include changes in technology, market, socio-political

and economic variables. Bouno & Bowditch mean that all these uncertainties create a number

of ambiguities for managers in terms of deciding on appropriate strategic responses. For

instance, how the firm should position itself with respect to its products, services and other

industry players.

According to Buono & Bowditch (1989), M&A decisions are influenced by the different

ambiguities and uncertainties created by changes in the environmental conditions. Hence, the

challenge of M&A activities is to reduce or avoid environmental uncertainty and

ambiguities. The larger degree of uncertainty, the greater the tendency to conduct

M&As. As the level of environmental uncertainties increase, M&A discussions tend to

begin. In many cases, fears arise that unless the firm grows or get access to additional

resources, large companies will destroy it, it will be less competitive, or it might even fail.

In other cases, M&As are seen as a way of developing new opportunities. Since strategic

discussions like M&As are usually conducted at top-management level of the company, most of

this uncertainty and ambiguity is focused on the management level.

As we see it, Buono & Bowditch (1989) mean that the different ambiguities and

uncertainties play a great impact on the M&A process. In contrast , Haspeslagh &



73

Jemison (1991) emphasize internal aspects of the process and do not include environmental

influences. In their internal perspective, the focus is on how to create value through the M&A

process.

As e a r l i e r m e n t i o n e d , we have adop ted Haspes l agh & Jemison’ s (1991)

perspective to be able to understand how our case companies are planning for value creation.

For instance, what drives the idea, how decisions are taken and how the companies are

planning for integration? However, in accordance to our research question, we find it

reasonable to suggest that new market conditions may be one of the main aspects that differ

for companies in the new economy, compared to traditional industries. Therefore, w e

believe that Bouno & Bowditch (1989) highlights important aspects since they consider influences

from the external environment on M&A decisions. This is also the reason for the

perspectives included in our theoretical model, where we combine the process view with

an environmental approach.



74

CHAPTER 6

THE MAIN MOTIVES OF MERGERS

AND ACQUISITION

Motives

The findings from the theoretical material and the empirical investigation will be analyzed both

horizontally and vertically according to the following: -



75

There are two types of motives involved in merger and acquisition and these are Explicit and

Implicit motives.

Explicit Motives

Synergy: Synergy means that the merged firm will have a greater value than the

sum of its parts as a result of enhanced revenues and the cost base.

Economies of Scale: Economic of scale refer to the reduction in unit cost achieved

by producing a large volume of a product. Horizontal mergers aim at achieving

economies of scale. This phenomenon continues while the firm grows to its

optimal size, after which a firm experiences diseconomies of scale.

Economies of Vertical Integration: Economies of vertical integration are

achieved in vertical mergers. It makes coordination of closely related operating

activities easier.

Entry to New Markets and Industries: A firm that wants to enter a new market

but lacks the know-how can do so through the purchase of an existing player in

that product or geographical market. This makes the two firms worth more

together than separately.

Tax Advantages: Past losses of an acquired subsidiary can be used to minimize

present profits of the parent company and thus lower tax bills. Thus, firms have a

reason to buy firms that have accumulated tax losses.

Diversification: One of the reasons for conglomerate mergers is diversification of

risk. There are two types of risks associated with businesses- systematic and



76

unsystematic risk. Systematic variability cannot be removed by diversification and

hence mergers are not able to eliminate this risk. Though, unsystematic risk can be

spread through mergers.

Managerial Motives: The management team of the acquiring firm tends to benefit

from the merger activity. The four most important managerial motives for merger

are empire building, status, power and remuneration.

Implicit Motives

Hubris: It is like a maturity test for the owners and the company boards of directors

when they see the opportunity to form a new business cycle.

Excess of Money: When a company has excess of money, the question of what to

do with it eventually comes up and this leads towards merger and acquisition.

Steps Involved in an Acquisition Valuation

Procedures for Analyzing Valuation of the Firm

An acquisition valuation programme can be segregated into five distinct steps like:

Step 1: Establish a motive for the acquisition.

Step 2: Choose a target.



77

Step 3: Value the target with the acquisition motive built in.

Step 4: Choose the accounting method for the merger/acquisition - purchase or pooling.

Step 5: Decide on the mode of payment - cash or stock.

Evaluations

Implicit Motives

Financing Mergers

The triangle in the figure provides a view of acquisition financing mechanism. As the options

for financing the acquisition would increase, the layers in the triangle would also increase. But

the basic question that arises or the consideration that comes is whether the transaction should

be made in cash or stock as it has different effect on the various stakeholders of both the

organizations the acquiring firm as well as the target firm. The influence of method of payment

on post-merger financial performance is ambiguous.

Post merger performance maybe affected by the means of payment in the takeover. There are

mainly two ways, in which mergers can be financed,

Cash

Stock



78

Using cash for payment helps the acquirer's shareholders to retain the same level of control

over the company. Another obvious reason of financing mergers through cash is the simplicity

and preciseness that gives a greater chance of success. Another advantage of using cash to the

target's shareholders is that it is more certain in its value. Also, the recipients can spread their

investments by purchasing a wide-ranging portfolio. There is also a disadvantage to target

shareholders. They may be liable to pay capital gains tax. This is payable when a gain is

realized.



79

CHAPTER 7

DATA ANALYSIS AND

INTERPRETATION



80

1. OWNERSHIP PATTERNS OF THE MERGED AND MERGING FIRMS

Merging firms Merged Firms

Ownership No. No.

Domestic 20 28

Foreign Subsidiaries

11 20

INTERPRETATION:

The above diagram suggests the ownership pattern followed by the merging and the

merged companies in the recent past. Form the above diagram we can conclude that, in

the case of both merged and merging companies most of the time ownership is retained

by the domestic companies.



81

2. CLASSIFICATION OF THE MERGING AND MERGED FIRMS BASED ON THE

SIZE OF THE BUSINESS (10 million – 1000 million)

Merging Merged

Size No. No.

Large (> 1000 Million) 28 1

Medium (10-1000 Million)

18 27

Small (< 10 Million) 1 0

INTERPRETATION:

The above diagram shows a shift in the trend. The most of the merged companies (28)

falls under medium sized companies. But in the case of merging companies the larger

companies with the minimum of one billion investments is going for merger. Hence we

can conclude that the larger companies (> one billion) are more interested to go for

merger strategy to expand themselves.



82

3. TYPE OF MERGERS RUNNING IN THE INDUSTRY

Type No.

Horizontal 38

Conglomerate 9

Other 3

INTERPRETATION:

The survey suggested that, about 90 percent of the companies are looking for horizontal type of

mergers. Hence we can conclude by saying that the horizontal type of merger is most preferred

type of merger for the domestic companies. It is followed by the conglomerate type of merger.



83

4. TYPE OF RELATIONSHIP BETWEEN THE FIRMS INVOLVED IN THE

MERGERS IN INDIA

Related Unrelated

Ownership No. No.

Domestic 25 7

Foreign Subsidiary 13 2

Domestic-Foreign 0 6

INTERPRETATION:

The above diagrams states that the domestic – domestic relation is seen in the mostly

recent time. We can notice that the relation between the domestic and foreign subsidiary

is nil in the related case, means the relation ship between the same industry is not seen

through out the survey we conducted. But in unrelated case the mergers among the

foreign and a domestic company can be noticed.



84

5. RELATION SHIP PATTERNS OF THE ACQUISITIONS ENTITIES IN INDIA

INTERPRETATION:

Our survey suggest that relation pattern in the case of acquisition is slightly different

from the previous case i.e., merger. In acquisition the foreign-foreign relation ship is

higher than any other case; it means most of the foreign companies use the acquisition

strategy rather than a particular domestic firm. Hence we can conclude that most of the

acquisition cases happen between two different companies of different countries.


Category Ownership No.

I Domestic- Domestic 15II Foreign- Foreign 20III Foreign- Domestic 6IV Domestic- Foreign 8V Foreign- Domestic Foreign 1


85

6. CLASSIFICATION OF THE ALLIANCES IN THE M&A DEALS ON THE BASIS OF

THE MOTIVES INVOLVED (WHAT MOTIVATES THE FIRMS?)

Motive No

Marketing 21

Marketing & Manufacturing 4

Expansion of Business 18

R&D and Technology 4

Not Specified 3

INTERPRETATION:

Our survey suggests that for most of the companies marketing turned to be favored reason to go

for merger and acquisition. It is followed by the expansion of business. Hence we can conclude

that marketing and Expansion of business are the two most preferred reason for the alliance



86

7. DISTRIBUTION OF SALE PROCEEDS BETWEEN THE ALLIANCES

Category Type No.

I Domestic –Domestic 5

II Domestic- Foreign 33

III Domestic Foreign Domestic

1

IV Foreign-Domestic 6

INTERPRETATION:

Many of the company’s are going for domestic foreign sales foreign - domestic sales are

next to these sales with a share of 6%, domestic –domestic sales occupies next to this

merges companies. Like wise the sales are distributing among the merges alliance

companies.



87

8. Parameters taken into account while evaluating the motives behind the firms

Gross profit margin 0

Net profit margin 5

Return on capital employed 0

Return on net worth 3

R&d intensity 9Advertisement intensity 0

Marketing intensity 18

Cost intensity 3

Export intensity 7

Import intensity 0

Capacity utilization 5

INTERPRETATION:

The companies going for the merger and acquisition mainly looks for certain parameters;

some of them are listed above. Among the listed parameter marketing intensity termed to

be highly preferred one which is followed by the R & D. This means most of the

companies look at the marketing and R & D skills of the other company with which it is

planning or planned to go for alliance.



88

9. Distribution of performance of the mergers during the two phases i.e. before and after

merges.

Parameters Pre merger firms vs. post merger firms

Above average Below average Above average Below average

Gross profit

margin

08 42 40 10

Net profit

margin

06 44 41 09

Return on

capital employed

04 46 43 07

Return on net

worth

05 45 41 09

R & D intensity 08 42 43 07

Marketing

intensity

09 41 44 06

Cost intensity 05 45 47 03

Export intensity 03 47 48 02

Import intensity 14 36 42 08

Capacity

utilization

12 38 44 06

INTERPRETATION:

The various parameters considered while going for mergers are ROI, ROE, Marketing intensity

capacity utilization; cost intensity, import intensity, R&D intensity, and net profit margin.



89

10. Comparison of the firms involved in the merges based on select parameters

Parameters Pre merger firms vs. post merger firms

Increased

(present)

Decreased

(Previous)

Difference

Gross profit

margin

50 24 26

Net profit

margin

26 12 14

Return on

capital employed

32 18 14

Return on net

worth

28 22 06

R & D intensity 40 10 30

Marketing

intensity

38 12 26

Cost intensity 40 10 30

Export intensity 42 08 34

Import intensity 16 34 (18)

Capacity

utilization

42 08 34

INTERPRETATION:

The various parameters considered while going for mergers is marketing intensity is always

better prospectus for a companies after mergers, export intensity gives more benefits to the

company, R&D intensity helps the company for better innovations and inventions, Profits are

always more for a post merger for than a pre merger form.



90

CHAPTER 8

FINDINGS AND SUGGESTIONS



91

FINDINGS:

As per the analysis the findings are found as suggestive. A further probe may be required to

determine exact cause for mergers and acquisition and to take corrective measures for the

pharmaceutical industry as a whole. The analysis was done with the purpose to highlight the

findings to a particular vertical of the industry, thus probe was limited to the fulfillment of

objective.

Domestic merged and merging companies are more in number than in foreign merged

and merging companies.

It is observed that large companies, which have more than 1000 millions investments, are

more in merging and merge companies.

Large companies prefer to go for horizontal merges; next to this some other also prefers

to go for Conglomerate merges. Few companies are going for other forms of merges than

the above two types.

Domestic relation prevails in many of the companies. It shows that out of the total

companies 25 companies are belonged to domestic, 13 belonged to foreign subsidiary and

no company belongs to domestic foreign.

Foreign-foreign ownership is the largest ownership, which consists of 20 companies.

Next to this domestic-domestic relation, this consists of 15 companies.

Many of the company’s are going for domestic foreign sales foreign - domestic sales are

next to these sales with share 6%, domestic –domestic sales occupies next to this merges

companies. Like wise the sales are distributing among the merges companies.

The various parameters considered while going for mergers is ROI, ROE, Marketing

intensity capacity utilization, cost intensity, import intensity, R&D intensity, and net

profit margin.

Mergers can fail for many reasons including a lack of management foresight, the inability

to overcome practical challenges and loss of revenue momentum from a neglect of day-

to-day operations.



92

SUGGESTIONS:

Growth is always essential for the existence of a business concern. A concern is bound to die if it

does not try to expand its activities. The expansion of a concern may be in the form of

enlargement of its activities or acquisition of ownership and control of other concerns. Internal

expansion results gradual increase in the activities of the concern. External expansion refers to

“business combination” where two or more concerns combine and expand their business

activities. This report is made before keeping each and every aspect in mind. The research is

done on behalf of various segments (employee, consumer and shareholders). As per employee

information analysis employee satisfaction, organization culture, salary package, technological

development and hierarchy level. The companies need to develop self sustainability in the areas

of marketing, R&D; exporting the products etc. other wise they need to go for mergers which

may not be that much useful for them.

The Pharmaceutical Industry is growing a rapid phase; to meet up the market

expectations companies should have excellence in all departments. To achieve the

excellence, companies can use Merger and Acquisition as a major weapon or strategy.

The merger and acquisition can be an economical scale strategy for those companies who

are looking to expand themselves (gain Market share, acquire technologies, Managerial

effectiveness) within and even cross border relation.

The companies undergoing merger and acquisition can create a synergy in such a way

that the value obtained of the combined companies must be greater than the sum of the

two individually.

The R&D should be the main objective or motive to be considered while going for

Merger & Acquisition.

Overall it is suggested that mergers takes place in a healthy environment it is really a

benefit for both the merge company and as well merging company too. So it is suggested

that in many of the cases merges gives a favorable results to the group of companies that

are merge ring.



93

CHAPTER 9

CONCLUSION



94

CONCLUSION

The study found that coincided with the global trends, the pharmaceutical industry experienced

greater consolidation through mergers, acquisitions, alliances as well as sale of assets. Even

through the mergers are dominated by the domestic firms, the foreign firms are actively

participating in acquisition as well as alliances which became possible due to the dilution of

various policy regulations. Most of the firms used it as a market expansion strategy rather than as

a technology enhancer and it is evident from the performance analysis carried out, which shows

that there is a significant difference in the marketing expenditure of merging firms compared to

the non-merging counterparts during the post merger period.

With industry challenges climbing, pharmaceutical companies are finding it difficult to sustain

desired or expected revenue growth rates. Although mergers and acquisitions (M&A) offer

several avenues for achieving growth, results are often short-lived. To develop capabilities that

fuel growth over the long term, pharmaceutical firms should exploit M&A transactions as a

potential way to dramatically improve research and development (R&D) productivity. Many

pharmaceutical companies have seen mergers as a way to stay abreast of this building tsunami of

market pressures. However, many mergers have reflected short-term strategies focused on filling

gaps in product portfolios or pipelines, or increasing in scale as a means to increase market share.

Although these strategies are effective in creating temporary benefits, they do not effectively

address more complex, long-term opportunities that can feed organizational success into the

future.

Even through the capacity expansion is one of the major motives of these strategies, the analysis

reaches an opposite trend albeit it is increasing during the post merger period. Majority of the

firms are using merger as a means to expand their product profile and thus to remain risk free. In

short, the merging firms which is less than 10 percent of all firms in this industry overall

performance is far better than the others and their own pre-merger period performance. I

conclude by saying that if this industry is able to transfer a part of their improved performance

due to consolidation to the consumers in the form of a price reduction and a better quality of



95

drugs, it would be a welcome sign and on the other hand if it lead to increased market power and

consequent price rise, then it would deserves special attention.

BIBLIOGRAPHY



96

WEB SITES

www.mergers acquisition.com

www.expresspharmaonline.com

www.thehindubusinessline.com

www.thepharmanetwork.com

www.kppub.com/indian_pharma_industry.htm

www.expresshealthcaremgmt.com

www.Wikipedia.com

www.moneycontoral.com

BOOKS

Title of Book: Mergers + Acquisitions

Author : Dana Vachon

Edition : Hard cover (2007)

Title of Book: Mergers and Acquisitions

Author : Fred Weston

Title of Book: Successful Mergers

Author : Marion Devine

NEWS PAPERS

Express Health Care Management (online)

Business Today

JOURNAL

Mergers and Acquisitions Journal

(www.acg.org/News/pablications/Mergersandacquisitionsjournal/tabid/381/default.aspx)

ARTICLES


http://www.acg.org/News/pablications/Mergersandacquisitions

http://www.wikipedia.com/

http://www.kppub.com/indian_pharma_industry.htm

http://www.thepharmanetwork.com/

http://www.thehindubusinessline.com/


97

Economist.com

(http://www.economist.com/research/articalsbysubject/display.cfm?id=348978)

ANNEXURE


http://www.economist.com/research/articalsbysubject/display.cfm?id=348978


98

QUESTIONNAIRE

Name of the Respondent: ___________________________________________

Designation: __________________________________________________________

Experience: ________________________________________________________________

1. Ownership patterns of the merged and merging firms

Domestic

Foreign Subsidiaries

2. Classification of the merging and merged firms based on the size of the business (10

million – 1000 million)

Small

Large

Medium

3. Type of mergers running in the industry

Horizontal

Conglomerate

Other................................

4. Type of relationship between the firms involved in the mergers in india

Domestic

Foreign Subsidiary

Domestic – Foreign Subsidiary

5. Ownership patterns of the Acquisition entities in India



99

Domestic – Domestic

Foreign – Foreign

Domestic – Foreign

Foreign – Domestic

Foreign – Domestic – Foreign

Others (specify)_________________________________

6. Classification of the alliances in the M&A deal on the basis of the motives involved

(what motivates the firms?)

Marketing

Marketing & Manufacturing

Expansion of Business

R&D and Technology

Not Specified

7. Distribution of sale proceeds between the alliances

Domestic – Foreign

Foreign – Domestic

Domestic – Domestic

Foreign-Foreign

8. Parameters taken into account while evaluating the motives behind the firms

Gross profit margin

Net profit margin

Return on capital employed

Return on net worth

R&d intensity

Advertisement intensity

Marketing intensity

Cost intensity



100

Export intensity

Import intensity

Capacity utilization

9. Distribution of performance of the mergers during the two phases

Parameters Pre merger firms vs post merger firms

Above average Below average Above average Below average

Gross profit

margin

Net profit

margin

Return on

capital employed

Return on net

worth

R & d intensity

Marketing

intensity

Cost intensity

Export intensity

Import intensity

Capacity

utilization



101

10. Comparison of the firms involved in the alliances based on select parameters

Parameters Pre merger firms vs post merger firms

Increased Decreased Difference

Gross profit

margin

Net profit

margin

Return on

capital employed

Return on net

worth

R & d intensity

Marketing

intensity

Cost intensity

Export intensity

Import intensity

Capacity

utilization

Thesis Response Sheet 1

Name: K. Ravi Babu



102

ID NO: HYD/FIN/FW04019

Thesis Guide: Mr. V. Vamsi Krishna

Topic: “What Motivates Pharmaceutical Companies to Go For Merges and Acquisitions”

Date of Consultation with the Guide: 09-02-2009

Out come of the Discussion:

The conversation was on the topic and to decide the content of the report and to plan a process to

continue the thesis.

Progress of the Thesis:

Prepared an introduction of the Thesis.


Name: K. Ravi Babu




103





The conversation was to discuss the few Mergers and Acquisitions and managed to use those as

examples in the Thesis.


Collected Literature on Secondary research of the Thesis.


Name: K. Ravi Babu




104





The conversation was to discuss the Structured Questionnaire planned a process to continue the

thesis.


Collected Literature on Primary and Secondary research of the Thesis.


Name: K. Ravi Babu




105





The conversation was too discussed and analyzed the data gathered from the Filed of experts and

Structured Questionnaire filtered the relevant information needed for the Thesis.


Prepared Report up to Data Analysis and Interpretation


Name: K. Ravi Babu




106





The conversation was too discussed and analyzed the data gather from various secondary sources

like Magazines, News papers and Articles.


Preparing Final Part of Thesis like Recommendations and Suggestions


Name: K. Ravi Babu




107





The conversation was to discussed on few case studies and Worked on the Consultation part of

the Thesis


Preparing Final Report of the Thesis.



final thesis report- ravi

Documents