SNC TIMES

From the Editors, Greetings fellow thinkers!

This month’s edition is a powerful capsule of

analysis and discourse on areas as varied as the

pharmaceutical industry and the automobile sector.

In the March edition, our analysis on the Sector in

Focus: The Pharmaceutical industry cited how

Mergers and Acquisitions would be a major growth

driver for the industry. Almost prophetically, we

saw a major acquisition in the Pharma sector last

month covered in The Sun-Ranbaxy Deal. This

month’s Sector in Focus is the Automobile

industry. The article Poison Pills covers a defensive

strategy against hostile acquisitions. We hope the

article on Profitability Framework gives a valuable

insight into analyzing the revenue of a company.

As always, we believe mistakes in History teach us

as much as, if not more than, the success stories.

JC Penney’s Failure has been analyzed in this

week’s Strategies That Went Wrong. Until our next

rendezvous, keep those grey cells working!

“IN PREPARING FOR BATTLE I’VE ALWAYS FOUND THAT PLANS ARE USELESS, BUT

PLANNING IS ESSENTIAL.”

-DWIGHT EISENHOWER

Sector in Focus:

The Automobile

Industry

Strategies That

Went Wrong: The

JC Penney Failure

Poison Pills

Profitability

Framework

The Sun-Ranbaxy

Deal

ISSUE 02 2

Finding a Cure: The Sun Ranbaxy Deal

-The Strategy and Consulting Club of IIM Rohtak

CONSULENZA

APRIL 2014

CONTENTS

SECTOR IN FOCUS:

THE AUTOMOBILE INDUSTRY

APRIL 2014

ISSUE 02

The automobile industry is one of India’s major sectors, accounting for 22% of the country’s

manufacturing GDP. The Indian auto industry, comprising passenger cars, two-wheelers, three-

wheelers and commercial vehicles, is the seventh-largest in the world with an annual production of

17.5 million vehicles, of which 2.3 million are exported. Two-wheelers dominate the Indian market;

more than 75% of the vehicles sold are two wheelers.

The Indian government encourages foreign investment in the automobile sector and allows 100%

FDI under the automatic route. It is a fully deli censed industry and free imports of automotive

components are allowed. Besides offering a liberal FDI regime, the government has made successive

policy changes that allow for stronger growth in the automotive sector. Major among these are:

Automotive Mission Plan: The plan also aims to double the contribution of the automotive sector to

the country’s GDP by taking its turnover to USD 145 billion and providing additional employment

to 25 million people by 2016.

National Automotive Testing and R&D Infrastructure Project: This is a USD 388.5 million

initiative of the Government of India aimed at creating a state-of-art and dedicated testing, validation

and R&D infrastructure across the country.

According to the Society of Indian Automobile Manufacturers (SIAM), the passenger vehicle

segment is expected to grow to nine million units and the two-wheeler segment to 30 million units

by 2020. SIAM estimates that car sales in India will grow to five million vehicles by 2015 and to

nine million by 2020. In fact, by 2050, Indian roads will top the world in terms of car volumes,

running a total of 611 million vehicles.

Besides the growing market, there are several other advantages for the Indian auto sector:

Structural advantages: Over half the country’s population is in the working-age group and the

economy has shown strong growth over most part of the last decade. These factors, in turn, translate

into beneficial spill overs for the Indian automobile sector:

Indian banks provide easy finance schemes for the segment

The country has low-cost, high-skilled manpower with the second-largest pool of engineering

talent in the world

o Auto components: India has a strong auto components industry which accounts for about 2% of the

country’s national income and is growing annually at 20%. The country has emerged as an

outsourcing hub for international companies such as Ford, General Motors Daimler Chrysler etc.

o Steel: India is the fifth-largest producer of steel in the world and among the lowest-cost ones as well.

It is slated to become the second-largest steel producer by 2015.

Useful Links: www.acmainfo.com; www.siamindia.com; www.atmaindia.org

Sector Overview

Policy and Promotion

Sector Outlook

STRATEGIES THAT WEN T WRONG:

THE JC PENNEY FAILURE

APRIL 2014

ISSUE 02

In fact Johnson was the same person who was responsible for making Target hip and turning the

Apple store into a monster success story. So what did Johnson do that was too bad? Following are

the reasons:

1. He misread what shoppers want: In early 2012, Johnson announced a major overhaul of the

way JC Penney does business, with a new “fair and square” everyday low pricing scheme to

replace the “fake prices” used commonly in the past. But not everyone hated those fake prices

and that’s where Johnson got it wrong. There were a certain part of the customers that loved

that and they were their core customers. Sales collapsed through early 2012, and by the

summer, even Johnson acknowledged the stores had made a big mistake.

2. He did not test ideas in advance: Johnson didn’t ask the customers what they want. When

Johnson floated plans for the chain’s radical makeover, he was asked about the possibility of

trying the new pricing strategies on a limited test basis. Johnson reportedly shot down the

idea, responding, “We didn’t test at Apple.”

3. He alienated core customers: As Johnson removed their beloved coupons and sales and

increasingly focused on making JC Penney a hip “destination” shopping experience complete

with boutique stores within the larger store, many of the chain’s oldest and most loyal

customers understandably felt like they were no longer JC Penney’s target market. The return

of “sales” hasn’t proved to bring about a return of these shoppers.

4. He totally misread the JC Penny brand: Johnson thought that people would show up in

stores because they were fun places to hang out and that they would buy things listed at full-

but-fair price. But JC Penny was not the apple store. The idea that people would show up at

JC Penny to hang out and to purchase items at full price was delusional.

JCPenny is a chain of American mid-range department

stores based in Plano, Texas. The company operates 1107

department stores in all 50 U.S States and Peurto Rico.

In the fall of 2011 Ron Johnson was appointed not just as

CEO of JC Penney, but as the savior responsible for

breathing new life into one of the dowdiest dinosaurs in

American retail. Seventeen months later, he was out of the

job.

Acquisitions happen for a variety of reasons. A

company may want to increase its market share,

acquire IP to enter new markets and launch new

products (diversify), take advantage of economies

of scale, or simply with intent to kill competition.

We can have, besides friendly and hostile

acquisitions, reverse and back flip acquisitions also.

Hostile acquisitions are that in which a company

proceeds to acquire a target company, opposing the

wishes of the latter’s management, or sometimes

bidding for the shares of the company without

taking consent of the board. Such a move would

naturally be resisted by the target company’s board, which may resort to various techniques

to thwart it, out of which one is called poison pill strategy. It works by making the target

firm’s stock uneconomical to buy and thus, make it difficult to acquire. Briefly put, there

are 2 variants of this version:

1. Flip-in plan In this variant ,the company issues shares at a substantial discount

to the market price to the existing shareholders (not to the potential acquirer)

,thus resulting in profits for the existing shareholders and diluting the stake

held by the potential acquirer . In another version, the company repurchases the

stock at a substantial premium to the market value, thus increasing the lower

benchmark price that must be bid for a share.

2. Flip-over plan In this variant, the common stockholders receive a right to

purchase the acquirer’s shares at a discount post a possible acquisition .The

rights are usually one for each share held ,and have an expiration date ,but with

no voting power .Again ,this threatens to dilute the acquirer’s stake post

acquisition ,making the acquisition less viable.

POISON PILLS A DEFENSIVE STRATEGY AGAINST HOSTILE ACQUISITIONS

APRIL 2014 ISSUE 02

Poison pills although a potent defensive strategy, have seen a decline in the last 10 years.

As far as India goes, the regulations are biased towards the acquirer .For example, there is a

Takeover code issued by SEBI that does not allow a potential target company to issue new

shares in an offer period (it can offer only unissued shares). It also cannot issue shares at an

arbitrary discounted price –the minimum issue price must be determined w.r.t. market price

of the shares at the date of issue, and it has to be approved by the shareholders. However, it

is a known fact that India has seen more of friendly acquisitions, rather than hostile ones.

Sun’s acquisition of Ranbaxy being a case in point, India is yet to fully see an application

of this obscure defensive strategy!

PROFITABILITY FRAMEWORK

APRIL 2014

ISSUE 02

Many of the cases presented during the interview may deal with issues of declining

profitability. This is a very helpful framework in laying out your thoughts in an organized fashion

and systematically tackling such issues. The Profitability Framework starts off by stating that profit is

simply a function of revenue and costs. When a company is facing declining profitability, either

revenue has decreased, costs have increased, or both. The idea here is to understand which side of the

equation is pulling profitability down and how to go about rectifying the problem.

On the revenue side, a number of factors have been listed that can have an impact on revenue.

This list can be three times as large, depending on the case. However, do not provide a laundry list of

issues that you think might impact revenue. Whatever you write down must be of significance.

Having said that, you should try to list a few more factors under revenue than you are willing to

cover. The reason being that interviewers would like to see you acknowledge that although these

factors can have an impact, you have the ability to prioritize as to what is most important!

On the cost side, you need to see if costs have increased, causing profitability to go down. It is

always a good idea to understand what type of cost has increased. Your interviewer will expect you

to provide specific ways on improving costs for the company.

When you use the Profitability Framework, make sure that you walk through it first with your

interviewer before you begin the analysis. Explain why you are using this framework and the

structure of it. Provide the road map before you start driving.

Write captions for the selected photos.

“The biggest challenge for Sun Pharma will be to restore and regain the trust and

confidence of the regulators, especially in the US.”

ISSUE 02

APRIL 2014

Write captions for the selected photos.

THE SUN-RANBAXY DEAL

Sun Pharmaceutical Industries announced that it would acquire troubled rival Ranbaxy

Laboratories in a $4-billion deal including transfer of Ranbaxy’s $800 million debt to Sun

Pharma’s accounts. This merged entity will be the largest pharmaceutical firm in India, with

combined revenue of about $4.2 billion and the fifth-largest specialty generics company in the

world. As per the agreement, Ranbaxy shareholders will get 0.8 share of Sun Pharma for each

share of Ranbaxy, representing an implied value of INR 457 for each Ranbaxy share. Daiichi,

who share would decrease to 9% after the merger would have the right to nominate one director

to Sun Pharma’s board post completion of merger.

Under mergers and acquisitions rule, the companies have to seek approval from CCI

and since both players have a significant presence in several relevant markets, the CCI would

have its hands full in assessing the dominance of the combined entity in all those markets.

With the baggage of regulatory issues, the biggest challenge for Sun Pharma will be to restore

and regain trust and confidence of the regulators, especially in the US. Four of Ranbaxy’s plants

are banned by USFDA and is under an ongoing consent decree. The merger won't have too many

cultural and integration issues since both companies are Indian. What we have to watch out for

are other HR issues such as rationalisation of manpower.

While the merger will pump up the on ground presence of Sun Pharma in India to an

enviable extent - a combined strength of 9000 medical representatives - this will lead to the

biggest operational challenge. The combined entity will have 47 manufacturing facilities across

5 continents. These diverse numbers of plants would mean increase oversight & could be a

regulatory nightmare. Ranbaxy has got a lot of ANDA's (Abbreviated New Drug Application)

approved for marketing in USA. Their problem is to find an API plant because main source of

API was from Toansa. If Sun Pharma fills this gap, Ranbaxy can begin its export to the USA.

So, Sun Pharma has got into this deal at the right time and the deal has an upside for all the

shareholders.

The only sad development is that brand Ranbaxy will see a sunset clause when the merger

takes place. It was and still is considered to be India's flagship pharmaceuticals company. It is

India's first blue-blooded MNC with global footprints.