TABLE OF CONTENTS

SR.NO TOPIC PAGE NO

1 INTRODUCTION TO MERGER AND

ACQUISITION

1-6

2 OVERVIEW OF PHARMACEUTICAL

INDUSTRY 7-14

3 OBJECTIVE OF THE STUDY 15-25

4 RELEVANCE OF THE STUDY 26-33

5 DATA COLLECTION 34-52

6 CONCLUSION 53-56

7 LIMITATION 57

8 BIBLIOGRAPHY 58

1

INTRODUCTION

HISTORY:

In the year 2012, India witnessed a substantial slowdown in the mergers and

acquisitions (“M&A”). In 2012, M&A deals fell to almost a three year low and

down nearly 61% from 2011 and 138.5 % from 2010.The pressure on the M&A

activity was primarily due to a difficult macro-economic climate throughout the

year. The global slowdown and the euro zone crisis had a significant impact on the

Indian economy. On the domestic front, the growing fiscal deficit, high inflation

and currency devaluation coupled with high interest rates had a severe impact on

the growth trajectory. In the initial months of 2012, the India economy grew at its

slowest rate since 2003 with GDP growth of only 5.3%.In addition to these macro-

economic factors India Inc. was also adversely affected by regulatory uncertainties

and bottlenecks. There was no movement on some of the key regulatory and

legislative changes such as the new Companies Bill, foreign direct investment in

retail, international financial reporting standards etc. till almost the fourth quarter

of 2012. Further, there was no clarity on the crucial General Anti Avoidance Rules,

introduced through the Union Budget, 2012, till almost the end of 2012.However,

the challenging economic climate, India Inc. in 2012 witnessed significant M&A

activity across diverse industry segments. The year witnessed 639 M&A deals

worth USD 26.4 billion, compared to 817 deals worth USD 42.5 billion in 2011

and 800 deals worth USD 62 billion in 2010.One of the key trends that emerged in

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2012 was the increase in domestic deals compared to cross border M&As. The

domestic deal value stood at USD 9.7 billion, an increase of almost 50.9%

compared to 2011. In terms of deal count, the domestic deals were primarily seen

in the financial service sector (23%).4 Some of the key domestic deals in 2012

include the merger of Tech Mahindra with Satyam and the all share merger of Sesa

Goa and Sterlite Industries. The total cross border deals amounted to USD 14.9

billion, down almost 45.8% from the first nine months of 2011. Inbound M&A

showed some signs of slowdown with an aggregate deal value of USD 17.4 billion,

30.1% lower than the corresponding sum last year. One of the features of 2012 in

so far as inbound investments are concerned is that Japan emerged as the third

largest country, after the United States and the United Kingdom, with over 25 deals

amounting to USD 1.5 billion. Outbound deal by contrast, stood at USD 11.2

billion, a 68.5% jump from last year.5 ONGC Videsh’s acquisition of 8.4% in

Kazakhstan oilfield from Conoco Phillips for about USD 5 billion was the largest

outbound transaction in 2012. In terms of industry segment, the Energy, Mining

and Utilities, Industries and Chemicals, Pharma, Medical and Biotech and Business

Services continues to witness the majority of the M&A deals.

MERGER

The term ‘merger’ is not defined under the Companies Act, 1956 (the “Companies

Act”), the Income Tax Act, 1961 (the “ITA”) or any other Indian law. Simply put,

a merger is a combination of two or more distinct entities into one; the desired

effect being not just the accumulation of assets and liabilities of the distinct

entities, but to achieve several other benefits such as, economies of scale,

acquisition of cutting edge technologies, obtaining access into sectors / markets

with established players etc. Generally, in a merger, the merging entities would

cease to be in existence and would merge into a single surviving entity. Very often,

the two expressions "merger" and "amalgamation" are used synonymously. But

there is, in fact, a fine distinction between a ‘merger’ and an ‘amalgamation’.

Merger generally refers to a circumstance in which the assets and liabilities of a

company (merging company) are vested in another company (the merged

company). The merging entity loses its identity and its shareholders become

shareholders of the merged company. On the other hand, an amalgamation is an

arrangement, whereby the assets and liabilities of two or more companies

(amalgamating companies) become vested in another company (the amalgamated

company).The amalgamating companies all lose their identity and emerge as the

amalgamated company; though in certain transaction structures the amalgamated

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company may or may not be one of the original companies. The shareholders of

the amalgamating companies become shareholders of the amalgamated company.

While the Companies Act does not define a merger or amalgamation, Sections 390

to 394 of the Companies Act deal with the analogous concept of schemes of

arrangement or compromise between a company, it shareholders and/or its

creditors. A merger of a company ‘A’ with another company ‘B’ would involve

two schemes of arrangements, one between A and its shareholders and the other

between B and its shareholders.

The ITA defines the analogous term ‘amalgamation’ as the merger of one or more

companies with another company, or the merger of two or more companies to form

one company. Mergers may be of several types, depending on the requirements of

the merging entities:

i. Horizontal Mergers

Also referred to as a ‘horizontal integration’, this kind of merger takes place

between entities engaged in competing businesses which are at the same stage of

the industrial process. A horizontal merger takes a company a step closer towards

monopoly by eliminating a competitor and establishing a stronger presence in the

market. The other benefits of this form of merger are the advantages of economies

of scale and economies of scope.

ii. Vertical Mergers

Vertical mergers refer to the combination of two entities at different stages of the

industrial or production process. For example, the merger of a company engaged in

the construction business with a company engaged in production of brick or steel

would lead to vertical integration. Companies stand to gain on account of lower

transaction costs and synchronization of demand and supply. Moreover, vertical

integration helps a company move towards greater independence and self-

sufficiency. The downside of a vertical merger involves large investments in

technology in order to compete effectively.

iii. Congeneric Mergers

These are mergers between entities engaged in the same general industry and

somewhat interrelated, but having no common customer-supplier relationship. A

company uses this type of merger in order to use the resulting ability to use the

same sales and distribution channels to reach the customers of both businesses.

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iv. Conglomerate Mergers

A conglomerate merger is a merger between two entities in unrelated industries.

The principal reason for a conglomerate merger is utilization of financial

resources, enlargement of debt capacity, and increase in the value of outstanding

shares by increased leverage and earnings per share, and by lowering the average

cost of capital. A merger with a diverse business also helps the company to foray

into varied businesses without having to incur large start-up costs normally

associated with a new business.

v. Cash Merger

In a typical merger, the merged entity combines the assets of the two companies

and grants the shareholders of each original company shares in the new company

based on the relative valuations of the two original companies. However, in the

case of a ‘cash merger’, also known as a ‘cash-out merger’, the shareholders of one

entity receive cash in place of shares in the merged entity. This is a common

practice in cases where the shareholders of one of the merging entities do not want

to be a part of the merged entity.

vi. Triangular Merger

A triangular merger is often resorted to for regulatory and tax reasons. As the name

suggests, it is a tripartite arrangement in which the target merges with a subsidiary

of the acquirer. Based on which entity is the survivor after such merger, a

triangular merger may be forward (when the target merges into the subsidiary and

the subsidiary survives), or reverse (when the subsidiary merges into the target and

the target survives).

ACQUISITIONS

An acquisition or takeover is the purchase by one company of controlling interest

in the share capital, or all or substantially all of the assets and/or liabilities, of

another company. A takeover may be friendly or hostile, depending on the offeror

company’s approach, and may be effected through agreements between the offeror

and the majority shareholders, purchase of shares from the open market, or by

making an offer for acquisition of the offeree’s shares to the entire body of

shareholders.

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i. Friendly Takeover

Also commonly referred to as ‘negotiated takeover’, a friendly takeover involves

an acquisition of the target company through negotiations between the existing

promoters and prospective investors. This kind of takeover is resorted to further

some common objectives of both the parties.

ii. Hostile Takeover

A hostile takeover can happen by way of any of the following actions: if the board

rejects the offer, but the bidder continues to pursue it or the bidder makes the offer

without informing the board beforehand.

iii. Leveraged Buyouts

These are a form of takeovers where the acquisition is funded by borrowed money.

Often the assets of the target company are used as collateral for the loan. This is a

common structure when acquirers wish to make large acquisitions without having

to commit too much capital, and hope to make the acquired business service the

debt so raised.

iv. Bailout Takeovers

Another form of takeover is a ‘bail out takeover’ in which a profit making

company acquires a sick company. This kind of takeover is usually pursuant to a

scheme of reconstruction/rehabilitation with the approval of lender banks/financial

institutions. One of the primary motives for a profit making company to acquire a

sick/loss making company would be to set off of the losses of the sick company

against the profits of the acquirer, thereby reducing the tax payable by the acquirer.

This would be true in the case of a merger between such companies as well.

Acquisitions may be by way of acquisition of shares of the target, or acquisition of

assets and liabilities of the target. In the latter case it is usual for the business of the

target to be acquired by the acquirer on a going concern basis, i.e. without

attributing specific values to each asset / liability, but by arriving at a valuation for

the business as a whole. An acquirer may also acquire a target by other contractual

means without the acquisition of shares, such as agreements providing the acquirer

with voting rights or board rights. It is also possible for an acquirer to acquire a

greater degree of control in the target than what would be associated with the

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

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target but may enjoy disproportionate voting rights, management rights or veto

rights in the target.

JOINT VENTURES

A joint venture is the coming together of two or more businesses for a specific

purpose, which may or may not be for a limited duration. The purpose of the joint

venture may be for the entry of the joint venture parties into a new business, or the

entry into a new market, which requires the specific skills, expertise, or the

investment of each of the joint venture parties. The execution of a joint venture

agreement setting out the rights and obligations of each of the parties is usually a

norm for most joint ventures. The joint venture parties may also incorporate a new

company which will engage in the proposed business. In such a case, the bye laws

of the joint venture company would incorporate the agreement between the joint

venture parties.

DEMERGERS

A demerger is the opposite of a merger, involving the splitting up of one entity into

two or more entities. An entity which has more than one business, may decide to

‘hive off’ or ‘spin off’ one of its businesses into a new entity. The shareholders of

the original entity would generally receive shares of the new entity. If one of the

businesses of a company is financially sick and the other business is financially

sound, the sick business may be demerged from the company. This facilitates the

restructuring or sale of the sick business, without affecting the assets of the healthy

business. Conversely, a demerger may also be undertaken for situating a lucrative

business in a separate entity. A demerger, may be completed through a court

process under the Merger Provisions, but could also be structured in a manner to

avoid attracting the Merger Provisions.

7

OVERVIEW OF PHARMACEUTICAL INDUSTRY

An Introduction

The pharmaceutical industry in India is among the most highly organized sectors.

This industry plays an important role in promoting and sustaining development in

the field of global medicine. Due to the presence of low cost manufacturing

facilities, educated and skilled manpower and cheap labor force among others, the

industry is set to scale new heights in the fields of production, development,

manufacturing and research. In 2008, the domestic pharma market in India was

expected to be US$ 10.76 billion and this is likely to increase at a compound

annual growth rate of 9.9 per cent until 2010 and subsequently at 9.5 per cent till

the year 2015.The Indian pharmaceutical industry currently tops the chart a mongst

India's science-based industries with wide ranging capabilities in the complex field

of drug manufacture and technology. A highly organized sector, the Indian

pharmaceutical industry is estimated to be worth $ 4.5 billion, growing at about 8

to 9 percent annually. It ranks very high a mongst all the third world countries, in

terms of technology, quality and the vast range of medicines that are manufactured.

It ranges from simple headache pills to sophisticated antibiotics and complex

cardiac compounds, almost every type of medicine is now made in the Indian

pharmaceutical industry. The Indian pharmaceutical sector is highly fragmented

with more than 20,000 registered units. It has expanded drastically in the last two

decades. The Pharmaceutical and Chemical industry in India is an extremely

fragmented market with severe price competition and government price control.

The Pharmaceutical industry in India meets around 70% of the country's demand

for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals,

tablets, capsules, orals, and injectibles. There are approximately 250 large units

and about 8000 Small Scale Units, which form the core of the pharmaceutical

industry in India (including 5 Central Public Sector Units).

The Government has also played a vital role in the development of the India

Software Industry. In 1986, the Indian government announced a new software

policy which was designed to serve as a catalyst for the software industry. This

was followed in 1988 with the World Market Policy and the establishment of the

Software Technology Parks of India (STP) scheme. In addition, to attract foreign

direct investment, the Indian Government permitted foreign equity of up to 100

percent and duty free import on all inputs and products.

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Industry Trends

The pharma industry generally grows at about 1.5-1.6 times the Gross

Domestic Product growth

Globally, India ranks third in terms of manufacturing pharma products by

volume

The Indian pharmaceutical industry is expected to grow at a rate of 9.9 % till

2010 and after that 9.5 % till 2015

In 2007-08, India exported drugs worth US$7.2 billion in to the US and

Europe followed by Central and Eastern Europe, Africa and Latin America

The Indian vaccine market which was worth US$665 million in 2007-08 is

growing at a rate of more than 20%

The retail pharmaceutical market in India is expected to cross US$ 12-13

billion by 2012

The Indian drug and pharmaceuticals segment received foreign direct

investment to the tune of US$ 1.43 billion from April 2000 to December 2008

Government Initiatives

The government of India has undertaken several including policy initiatives and

tax breaks for the growth of the pharmaceutical business in India. Some of the

measures adopted are:

Pharmaceutical units are eligible for weighted tax reduction at 150% for the

research and development expenditure obtained.

Two new schemes namely, New Millennium Indian Technology Leadership

Initiative and the Drugs and Pharmaceuticals Research Program have been

launched by the Government.

The Government is contemplating the creation of SRV or special purpose

vehicles with an insurance cover to be used for funding new drug research

The Department of Pharmaceuticals is mulling the creation of drug research

facilities which can be used by private companies for research work on rent

Pharma Export

In the recent years, despite the slowdown witnessed in the global economy, exports

from the pharmaceutical industry in India have shown good buoyancy in growth.

Export has become an important driving force for growth in this industry with

more than 50 % revenue coming from the overseas markets. For the financial year

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2008-09 the export of drugs is estimated to be $8.25 billion as per the

Pharmaceutical Export Council of India, which is an organization, set up by the

Government of India. A survey undertaken by FICCI, the oldest industry chamber

in India has predicted 16% growth in the export of India's pharmaceutical growth

during 2009-2010.

Current Scenario

Indian pharmaceutical industry is expected to grow at 19% in 2013. India is

now among the top five pharmaceutical emerging markets. There will be new drug

launches, new drug filings, and Phase II clinic trials throughout the year. On back

of increasing sales of generic medicines, continued growth in chronic therapies and

a greater penetration in rural markets, the domestic pharmaceutical market is

expected to register a strong double-digit growth of 13-14 per cent in 2013.

Moreover, the increasing population of the higher-income group in the country will

open a potential US$ 8 billion market for multinational companies selling costly

drugs by 2015. Besides, the domestic pharma market is estimated to touch US$ 20

billion by 2015, making India a lucrative destination for clinical trials for global

giants. Further estimates the healthcare market in India to reach US$ 31.59 billion

by 2020. According to the estimates, the Indian diagnostics and labs test services,

in view of its growth potential, is expected to reach Rs159.89 billion by 2013. The

Indian market for both therapeutic and diagnostic antibodies is expected to grow

exponentially in the coming years. Findings from the report suggest that more than

60% of the total antibodies market is currently dominated by diagnostic antibodies.

Some of the major Indian pharmaceutical firms, including Sun Pharma, Cadila

Healthcare and Piramal Life Sciences, had applied for conducting clinical trials on

at least 12 new drugs in 2010, indicating a growing interest in new drug discovery

research.

Future Scenario

With several companies slated to make investments in India, the future scenario of

the pharmaceutical industry in looks pretty promising. The country's

pharmaceutical industry has tremendous potential of growth considering all the

projects that are in the pipeline. Some of the future initiatives are:

According to a study by FICCI-Ernst & Young India will open a probable

US$ 8 billion market for MNCs selling expensive drugs by 2015

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The study also says that the domestic pharma market is likely to reach US$

20 billion by 2015

The Minister of Commerce estimates that US$ 6.31 billion will be invested

in the domestic pharmaceutical sector

Public spending on healthcare is likely to raise from 7 per cent of GDP in

2007 to 13 per cent of GDP by 2015

Dr Reddy's Laboratories has tied up with GlaxoSmithKline to develop and

market generics and formulations in upcoming markets overseas

Lupin, a Mumbai based pharmaceutical company is looking to tap

opportunities of about US$ 200 million in the US oral contraceptives market

Due to the low cost of R&D, the Indian pharmaceutical off-shoring industry

is designated to turn out to be a US$ 2.5 billion opportunity by 2012

Advantage India

The Indian Pharmaceutical Industry, particularly, has been the front runner

in a wide range of specialties involving complex drugs' manufacture, development,

and technology. With the advantage of being a highly organized sector, the

pharmaceutical companies in India are growing at the rate of $ 4.5 billion,

registering further growth of 8 - 9 % annually. More than 20,000 registered units

are fragmented across the country and reports say that 250 leading Indian

pharmaceutical companies control 70% of the market share with stark price

competition and government price regulations. Competent workforce: India has a

pool of personnel with high managerial and technical competence as also skilled

workforce. It has an educated work force and English is commonly used.

Professional services are easily available.

Cost-effective chemical synthesis: Its track record of development, particularly in

the area of improved cost-beneficial chemical synthesis for various drug molecules

is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk

drugs.

Legal & Financial Framework: India has a solid legal framework and strong

financial markets. There is already an established international industry and

business community.

Information & Technology: It has a good network of world-class educational

institutions and established strengths in Information Technology.

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Globalization: The country is committed to a free market economy and

globalization. Above all, it has a 70 million middle class market, which is

continuously growing.

Consolidation: For the first time in many years, the international pharmaceutical

industry is finding great opportunities in India. The process of consolidation, which

has become a generalized phenomenon in the world pharmaceutical industry, has

started taking place in India.

MAJOR PHARMACEUTICAL COMPANIES IN INDIA

Some of the leading Indian players by sales (INR Billion)

Company name Sales in INR billion

Cipla 69.77

Ranbaxy Lab 76.86

Dr Reddy's Labs 66.86

Sun Pharma 40.15

Lupin Ltd 53.64

Aurobindo Pharma 42.84

Jubilant Life 26.41

Cadila Health 31.52

Ipca Labs 23.52

Wockhardt 26.50

Ranbaxy

Ranbaxy is among the predominant pharmaceutical companies in India and

was founded in 1961. Ranbaxy is a research based pharma giant and became a

public limited company in 1973. Ranbaxy was recently ranked among the top 10

international pharmaceutical companies in the world have presence across 49

countries. Ranbaxy is also reputed for its 11 state-of-the-art manufacturing

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facilities in countries like China, India, Brazil, South Africa, and Nigeria. The

company has also won several awards and recognitions for its pioneering

initiatives in the developing markets of the world. Ranbaxy is also a member of the

Indian Pharmaceutical Alliance and Organization of Pharmaceutical Producers of

India. In the present scenario Ranbaxy commands more than 5% share of the

Indian pharmaceutical market. Ranbaxy’s product portfolio is diverse and includes

drugs that cater to nutrition, infectious diseases, gastro-enteritis, pain management,

cardiovascular ailments, dermatology, and central nervous system related ailments.

Ranbaxy’s operations in India are designed under as many as 9 SBUs which take

care of the various categories of medicines and drugs that are manufactured by

Ranbaxy. The company is especially well-known for having the highest research

and development (R&D) budget among pharma companies in the world which is

as high as US$ 100 million. Ranbaxy India operations are handled by 2,500

employees and the company’s market share in India is worth around US$6 billion.

Dr. Reddy's Laboratories

Dr. Reddy's Laboratories is one of the popular pharmaceutical companies

with base in more than 100 countries. The medicines of Dr. Reddy's Laboratories

Limited are easily available all across the globe. Dr. Reddy's Pharmaceutical

Company is very much customer friendly. It takes care of the fact that maximum

people get benefited by the products of this pharmaceutical company. It

commercialized various treatments so as to provide high tech treatment to the

masses. It tries to meet the medical needs of the people.

Though Dr. Reddy's Laboratories is located in various parts of the world, it

has its headquarters in India. The subsidiaries of this company are found at various

countries like US, Germany, UK, Russia, and Brazil. 16 countries have the

representative offices of Dr. Reddy's Laboratories Limited. 21 countries have third

party distribution.

Cipla

Cipla was founded by Khwaja Abdul Hamied in 1935 and was known as

The Chemical, Industrial and Pharmaceutical Laboratories, though it is better

known by the acronym Cipla today. Cipla was registered in August, 1935 as a

public limited enterprise and it began with an authorized capital of Rs. 6 lakh.

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Though set up in 1935, it was only in 1937 that Cipla began manufacturing and

marketing its pharmaceutical products. Today, the company has its facilities spread

across several locations across India such as Mumbai, Goa, Patalganga,

Kurkumbh, Bangalore, and Vikhroli.Apart from its strong presence in the Indian

market, Cipla also has an extensive export market and regularly exports to more

than 150 countries in regions such as North America, South American, Asia,

Europe, Middle East, Australia, and Africa. For the year ended 31st March, 2007

Cipla’s exports were worth approximately Rs. 17,500 million. Cipla is also

considerably well-known for its technological innovation and processes for which

the company received know-how loyalties to the tune of Rs. 750 million during

2006-07.

Sun Pharmaceuticals

Sun Pharmaceuticals was set up in 1983 and the company started off with

only 5 products to cure psychiatric illness. Sun Pharma is known worldwide as the

manufacture of specialty Active Pharmaceuticals Ingredients and formulations.

However, the company is also concerned with chronic treatments such as

cardiology, psychiatry, neurology, gastroenterology, diabetology, and respiratory

ailments. Active Pharmaceuticals Ingredients (API) includes peptides, steroids,

hormones, and anti-cancer drugs and their quality is internationally approved. The

international offices of Sun Pharmaceuticals Industries Ltd. are located in British

Virgin Islands, Russia, and Bangladesh. In India, the offices are in Vapi, Silvassa,

Panoli, Ahmednagar, and Chennai.

There are 3 major group companies of Sun Pharmaceuticals Industries are:

Caraco Pharmaceuticals Laboratories (based in Detroit, Michigan)

Sun Pharmaceuticals Industries Inc. (Michigan)

Sun Pharmaceuticals (Bangladesh)

Aurobindo Pharma

Aurobindo Pharma, an India-based private pharmaceutical company having

presence around the world. Aurobindo Pharma was set up in the year 1986 and

started its operations in 1988-89 in Pondicherry, India. Now, the company is

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headquartered at Hyderabad, India. Aurobindo Pharma is one of the most respected

generic pharmaceuticals and active pharmaceutical ingredients (API)

manufacturing company of the world. Aurobindo Pharma operates in over 100

countries across the world. Further, the pharmaceutical major markets are over 180

APIs and 250 formulations throughout these destinations. This Indian

pharmaceutical major has filed over 110 DMFs and 90 ANDAs for the USA

market. So far, Aurobindo has received 45 ANDA approvals (both final and

tentative) from USA alone.

Aurobindo Pharma products cover segments like –

Antibiotics,

Anti-Retro Virals

CVS

CNS

Gastroenterological Anti-Allergic

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OBJECTIVE OF STUDY

1) To study the definition of acquisition, and merger their types in

general, underlying rationales.

2) To find the required conclusion and suggestion for better M&A

policy.

3) Procedure under Indian companies act 1956, for Merger

4) Rationale for acquiring Ranbaxy, despite the troubles faced by Ranbaxy in

Foreign markets?

5) Studying merger and acquisition with example of recent case

WHY COMPANIES MERGE AND ACQUIRE?

There are numerous reasons why one company chooses to merge with or acquire

another. The literature suggests that the underlying motivation to merge is driven

by a series of rationales and drivers. Rationales consist of the higher-level

reasoning that represents decision conditions under which a decision to merge

could be made. Drivers are mid-level specific (often operational) influences that

contribute towards the justification or otherwise for a merger.

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SOME UNDERLYING RATIONALES

There are several primary rationales that determine the nature of a proposed

merger or acquisition. These rationales are:

Strategic rationale -The strategic rationale makes use of the merger or acquisition

in achieving a set of strategic objectives. As discussed above, a merger to secure

control of capacity in the chosen sector is an example. Mergers and acquisitions

are usually not central in the achievement of strategic objectives, and there are

usually other alternatives available. For example, company A might want to gain a

foothold in a lucrative new expanding market but lacks any experience or expertise

in the area. One way of overcoming this may be to acquire a company that already

has a track record of success in the new market. The alternative might be to

develop a research and development division in the new market products in an

attempt to catch up and overtake the more established players. This alternative

choice has obvious cost and time implications. In the past it has only really been

achieved successfully where the company wishing to enter the new market already

produces goods or has expertise in a related area. As an example, an established

producer of electronic goods might elect to divert some of its own resources into

developing a new related highly promising area such as digital telephones. A large

scale example is the electronics giant Sony in taking the strategic decision to create

a research and development facility in electronics games consoles in order to

develop a viable competitive base in this area despite there being a relatively small

number of very powerful and established competitors in the area.

Speculative rationale -The speculative rationale arises where the acquirer views the

acquired company as a commodity. The acquired company may be a player in a

new and developing field. The acquiring company might want to share in the

potential profitability of this field without committing itself to a major strategic

realignment. One way to achieve this is to buy established companies, develop

them, and then sell them for a substantial profit at a later date. This approach is

clearly high risk, even if the targets are analyzed and selected very carefully. A

major risk, particularly in the case of small and highly specialized targets, is that a

significant proportion of the highly skilled people who work for the target may

leave either before, during or immediately after the merger or acquisition. If this

does happen the actual (rather than apparent) value of the target could diminish

significantly within a very short time. Another form of speculative rationale is

where the acquirer purchases an organization with the intention of splitting the

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acquired organization into pieces and selling these, or major parts of them, for a

price higher than the cost of acquisition. The speculative rationale is also high risk

in that it is very vulnerable to changes in the environment. Apparently attractive

targets, purchased at inflated (premium) cost, may soon diminish significantly in

value if market conditions change.

Management failure rationale -Mergers or acquisitions can sometimes be forced on

a company because of management failures. Strategies may be assembled with

errors in alignment, or market conditions may change significantly during the

implementation timescale. The result may be that the original strategy becomes

misaligned. It is no longer appropriate in taking the company where it wants to go

because the company now wants to go somewhere else. Such strategy

compromises can arise from a number of sources including changing customer

demand and the actions of competitors. In such cases, by the time the strategy

variance has been detected, the company may be so far off the new desired

strategic track that it is not possible to correct it other than by merging with or

acquiring another company that will assist in correcting the variance.

Financial necessity rationale -Mergers and acquisitions are sometimes required for

reasons of financial necessity. A company could misalign its strategy and suddenly

find that it is losing value because shareholders have lost confidence. In some

cases the only way to address this problem is to merge with a more successful

company or to acquire smaller more successful companies.

Political rationale -The impact of political influences is becoming increasingly

significant in mergers and acquisitions. In the UK between 1997 and 2002, the

government instructed the merger of a number of large government departments in

order to rationalize their operations and reduce operating costs. Government policy

also encouraged some large public sector organizations to consider and execute

mergers. These policies resulted in the merger of several large health trusts. By

2002 several large universities were also considering merging as a result of

changes in government funding policy.

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MERGER DRIVERS SOME TYPICAL MERGER DRIVERS ARE

CONSIDERED BELOW:

A requirement for specialist skills and/or resources-A company sometimes seeks to

merge with or acquire another company because the company is keen to acquire a

specific skill or resource owned by the other company. This type of merger or

acquisition often occurs where a smaller company has developed high-value

specific skills over a number of years and where it would take an acquiring

company a long time and a great deal of investment to develop these same skills.

National and international stock markets-Variations in share prices can act as

powerful drivers for mergers and acquisitions. A stock market boom tends to make

acquisition activity more attractive because it becomes easier to use the acquirer’s

shares as the basis for the transaction rather than cash. Alternatively a falling stock

market can lead to potential targets being valued lower, and therefore they become

more attractive for a cash purchase.

Globalization drivers-Increasing globalization, facilitated to a considerable extent

by the growth and development of IT, tends to encourage mergers as the

geographical separation between individual companies becomes less of an obstacle

to organizations working together as single entities, both within the same countries

and across international boundaries.

National and international consolidation-This type of driver occurs where there are

compatible companies available for merger or acquisition within the same general

geographical area(s).

Diversification drivers-A company may want to diversify into new areas or sectors

as a means of balancing the risk profile of its portfolio. Diversification was a

primary driver of many mergers and acquisitions in the 1960s, 1970s and 1980s.

More recently there has been a discernible move away from diversification as a

risk-management strategy. Numerous researchers and practitioners have argued

that diversification and non-related acquisition does not in fact reduce the risk

profile faced by an organization. This argument is supported by the assertion that

the more diversified an organization is, the less it has developed the specific tools

and techniques needed to address individual problems relating to any one of its

range of business activities.

Industry and sector pressures-In the 1990s, mergers became very commonplace in

some sectors. Large-scale mergers were particularly popular in the oil exploration

19

and production sector. In one notable case British Petroleum Amoco merged with

Exxon Mobil on the same day that Total and Petrofina also merged.

Capacity reduction-The total production in a given sector may exceed or be near to

demand so that the value of the product is low. In some cases it may be desirable

for a company to merge with or acquire a competitor in order to secure a greater

degree of control over total sector output. If company A acquires company B,

company A has achieved greater control over total sector production and also has

the opportunity to maintain more of its own production facilities and employees

within the new company at the expense of company B.

A drive for increased management effectiveness and efficiency. A particular

company may have a deficit in management expertise in one or more key

areas. Such areas may be ‘key’ because they are central to a new growth area

the company is seeking to develop, or because they relate to the achievement

of new strategic objectives that have just been established.

A drive to acquire a new market or customer base. A merger or acquisition

can often provide a fast-track route to new and established markets. If a

large high street bank merges with another bank, each bank acquires the

customer base of the other bank. In some cases the acquired customer base

may represent a market that was previously unavailable For example one

bank may have previously specialized in business customers and the other

bank in domestic customers. The new arrangement provides a more balanced

customer base.

A drive to buy into a growth sector or market. Companies sometimes use

mergers or acquisitions as a way to enter a desirable new market or sector,

particularly if they expect that market or sector to expand in the future.

20

INTRODUCTION OF PHARMA COMPANY BEFORE MERGER

SUN PHARMACEUTICAL INDUSTRIES LIMITED

It is a multinational pharmaceutical company headquartered in Mumbai,

Maharashtra that manufactures and sells pharmaceutical formulations and active

pharmaceutical ingredients (APIs) primarily in India and the United States. The

company offers formulations in various therapeutic areas, such

ascardiology, psychiatry, neurology, gastroenterology and diabetology. It also

provides APIs such as warfarin, carbamazepine, etodolac, and clorazepate, as well

as anti-cancers, steroids, peptides, sex hormones, and controlled substances.

Sun Pharmaceuticals was established by Mr. Dilip Shanghvi in 1983 in Vapi with

five products to treat psychiatry ailments. Cardiology products were introduced in

1987 followed by gastroenterology products in 1989. Today it is the largest chronic

prescription company in India and a market leader in psychiatry, neurology,

cardiology, orthopedics, ophthalmology, gastroenterology and nephrology. The

2014 acquisition of Ranbaxy will make the company the largest pharma company

in India, the largest Indian pharma company in the US, and the 5th largest specialty

generic company globally. Over 72% of Sun Pharma sales are from markets

outside India, primarily in the US. The US is the single largest market, accounting

for about 60% turnover in all, formulations or finished dosage forms, account for

93% of the turnover. Manufacturing is across 26 locations, including plants in the

US, Canada, Brazil, Mexico and Israel. In the US, the company markets a large

basket of generics, with a strong pipeline awaiting approval from the U.S. Food

and Drug Administration (FDA). Sun Pharma was listed on the stock exchange in

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

majority stake in the company. Today Sun Pharma is the second largest and the

most profitable pharmaceutical company in India, as well as the largest

pharmaceutical company by market capitalization on the Indian exchanges. The

Indian pharmaceutical industry has become the third largest producer in the world

in terms of volumes and is poised to grow into an industry of $20 billion in 2015

from the current turnover of $12 billion] In terms of value India still stands at

number 14 in the world.

ACQUISITIONS AND JOINT VENTURES

Sun Pharma has complemented growth with select acquisitions over the last two

decades. In 1996, Sun purchased a bulk drug manufacturing plant

at Ahmednagar from Knoll Pharmaceuticals and MJ Pharma's dosage plant at

Halol that are both U.S. FDA approved today. In 1997, Sun acquired Tamil Nadu

Dadha Pharmaceuticals Limited (TDPL) based in Chennai, mainly for their

extensive gynecology and oncology brands. Also in 1997, Sun Pharma initiated

their first foray into the lucrative US market with the acquisition of Caraco

Pharmaceuticals, based in Detroit. In 1998, Sun acquired a number of respiratory

brands from Natco Pharma. Other notable acquisitions include Milmet Labs and

Gujarat Lyka Organics (1999), Pradeep Drug Company (2000), Phlox Pharma

(2004), a formulation plant at Bryan, Ohio and ICN, Hungary from Valeant

Pharma and Able Labs (2005), and Chattem Chemicals (2008). In 2010, the

company acquired a large stake in Taro Pharma, Inc., a mongst the largest generic

derma companies in the US, with operations across Canada and Israel. The

company currently owns ~ 69% stake in Taro, for about $260 million. In 2011, Sun

Pharma entered into a joint venture with MSD to bring complex or differentiated

generics to emerging markets (other than India).In 2012, Sun announced

acquisitions of two US companies: DUSA Pharmaceuticals Inc.,a dermatology

device company; and generic pharma company Inc. In 2013, the company

announced an R&D joint venture for ophthalmology with the research company,

Intrexon. On 6 April 2014, Sun Pharma announced that it would acquire 100%

of Ranbaxy Laboratories Ltd, in an all-stock transaction, valued at $4 billion.

Japan's Daiichi Sankyo held 63.4% stake in Ranbaxy. After this acquisition, which

is expected to close by end 2014, Sun Pharma would be the largest pharmaceutical

company in India, the largest Indian Pharma company in the US, and the 5th

largest generic company worldwide In December 2014, the Competition

Commission of India approved Sun Pharma's $3.2 billion bid to buy Ranbaxy

22

Laboratories, but ordered the firms to divest seven products to ensure the deal

doesn't harm competition. Sun Pharmaceutical Industries Ltd, India's largest drug

maker by sales, said on Tuesday it has agreed to buy Glaxo SmithKline's opiates

business in Australia to strengthen its pain management portfolio.

Ranbaxy Laboratories Limited (BSE: 500359) is an Indian

multinational pharmaceutical company that was incorporated in India in 1961. The

company went public in 1973 and Japanese pharmaceutical company Daiichi

Sankyo acquired a controlling share in 2008. In 2014, Sun Pharma acquired the

entire 63.4% share of Ranbaxy making the conglomerate world’s fifth largest

specialty generic pharma company. Ranbaxy exports its products to 125 countries

with ground operations in 43 and manufacturing facilities in eight countries. In

2011, Ranbaxy Global Consumer Health Care received the OTC Company of the

year award. In the Brand Trust Report 2012, Ranbaxy was ranked 161st among

India's most trusted brands and subsequently, according to the Brand Trust

Report 2013, Ranbaxy was ranked 225th among India's most trusted brands. In

2014 however, Ranbaxy was ranked 184th among India's most trusted brands

according to the Brand Trust Report 2014, a study conducted by Trust Research

Advisory, a brand analytics company. Ranbaxy was started by Ranbir Singh and

Gurbax Singh in 1937 as a distributor for a Japanese company Shionogi. The name

Ranbaxy is a portmanteau of the names of its first owners Ranbir and Gurbax. Bhai

Mohan Singh bought the company in 1952 from his cousins Ranbir and Gurbax.

After Bhai Mohan Singh's son Parvinder Singh joined the company in 1967, the

company saw an increase in scale

23

ACQUISITIONS

In June 2008, Daiichi-Sankyo acquired a 34.8% stake in Ranbaxy, for a value $2.4

billion. In November 2008, Daiichi-Sankyo completed the takeover of the

company from the founding Singh family in a deal worth $4.6 billion by acquiring

a 63.92% stake in Ranbaxy. Ranbaxy's Malvinder Singh remained as CEO after the

transaction. The addition of Ranbaxy Laboratories extends Daiichi-Sankyo's

operations – already comprising businesses in 22 countries. The combined

company is worth about US$30 billion. In 2009 it was reported that

former Novartis Senior Vice-President Yugal Sikri would lead the India operations

of Ranbaxy Laboratories. On 7 April 2014 India based Sun Pharmaceutical and

Japan based Daiichi Sankyo jointly announced the sale of entire 63.4% share

from Daiichi Sankyo to Sun Pharma in a $4 billion all share deal. Under these

agreements, shareholders of Ranbaxy, will receive 0.8 share of Sun Pharmaceutical

for each share of Ranbaxy. After this acquisition, the partner Daiichi-Sankyo will

hold a stake of 9% in Sun Pharmaceutical. The combination of Sun Pharma and

Ranbaxy creates the fifth-largest specialty generics company in the world and the

largest pharmaceutical company in India.

TAKEOVER OF RANBAXY BY DAIICHI SANKYO

Introduction

Ranbaxy Laboratories Limited was incorporated in 1961, promoted by Ranbir

Singh and Gurbax Singh. It was listed on Bombay Stock Exchange on 1973 and it

became one of the largest pharmaceutical companies in India.

Rational of takeover

In 2001 India liberalised foreign direct investment (FDI) norms for the

pharmaceutical sector. As a result, 100% FDI was allowed through the 'automatic

route' (without prior permission) in pharmaceutical manufacturing (except in

sectors using DNA technology). The FDI policy did not make any distinctions

between 'greenfield' (new facilities) and 'brownfield' (takeover of existing

facilities) investments. However, during the last 12 years MNCs did not make any

major effort to undertake Greenfield investments in India, largely opting for

brownfield investments, i.e., acquisition of Indian companies. Ranbaxy at the time

of takeover was among the top 100 pharmaceuticals in the world and that it was the

15th fastest growing company in India. Daiichi Sankyo was Japan's third-largest

drug maker. Daiichi Sankyo had its operations in 21 countries at the time of the

24

deal. The deal with Ranbaxy would expand its presence to 56 countries and

provide it the platform to launch its innovator products at competitive prices and

expand its global operations.

Trigger point – the binding agreement

In the month of June, 2008, Daiichi entered into a share purchase and share

subscription agreement with Ranbaxy and the controlling shareholders (i.e.

Promoters), to acquire controlling stake in Ranbaxy. It acquired 129,934,134 fully

paid-up equity shares representing 34.81% of the total fully paid-up equity capital

of Ranbaxy at a Negotiated price of INR 737/-per fully paid up equity share in

cash. As per Regulations 10 and 12 of the Securities and Exchange Board of India

(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (―Takeover

Code), acquisition of hares/ voting rights in a listed company, which in aggregate,

gave the acquirer 15% or more of the voting rights in the company or acquisition

of control over a listed company, would immediately trigger an open offer

requirement. On June 27, 2008, Daiichi made the open offer at a price of INR 737

per share to all shareholders of the Company. Daiichi acquired 11.42% shares from

the stock market & raised equity stake in Ranbaxy up to 63.92%.

PROCEDURE UNDER THE COMPANIES ACT, 1956 FOR MERGER/

AMALGAMATION OF COMPANIES

Even though most provisions of CA 2013 have been notified by the Ministry of

Corporate Affairs, the provisions relating to M&A have not been notified as of

April 1, 2014. Therefore, the scheme of merger/ amalgamation would have to be

executed under the provisions of CA 1956.

Sections 391 to 394 of the CA 1956 lay down the procedure for mergers and

amalgamations.

￭ following approval of the scheme by the boards of the merging and surviving

companies, the companies are required to file the scheme with the High Court

situated in the jurisdiction of their respective registered offices.

￭ prior to the scheme being presented before the court, listed companies are also

required to file the proposed scheme with the stock exchanges where the equity

shares of such companies are listed, for approval.

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￭ on receiving the scheme, the High Court shall give directions fixing the date,

time and venue and quorum for the members’ meeting and appoint a Chairman to

preside over the meeting and submit a report to the Court. The scheme should be

approved by a majority of the shareholders representing at least three-fourths in

value of the shareholders of each of the companies, present and voting.

￭ the resolution of the shareholders approving the scheme should be filed with the

Registrar of Companies within 30 days of passing the resolution.

￭ Within 7 days from the date of the meeting of shareholders, the chairman of the

general meeting is required to submit a report to the High Court, setting out the

number of persons who attended personally or by proxy and the percentage of

shareholders who voted in favor of the scheme as well as the resolution passed by

the meeting.

￭ Within 7 days of the chairman submitting the report, the merging and surviving

companies shall make a joint petition to the High Court for approving the scheme.

￭ on receipt of the petition for amalgamation under Section 391 of the CA 1956,

the court is required to give notice of the petition to the Regional Director,

Company Law Board (“RD”) and will take into consideration, any representations

made by him.

￭ The Ministry of Corporate Affairs, has by way of General Circular 01/ 2014

dated January 15, 2014, instructed the RD to obtain inputs and comments from the

Income Tax Department, while furnishing their report to the court.71 This is to

ensure that the proposed scheme of amalgamation has not been designed in such a

way as to defraud the tax department.

￭ If there are no objections to the scheme from the RD or any other person entitled

to oppose the scheme, the court may after hearing the petition, pass an order

approving the scheme.

￭ the companies may then file the court’s order with the Registrar of Companies in

their respective jurisdictions, as required under Section 394(3) of the CA 1956.

It would be interesting to analyze the situation where the M&A provisions under

CA 2013 are notified prior to approval of the scheme by the High Courts. In such a

case, the Ministry of Corporate Affairs may issue a notification exempting all

companies which have filed their schemes prior to the notification of the M&A

26

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

scheme of merger under CA 2013

RELEVANCE OF THE STUDY

SUN PHARMA AND RANBAXY MERGER

Sun Pharmaceutical Industries Limited (“Sun Pharma”) and Ranbaxy Laboratories

Limited (“Ranbaxy”) set the Indian pharmaceutical industry abuzz with excitement

on April 6, 2014 when they released a press statement announcing that they had

entered into definitive documents under which Sun Pharma would acquire 100

percent of Ranbaxy (“Transaction”).

1.The Transaction which was a heavily guarded secret until the public

announcement, is to be effected by means of a merger/ amalgamation between Sun

Pharma and Ranbaxy. The combined entity, upon successful consummation of the

Transaction, would be the fifth-largest specialty generics company in the world

and the largest pharmaceutical company in India.

2. The scale of operations of the resulting entity would be massive, with operations

spanning across 65 countries and 47 manufacturing facilities across 5 continents,

27

as well as a sizeable portfolio of specialty and generic products sold across the

world, including 629 abbreviated new drug applications (“ANDAs”).

The announcement of the Transaction was of particular interest to the

pharmaceuticals industry as it came at a crucial time for Ranbaxy. Ranbaxy’s

manufacturing facilities in Toansa, Paonta Sahib, Dewas and Mohali in India have

been under the scanner of the United States Food and Drug Administration

(“USFDA”) following observation of certain lapses in complying with current

good manufacturing practices during the course of inspection of these facilities by

the USFDA.5 As a result, the USFDA had prohibited Ranbaxy from distributing

drugs manufactured using active pharmaceutical ingredients (“APIs”) from these

facilities, in the United States. The USFDA sanctions on Ranbaxy and certain other

companies in India have caused the multi-billion dollar Indian generic

pharmaceutical industry severe loss in international markets. The acquisition by

Sun Pharma may result in a turnaround for the beleaguered Ranbaxy and is

therefore, welcome news for Ranbaxy as well as its Japanese parent Daiichi

Sankyo Co Ltd (“Daiichi”). The Competition Commission of India (“CCI”) by

way of its order dated December 5, 2014 approved the Transaction subject to

satisfaction of certain conditions.

The Transaction comes in the wake of various big ticket deals entered, or proposed

to be entered into by pharmaceutical companies across the globe, such as Novartis’

and Glaxo SmithKline’s (~USD 23 billion) business swap, Pfizer’s USD 100

billion offer for AstraZeneca, Bayer’s acquisition of Merck’s consumer care

business for USD 14.2 billion and Valeant’s USD 47 billion offer for Allergan. On

the home front, Sun Pharma itself has been gearing up for an acquisition drive,

with its open offer to the shareholders of Zenotech Laboratories Limited

immediately after the announcement of the Transaction.

Several reasons may be attributed to such M&A activity by pharma companies,

some of them being:

i. Attaining the scale necessary in those therapeutic areas where they intend to

focus, by building a broader product portfolio and services;

ii. Pressure by governmental agencies, insurance companies in North America and

Europe to reduce cost of medicines, due to difficulty in meeting mounting

healthcare costs etc.

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

pharmaceutical companies. Therefore, pharmaceutical companies may opt to

achieve their objectives through inorganic growth by way of M&A. Further, M&A

activity in certain industries such as pharmaceuticals follows a cyclical trend, with

acquisitions ramping up over five-year periods. This is evident from the spurt of M

& A in 2008-2009 with Pfizer’s acquisition of Wyeth, Merck’s acquisition of

Schering-Plough Corp, Novartis’ acquisition of Alcon Inc., as well as Daiichi’s

acquisition of Ranbaxy.

Indian pharmaceutical companies hold considerable advantage over foreign

pharmaceutical manufacturers in terms of cost-effectiveness of manufacturing

processes as well as research and development. Thus, the Transaction has the

potential to give rise to a formidable force in pharmaceutical manufacturing

leading to wider presence and broader product portfolio. This M&A Lab analyzes

in detail, the legal, regulatory, tax and commercial considerations behind the

Transaction.

A CRUCIAL TIME FOR RANBAXY

Ranbaxy Laboratories was established in 1961 and is a member of the Daiichi

Sankyo group (Tokyo, Japan), a leading global pharma innovator. Daiichi Sankyo

is also a majority shareholder of Ranbaxy, with 63.4% outstanding

shares. Ranbaxy has ground operations in 43 countries and 21 manufacturing

facilities located in 8 countries, and its impressive portfolio of products is sold in

over 150 countries. Although the company met its sales targets for the latest

financial year, it has been incurring a net loss and suffering a decline in net

worth since 2011, which can be attributed to a few key circumstances. These

include the settlement amount of US$ 515 million paid to the US Department of

Justice (DOJ) in May 2013 after civil and criminal charges were brought against it

for misrepresentation of data and irregularities found in two of its facilities in

India, diminution in the value of its investments and a loss on foreign currency

option derivatives. Thus, the merger of the company with Sun Pharma comes at a

crucial time when Ranbaxy is struggling to improve its financial position.

29

REGULATORY APPROVALS

By August 2014, Sun Pharma and Ranbaxy had obtained clearances from

both the stock exchanges in India (NSE and BSE) as well as from anti-

competition authorities in all applicable markets except India and the U.S.

The CCI (Competition Commission of India) approved the acquisition of

Ranbaxy by Sun Pharma on December 5, 2014 on the precondition that

seven brands, constituting less than 1% of total revenues of the combined

entity in India, be divested in order to prevent the merger from negatively

impacting competition in the domestic market.

On February 2, 2015, both companies announced that the U.S. FTC(Federal

Trade Commission) had granted early termination of the waiting period

under the Hart-Scott-Rodino Antitrust Improvements Act of 1976(HSR Act)

on the precondition that Sun Pharma and Ranbaxy divest Ranbaxy’s

interests in generic minocycline tablets and capsules to an external third

party. As per the proposed settlement, Ranbaxy’s generic minocycline assets

will be sold to Torrent Pharmaceuticals, which markets generic drugs in the

U.S.

As of February 22, 2015, the companies were awaiting approval of the High

Court of Punjab and Haryana, India. Both Sun Pharma and Ranbaxy will

also have to meet the pre-conditions set forth by the CCI and U.S. FTC for

the merger to be closed.

THE OUTCOME AND RESULTING SYNERGIES

The annual report of Sun Pharma for FY 2013-14 highlights the following points

of significance to note about this merger, and the opportunities that are to result

from it:

The new entity will be the world’s fifth largest specialty-generic pharma

company with sales of US$ 4.2 billion on a pro-forma basis for CY 2013.

The entity will have a presence in 55 countries and be supported by 40

manufacturing facilities worldwide, with a highly complementary portfolio

of products for both acute and chronic treatments.

30

In the U.S., the merged entity will be No.1 in the generic dermatology

market and No. 3 in the branded dermatology market. It will also become the

largest Indian pharma company operating in the U.S.

The pro-forma U.S. revenues of the merged entity for CY 2013 are

estimated at US$ 2.2 billion and the entity will have a strong potential in

developing complex products through a broad portfolio of 184 ANDAs

(Abbreviated New Drug Application) awaiting US FDA approval, including

many High-value FTF (First to File) opportunities.

The merger will make Sun Pharma the largest pharma company in India

with pro-forma revenues of US$ 1.1 billion for CY 2013 and over 9%

market share. The acquisition will also enable Sun Pharma to enhance its

edge in acute care, hospitals and OTC businesses with 31 brands among

India’s top 300 brands and a better distribution network.

The merger will also improve Sun Pharma’s global footprint in emerging

pharma markets like Russia, Romania, Brazil, Malaysia and South Africa,

offering opportunities for cross-selling and better brand-building. The

merged entity will have combined pro-forma revenues of US$ 0.9 billion for

CY 2013 in emerging pharma markets.

Pro-forma EBITDA of the merged entity for CY 2013 is estimated at US$

1.2 billion.

Synergy benefits of US$ 250 million are expected to be realized by the third

year following the closure of the deal, driven by a combination of revenue,

procurement and supply chain efficiencies and other cost synergies.

Post-deal closure, Daiichi Sankyo (the majority shareholder of Ranbaxy)

will become the second largest shareholder of Sun Pharma with a 9% stake.

Daiichi Sankyo has also agreed to indemnify the merged entity for costs and

expenses incurred in Ranbaxy’s recent settlement with the US Department

of Justice in regards to its Toansa facility in India.

31

DETAILS OF THE DEAL

A. Sun Pharma

Sun Pharma is an Indian origin, specialty pharmaceutical company, established in

1983 with a portfolio of five psychiatric medications and a manufacturing facility

in Vapi, Gujarat. Sun Pharma established its first research center in 1991, driving

further growth for the company. It went public in 1994 and is currently listed on

the Bombay Stock Exchange (“BSE”) as well as the National Stock Exchange

(“NSE”). Approximately 64 percent of the shareholding of Sun Pharma is still held

by the promoters and promoter group. In addition to its formulations in various

therapeutic areas, Sun Pharma also manufactures APIs to facilitate the manufacture

of complex formulations such as anti-cancers, peptides, sex hormones and

controlled substances.

In 30 years of its existence, Sun Pharma has become one of the world’s most

profitable pharmaceuticals manufacturers. Sun Pharma has complemented its

32

growth by way of extensive acquisitions and joint ventures in India and abroad.

The acquisition of Tamil nadu Dadha Pharma has helped Sun Pharma’s entry into

oncology and gynecology. The company’s initial investment in and subsequent

takeover of Gujarat Lyka Organic Ltd provided access to a manufacturing facility

for cephalexin for supply to the international market. Sun Pharma’s 2002-

acquisition of MJ Pharma has provided Sun Pharma a USFDA and UKMHRA

approved plant which is currently a manufacturing base for the European generic

market. In 1997, Sun Pharma invested in Caraco, a Detroit-based manufacturer of

generics and in 2010, completely acquired Caraco, enabling its entry into the U.S

generic market. The acquisition of majority stake in Taro Pharmaceutical

Industries Limited in 2010, an established multinational generics manufacturer,

increased the company’s U.S presence, as well as in Israel and Canada. In addition

to developed markets, Sun Pharma has also focused on emerging markets with its

joint venture with MSD.

B. Ranbaxy

Established in 1961, Ranbaxy is an Indian company listed on the BSE, NSE and

the Luxembourg stock exchange, with ground operations in 43 countries and 21

manufacturing facilities spread across 8 countries. It is engaged in development,

manufacture and marketing of pharmaceutical products and APIs. In 1988,

Ranbaxy’s Toansa plant achieved USFDA approval, thereby enabling it to

manufacture pharmaceuticals for the US market.

Ranbaxy has also engaged in acquisitions to further its growth objectives. The

company’s acquisition of Crosland Research Laboratories, Rima Pharmaceuticals

etc. provided it a foothold in niche, high-value markets in the European Union. The

33

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

making it the first Indian company to reach such global status.

In 2008, Daiichi entered into definitive agreements with the erstwhile promoters of

Ranbaxy (the Singh family) to acquire a controlling stake in Ranbaxy. This was an

off-market transaction, pursuant to which Daiichi was required to make an open

offer to the public shareholders of Ranbaxy. Pursuant to the conclusion of the open

offer, Daiichi acquired an additional 20 percent equity stake in Ranbaxy resulting

in an aggregate shareholding of 63.92 percent in Ranbaxy.

Following the acquisition of controlling stake by Daiichi however, Ranbaxy has

had a number of entanglements with the USFDA for issues related to quality-

control, making it difficult to keep a clean name. Ranbaxy’s plants at Dewas and

Paonta Sahib were slapped with import alerts by the USFDA in 2008.In May 2013,

Ranbaxy also pleaded guilty to felony charges in the US, relating to the

manufacture and distribution of certain adulterated drugs made at Ranbaxy’s

manufacturing facilities in India and had to pay a fine of USD 500 million. Further,

in September 2013, the company’s Mohali facility was also banned from

manufacturing pharmaceuticals which were intended to be exported to the US.

This was followed by the ban on the Toansa facility in Punjab for lapses in quality

control and adherence to procedure.

C. Daiichi

Daiichi is a global pharmaceutical company with corporate origin in Japan. In

2008, Daiichi acquired a controlling stake in Ranbaxy. However, the value of

Daiichi’s investments has halved over the years, as Ranbaxy has not been able to

ensure compliance of its factories supplying to the US, with USFDA guidelines.

34

DATA COLLECTION

RESEARCH OBJECTIVE:

Merging Company Ranbaxy Surviving Company Sun Pharma Share Swap Ratio

0.8 share of Sun Pharma of face value of INR 1/- each will be allotted to the

shareholders of Ranbaxy for each share of INR 5/- each held by them in Ranbaxy.

Implied value per share INR 457 for each Ranbaxy share, representing an 18

percent premium to Ranbaxy’s 30-day volume weighted average share price 30

Total equity value of the Transaction USD 3.2 billion (USD 4 billion including

payment to NCD holders)

35

A BRIEF CHRONOLOGY OF EVENTS PERTAINING TO THE

TRANSACTION IS PROVIDED BELOW:

Date Event April 6, 2014 Resolutions regarding the amalgamation agreement and

other matters passed at the Board of Directors meetings of Sun Pharma and

Ranbaxy

April 30, 2014 Andhra Pradesh High Court issues notices to the Securities and

Exchange Board of India (“SEBI”), BSE, NSE, Sun Pharma, Ranbaxy and Silver

Street Developers LLP to maintain status quo, based on a writ petition alleging

insider trading in the shares of Ranbaxy in the days prior to the announcement of

the Transaction

May 11, 2014 Daiichi files a petition before the Andhra Pradesh High Court

requesting it to vacate the 'status quo' order

31 May 13, 2014 Sun Pharma moves the Supreme Court against the status quo

order of the Andhra Pradesh High Court.

May 13, 2014 FIPB to take up Daiichi’s FDI proposal in Sun Pharma

May 21, 2014 Supreme Court directs the Andhra Pradesh High Court to decide the

matter and posts the case for hearing on May 27, 2014 May 24

36

2014 Andhra Pradesh High Court vacates status quo order July 11, 2014 Approval

for the scheme from BSE and NSE

August 22, 2014 Court-convened extraordinary general meeting of shareholders of

Sun Pharma conducted pursuant to an order dated August 5, 2014 of the High

Court of Punjab and Haryana

August 27, 2014 Competition Commission of India (“CCI”) directs the Company

to publish the details of the proposed combination in the prescribed format

September 4, 2014 CCI invites comments from public in respect of the Transaction

September 19, 2014 Court-convened extraordinary general meetings of

shareholders Ranbaxy to be conducted pursuant to an order dated August 5, 2014

of the High Court of Punjab and Haryana

December 5, 2014 CCI grants conditional approval to the Transaction

December-end, 2014 / January 2015 (estimated) Merger/ amalgamation completed

with approval from high courts in India, the Indian central government and

relevant state governments, stock exchanges and approval under the Hart-

ScottRodino Act in the US.

KEY TERMS OF THE DEAL

Ranbaxy will merge into Sun Pharma pursuant to a scheme of merger under

Companies Act, 1956. At present, Daiichi owns approximately 63.41 percent of the

shares of Ranbaxy. Both Daiichi and the promoters of Sun Pharma have

irrevocably agreed to vote in favour of the Transaction at the general meetings of

Ranbaxy and Sun Pharma respectively.

Under the terms of the Transaction, 0.8 share of Sun Pharma of face value of INR

1/- each will be allotted to the shareholders of Ranbaxy for each share of INR 5/-

held by them in Ranbaxy. Like other subsidiaries of Ranbaxy, Ranbaxy

(Netherlands) B.V., which is a wholly owned subsidiary of Ranbaxy, will also

become a subsidiary of Sun Pharma pursuant to the Transaction.

A. Shareholding Post Consummation of Transaction

Post closing of the Transaction, Daiichi will become the second largest shareholder

in Sun Pharma with a stake of 9 percent, while the shareholding of the promoter

group of Sun Pharma will stand reduced to ~55 percent. The public shareholders of

37

Ranbaxy are expected to hold 14 percent and existing public shareholders of Sun

Pharma will hold 22 percent in Sun Pharma, post-closing of the Transaction.

B. Daiichi Director

Daiichi shall also have the right to nominate one director on the board of Sun

Pharma. This right will terminate when Daiichi’s shareholding falls below 5

percent of the equity shareholding of Sun Pharma.

C. Indemnity

Ranbaxy has recently received a subpoena from the United States Attorney for the

District of New Jersey requiring Ranbaxy to produce certain documents relating to

issues previously raised by the USFDA with respect to Ranbaxy’s Toansa facility

in Punjab, India. In connection with the Transaction, Daiichi has agreed to

indemnify Sun Pharma and Ranbaxy for, among other things, certain costs and

expenses that may arise from the proceeding. Such indemnity may be essential for

the consummation of the Transaction as any liability which may arise as a result of

an adverse order by the judicial authority may have implications for the successor

entity post the merger.

In addition, under the scheme, Sun Pharma is required to indemnify each present or

former officer or director of Ranbaxy or any of its subsidiaries, for a period of 6

years from the effective date of the scheme, to the extent such officers and

directors are indemnified under the policies of Ranbaxy and its subsidiaries, in the

manner and to the extent mutually agreed between Sun Pharma and Ranbaxy.

D. Global Depositary Receipts of Ranbaxy

The board of directors of Sun Pharma may elect, at its sole discretion, to pursue

either of the below options for the global depositary receipts of Ranbaxy

(“GDRs”).

i. Equity option: effect the exchange and cancellation of the GDRs for a

proportional number of equity shares of Sun Pharma based on the Share Swap

Ratio; or

ii. Cash-out option: cash out existing GDR holders following the

effectiveness of the scheme.

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E. ESOPs of Ranbaxy

Upon the scheme being approved by the High Courts, Sun Pharma shall issue stock

options (“Sun Pharma ESOPs”) to employees of Ranbaxy holding stock options of

Ranbaxy (“Ranbaxy ESOPs”), which shall entitle the eligible employees to

purchase equity shares of Sun Pharma. The number of Sun Pharma ESOPs issued

shall equal the product of the number of Ranbaxy ESOPs (whether vested or

unvested) outstanding at the time the scheme comes into effect, multiplied by the

Share Swap Ratio, with any fractional shares rounded down to the next higher

whole number of shares (i.e. for every Ranbaxy ESOP held by an eligible

employee which entitles such eligible employee to acquire 1.00 equity share in

Ranbaxy, such eligible employee will be conferred a Sun Pharma ESOP to acquire

0.80 equity shares in Sun Pharma).

The terms and conditions applicable to the Sun Pharma ESOPs shall be no less

favorable than those provided under the Ranbaxy ESOPs. Such Sun Pharma

ESOPs will be issued under a new employee stock option scheme created by Sun

Pharma, inter alia for the purpose of granting stock options to the eligible

employees pursuant to the scheme

39

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

An amount equal to the balance lying to the debit in statement of profit and loss in

the books of Ranbaxy on the close of March 31, 2014 shall be adjusted/ reduced as

follows in accordance with Sections 391 to 394, sections 78 and 100 to 103 of the

Companies Act, 1956 (“CA 1956”) and Section 52 of the Companies Act, 2013

(“CA 2013”) and any other applicable provisions of law:

i. Firstly, against reduction of the capital reserve account of Ranbaxy amounting to

INR 1.762 billion;

ii. Secondly, against reduction of securities premium account of Ranbaxy

amounting to INR 35.014 billion;

40

iii. Thirdly, against reduction of the general reserve of Ranbaxy amounting to INR

5.519 billion, to the extent available or required;

iv. The balance, if any remaining in the debit in statement of profit and loss in the

books of Ranbaxy shall be carried in the books of Ranbaxy as on March 31, 2014.

G. Appointed Date and Effective Date

The ‘appointed date’ implies the date of amalgamation, that is, the date from which

the undertaking including assets and liabilities of the transferor company vest in

the transferee company. Typically, accounts of the transferor company on the

appointed date form the basis for valuation of shares and determination of the share

exchange ratio. Appointed date is relevant for the purpose of assessment of income

of the transferor and transferee companies. The ‘effective date’ is the date on

which the formalities of the merger / amalgamation are completed, i.e., when the

certified copy of the High Court’s order is filed with the registrar of companies or

the final approvals in relation to the scheme have been obtained. From the effective

date, the merger becomes effective.

41

SUN PHARMA’S RATIONALE FOR ACQUIRING RANBAXY, DESPITE

THE TROUBLES FACED BY RANBAXY IN FOREIGN MARKETS?

A. Increased Market Penetration and Entry into New Markets

A merger or amalgamation is essentially an integration of synergies and one of the

prime considerations for the Transaction includes the integration of product

portfolio (including APIs), supply chain and manufacturing. Ranbaxy has a

significant presence in the Indian market (21 percent sales) and in the US (29

percent sales). Sun Pharma on the other hand, has a strong presence in the US (60

percent of sales) and India (23 percent), while the rest of the world accounts for 17

percent sales of Sun Pharma. Thus, the combined entity will be more diversified

with the US, the rest of the world and India contributing 47 percent, 31 percent and

22 percent of sales respectively. In the emerging markets (50 percent of Ranbaxy’s

sales), it provides a platform which complements Sun Pharma’s strengths. Through

the Transaction, along with the emerging markets, Sun Pharma will also gain entry

into Japan, a market with high growth potential and low penetration of generic

drugs. Sun Pharma has estimated that it will save ~USD 250 million in the third

year of the merger/ amalgamation because of operating synergy. The Transaction

will create the No. 1 drug company in India with a market share of approximately

9% and the fifth largest generic drug firm globally.

B. Diversified Product Portfolio

A combined Sun Pharma and Ranbaxy will have a diverse, highly complementary

portfolio of specialty

And generic products marketed globally, including 445 ANDAs. Additionally, the

combination will create one of the leading dermatology platforms in the United

States. Sun Pharma will also get access to Ranbaxy’s new product pipeline

including a generic version of AstraZeneca’s heartburn drug Nexium. A diversified

product portfolio is important from a business risk control perspective, with

emerging markets leaning towards generic drugs and customers in developed

markets preferring to use branded products. Further, rising healthcare costs and

increasing awareness of the efficacy of generics has also led to a surge in demand

for generics in the developed world.

Mr. Dilip Shanghvi, the promoter of Sun Pharma, had mentioned that resolving

Ranbaxy’s regulatory troubles would be his priority, saying “For Sun, it is not the

42

size of the deal which matters…it is the quality of business (we acquire) and its

integration”.He further said that Sun Pharma’s primary focus will be to comply

with regulatory standards, a key issue Ranbaxy is facing now, and make it healthy

“before jumping into the business priorities”.

Sun Pharma is believed to have chalked out a detailed turnaround plan for Ranbaxy

and prepared a three pronged strategy which includes integration of supply chain

and field force for enhanced efficiency and productivity, resolution of regulatory

issues and higher growth through synergy in domestic and emerging markets. It is

believed that Sun Pharma is targeting a three- to four-year period after the closure

of the transaction to engineer the full turnaround of Ranbaxy.

LEGAL AND REGULATORY CONSIDERATIONS

The exchange control implications of the Transaction

A. FDI in Pharmaceuticals – History

Prior to 2011, foreign direct investment (“FDI”) up to 100 percent was permitted in

the pharmaceutical sector under the automatic route. However, following the

acquisitions of various home grown Indian pharmaceutical companies such as

Ranbaxy by Daiichi in 2008, Shanta Biotech by Sanofi Aventis of France in 2009

and Piramal Health Care’s formulation business by Abbott Laboratories of the US

in 2010 68, the Indian Government adopted a cautious approach in 201169

bringing all the investment in the brownfield pharmaceutical sector, under the

government approval route. The Indian Government’s actions may have been

driven by the concern that the entry of foreign pharmaceutical manufacturers into

the Indian market may drive up prices of essential drugs, leading to basic

healthcare becoming expensive and therefore, inaccessible to a large chunk of the

Indian population.

B. FDI Issues and Approval from the Foreign Investment Promotion Board

Under Circular 1 of 2014 notified by the Department of Industrial Policy and

Promotion (“FDI Policy”), foreign investment in the pharmaceuticals sector is

permitted up to 100 percent in both greenfield and brownfield projects.70 In a

greenfield project, FDI of up to 100 percent is permitted under the automatic route

and in a brownfield project, FDI of up to 100 percent is permitted with approval

from the Foreign Investment Promotion Board (“FIPB”). Also, for both such kind

43

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

circumstances with the approval of the FIPB. It is to be noted that the general

approach of the FIPB seems to be positive as it has been granting approvals to

most of the FDI proposals in brownfield projects.

As discussed above, as a result of the Transaction, Daiichi will become the second

largest shareholder in Sun Pharma with a stake of ~9 percent. Since Daiichi’s

holding in Sun Pharma, on successful consummation of the Transaction will be a

brownfield investment, Daiichi shall be required to obtain approval from the FIPB.

Similarly, approval of the FIPB would also be required for the other nonresident

shareholders of Ranbaxy obtaining shares in Sun Pharma.

C. ODI Filings

Ranbaxy has a subsidiary in the Netherlands, which will be owned by Sun Pharma

post the successful consummation of the Transaction. Under the provisions of

RBI’s Master Circular on Direct Investment by Residents in Joint Venture (JV) /

Wholly Owned Subsidiary (WOS) Abroad dated July 1, 2013 (“ODI

Regulations”), Sun Pharma would be required to report the details of such change

in shareholding pattern of the overseas subsidiary to the RBI, within 30 days of the

approval of the decision by the board of the subsidiary in terms of local laws of the

host country and include the same in the Annual Performance Report required to

be forwarded to the AD Category-I bank.

Further, under the ODI Regulations, an Indian party is permitted to invest in

overseas Joint Ventures (“JV”) / Wholly Owned Subsidiaries (“WOS”), not

exceeding 400 percent of the net worth as on the date of last audited balance sheet

of the Indian party. Post successful consummation of the Transaction, Sun Pharma

would have to make filings in Form ODI along with all prescribed enclosures/

documents and ensure that its combined investments in JVs and WOS abroad does

not exceed 400 percent of its net worth as on the date of its last audited balance

sheet. If an Indian company proposes to directly invest more than 400 percent of its

net worth in an offshore JV or WOS, the RBI may consider such proposal under

the approval route. However, any financial commitment exceeding USD 1 billion

(or its equivalent) in a financial year by an Indian party would require prior

approval of the RBI even when the total financial commitment of the Indian party

is within the limit of 400% of its net worth as per the last audited balance sheet.

44

THE COMPLIANCES TO BE CARRIED OUT BY SUN PHARMA AND

RANBAXY WITH RESPECT TO SEBI AND THE STOCK EXCHANGES

A. Stock Exchange

Sun Pharma and Ranbaxy both being listed on the BSE as well as the NSE, are

required to comply with the existing Clause 24(f) of the Listing Agreement which

mandates them to file a proposed scheme with the stock exchange, for approval, at

least a month before it is presented to the court or tribunal.

B. SEBI Circulars

Further, under the provisions of the SEBI Circular No. CIR/CFD/DIL/5/2013 dated

February 4, 201373 (“February 4 Circular”), read with the provisions of SEBI

Circular No. CIR/CFD/DIL/8/2013 dated May 21, 2013 (“May 21 Circular”), there

are certain obligations required to be met by listed companies:

i. Paragraph 5.2 of the February 4 Circular requires the listed company to place the

valuation report obtained from an independent chartered accountant before their

audit committee for approval.

ii. Companies listed on any stock exchange having nationwide terminals and/ or a

regional stock exchange are required to choose the stock exchange having

nationwide trading terminals as the designated stock exchange for the purpose of

45

coordinating with SEBI, under Paragraph 5.3 of the February 4 Circular read with

Paragraph 5 of the May 21 Circular.

iii. Under Clause 5.4 of the February 4 Circular, listed companies shall be required

to: (a) include the observation letter of the stock exchanges, in the notice sent to

the shareholders seeking approval of the scheme; and (b) bring the same to the

notice of the High Court at the time of seeking approval of the scheme.

iv. Under Clause 5.11 of the February 4 Circular, the listed company shall disclose

the draft scheme and all the relevant documents on its website immediately upon

filing of the draft scheme with the stock exchanges. It shall also disclose the

observation letter of the stock exchanges on its website within 24 hours of

receiving the same.

v. in addition, under Clause 5.13 of the February 4 Circular, all

complaints/comments received by SEBI on the draft scheme shall be forwarded to

the designated stock exchange, for necessary action and resolution by the

company. The company shall submit to stock exchanges a ‘Complaints Report’

which shall contain the details of complaints/comments received by it on the draft

scheme from various sources prior to obtaining observation letter from stock

exchanges on the draft scheme.

C. Insider Trading Regulations

Further, there are certain disclosure obligations on Ranbaxy’s directors, officers,

promoters or persons belonging to the promoter group under the provisions of

Regulation 13 of SEBI (Prohibition of Insider Trading) Regulations, 1992 (“SEBI

Insider Trading Regulations”) which are required to be made with the stock

exchange on which the company is listed, in case of change in shareholding or

voting rights of such persons.

D. Takeover Code

Since the Transaction is structured by way of merger, Sun Pharma would be

exempt from the obligation to make an open offer, since under the provisions of

Regulation 10(1)(d) of the SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 2011 (“Takeover Code”), an acquisition pursuant to a scheme of

arrangement involving the target company as a transferor company or as a

transferee company, including merger pursuant to an order of a court, is exempt

from the requirement to make an open offer under Regulations 3 and 4 of the

Takeover Code subject to certain reporting requirements.

46

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

Limited (“Zenotech”). Since the Transaction would involve Sun Pharma acquiring

55 percent of the shareholding in Ranbaxy, post consummation of the Transaction,

it would enable Sun Pharma to exercise 25 percent voting rights indirectly in

Zenotech. This would be considered as indirect acquisition of voting rights under

the provisions of Regulation 5 of the Takeover Code. Accordingly, Sun Pharma on

April 11, 2014, made an open offer to the equity shareholders of Zenotech for

shares constituting 28.1 percent of the fully diluted voting capital of Zenotech.

THE CHALLENGES FACED BY THE TRANSACTION IN RESPECT OF

THE SEBI INSIDER TRADING REGULATIONS?

On April 30, 2014, the Andhra Pradesh High Court ordered the BSE and NSE not

to approve the Transaction until it decided on a petition alleging insider trading in

the shares of Ranbaxy in the days leading to the announcement of the Transaction.

The court issued the order pursuant to a writ petition filed by a group of investors

who claimed that entities with prior knowledge of the deal illegally profited to the

extent of INR 2.85 billion. Shares of Ranbaxy, which is majority-owned by Japan’s

Daiichi-Sankyo, saw an unusual increase in price and turnover during six trading

days before the deal was announced on April 6.The price of Ranbaxy shares rose

by almost 33 percent between March 28, 2014 and April 4, 2014. Retail investors

say that Ranbaxy and Sun Pharma, as well as Silver Street Developers LLP, an

entity related to Sun Pharma had used price sensitive information to their benefit,

and to the detriment of the retail investors.

Silver Street Developers LLP held 1.64 percent stake in Ranbaxy as on March 31,

2014.Sun Pharma clarified that the purchase of purchase of shares of Ranbaxy by

Silver Street Developers LLP does not violate insider trading rules, since both

partners of Silver Street Developers LLP are wholly owned subsidiaries of Sun

Pharma. Hence, all benefits flowing from the investment in Ranbaxy shall accrue

to Sun Pharma. Further, it is also understood that such shares held by Silver Street

Developers LLP shall be cancelled and no further shares of Sun Pharma will be

issued to Silver Street upon the completion of the merger.

Based on the writ petition, the Andhra Pradesh High Court, issued notices to SEBI,

BSE, NSE, Sun Pharma, Ranbaxy, Daiichi Sankyo and Silver Street Developers

LLP to maintain status quo. On May 13, 2014, Sun Pharma moved the Supreme

Court of India against the status quo ordered by the Andhra Pradesh High Court in

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the Transaction. On May 21, 2014, the Supreme Court of India, after hearing the

appeal, directed the Andhra Pradesh High Court to decide the issue and posted the

case for hearing on May 27, 2014.On May 24, 2014, the Andhra Pradesh High

Court vacated the status quo order it issued, clearing the way for the BSE, the NSE

and SEBI to scrutinize the scheme and grant their assent to the Transaction.

Under the provisions of the SEBI Insider Trading Regulations, an “insider” is

prohibited from dealing in securities of a listed company, either on his behalf or on

behalf of any other person, when in possession of any unpublished price sensitive

information.Silverstreet Developers LLP may be considered an “insider” by virtue

of its shareholding in Ranbaxy. However, with the Andhra Pradesh High Court

exonerating Silver Street, all claims as to insider trading have been dropped.

THE OTHER REGULATORY ISSUES INVOLVED IN THE

TRANSACTION?

A. Pharmaceutical Licenses

Upon successful consummation of the Transaction, the licenses issued by the Drug

Controller General of India and the State Drug Licensing Authorities (such as State

Food and Drug Administration) to Ranbaxy for all of its products will be

extinguished. Sun Pharma will be required to make fresh applications to the State

Drug Licensing Authorities for manufacturing and sale of Ranbaxy’s products

under the Drugs and Cosmetics Act, 1940 read with the Drugs and Cosmetics

Rules, 1945. In addition, Sun Pharma would also have to obtain a no-objection

certificate from the Drug Controller General of India for exporting its products, if

such products include unapproved or approved new drugs or prohibited drugs.

B. Indirect Tax Registrations

Post the consummation of the Transaction, Sun Pharma would be required to

obtained fresh VAT registrations in the states where Ranbaxy’s products are sold.

C. Successor Liability

In case of a merger of two corporations, a successor corporation will be liable for

the debts and liabilities of the predecessor corporation. In the event of the

successful consummation of the merger between Ranbaxy and Sun Pharma, the

surviving entity, i.e., Sun Pharma would have to shoulder the debts and liabilities

of Ranbaxy which existed prior to the merger. As discussed earlier, Ranbaxy had

48

recently received a subpoena from the United States Attorney for the District of

New Jersey in respect of USFDA compliance of its plants, as well as several other

regulatory actions that are still pending. Daiichi may have agreed to indemnify Sun

Pharma against all liabilities arising out of such regulatory actions and/ or existing

liabilities of Ranbaxy. However, the scope of such indemnity is not known as the

definitive documents are not available in the public domain. In the event of any

losses arising out of previously existing liabilities of Ranbaxy, Sun Pharma would

have to make a claim against Daiichi for indemnity against such loss.

D. Delisting

The shares of Ranbaxy will be delisted from the NSE and BSE if the merger is

successfully consummated

E. Change of Control Provisions under Contracts or Financing Arrangement

Considering that Ranbaxy has operations spanning continents, it has entered into a

large number of agreements with suppliers, financiers, lenders etc. The terms of

these agreements may dictate that change of control of Ranbaxy shall not occur

without prior notification to/ consent of the parties to such agreements.

Accordingly, Ranbaxy may have to obtain prior consent/ notify the opposite parties

to its agreements, prior to entering into the Transaction.

TAX CONSIDERATIONS

I. Is the Transaction tax-exempt?

Under the provisions of Section 47(vi) of the ITA, “any transfer, in a scheme of

amalgamation, of a capital asset by the amalgamating company to the

amalgamated company if the amalgamated company is an Indian company”, will

not be considered as a ‘transfer’ for the purpose of assessment of capital gains.

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

“amalgamation”, in relation to companies, means the merger of one or more

companies with another company or the merger of two or more companies to form

one company (the company or companies which so merge being referred to as the

amalgamating company or companies and the company with which they merge or

49

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

manner that,

i. All the property of the amalgamating company or companies immediately before

the amalgamation becomes the property of the amalgamated company by virtue of

the amalgamation

ii. All the liabilities of the amalgamating company or companies immediately

before the amalgamation become the liabilities of the amalgamated company by

virtue of the amalgamation

iii. shareholders holding not less than three-fourths in value of the shares in the

amalgamating company or companies (other than shares already held therein

immediately before the amalgamation by, or by a nominee for, the amalgamated

company or its subsidiary) become shareholders of the amalgamated company by

virtue of the amalgamation, otherwise than as a result of the acquisition of the

property of one company by another company pursuant to the purchase of such

property by the other company or as a result of the distribution of such property to

the other company after the winding up of the first-mentioned company

As a result of the Transaction, (i) the property of Ranbaxy immediately before the

merger will become the property of Sun Pharma, (ii) all liabilities of Ranbaxy

immediately before the merger will become the liabilities of of Sun Pharma and

(iii) current shareholders of Ranbaxy will become the shareholders of Sun Pharma

and hence, this should result in a tax-neutral transaction for both Ranbaxy and its

shareholders.

II. What are the tax implications for holders of ESOPs and GDRs?

A. ESOPs

The Transaction should have tax implications for stock option holders of Ranbaxy.

Post the consummation of the transaction, the Ranbaxy ESOPs will be cancelled

and the holders of the Ranbaxy ESOPs will be issued Sun Pharma ESOPs in

exchange. While exchange of ESOPs may be considered as transfer as per the ITA,

if Ranbaxy ESOPs do not have cost of acquisition, an argument can be made that

such exchange should not be subject to tax. Upon vesting of the Sun Pharma

ESOPs, the difference in fair market value of Sun Pharma ESOPs and the exercise

price may be taxed as salary income in the hands of such stock option holders.

Further, upon transfer of the Sun Pharma shares, the difference between the

50

consideration received and fair market value of Sun Pharma ESOPs may be taxable

as capital gains.

B. GDRs

Sun Pharma would have two options to deal with the GDRs – the equity option and

the cash-out option, as mentioned in the section titled ‘Details of the Deal’. One

view is that the equity option is akin to conversion of the GDRs into equity shares.

The report of the Committee to Review the FCCBs and Ordinary Shares (Through

Depository Receipt Mechanism), 1993 had recommended that the conversion of

depository receipts not be treated as a taxable event. However, currently there are

no specific provisions in the ITA which exempt the conversion of GDRs from

taxation and hence it’s a taxable event. The other view is that depositary will

receive Sun Pharma shares in exchange for Ranbaxy shares which is a tax neutral

transaction and then cancel Ranbaxy GDRs against in specie distribution of Sun

Pharma shares. The second leg will be a tax exempt transaction for the GDR

holders since transfer will be from nonresident to non-resident but may be taxable

for the depositary since depositary may transfer shares of an Indian company to

depositary receipt holder off the floor of the exchange. To that extent, there is an

ambiguity with respect to the tax implications of the equity option.

The cash-out option would effectively be extinguishment of the GDRs. Under

Section 2(47) of the ITA, ‘transfer’ in relation to capital asset is defined to include

the extinguishment of any rights in such capital asset. The cash-out option may

hence be treated as a transfer of capital asset from a nonresident to a resident.

Section 115AC of the ITA provides for taxation of capital gains arising from

transfer of global depository receipts. Therefore, capital gains arising from the

exercise of the cash-out option of the GDRs may be taxable at 10 percent in the

hands of the GDR holders under Section 115AC of the ITA.

CHALLENGES and FUTURE GROWTH

Challenges

Every industry has its own sets of advantages and disadvantages under which they

have to work; the pharmaceutical industry is no exception to this. Some of the

challenges the industry faces are:

51

Regulatory obstacles

Lack of proper infrastructure

Lack of qualified professionals

Expensive research equipment’s

Lack of academic collaboration

Underdeveloped molecular discovery program

Divide between the industry and study curriculum

Over the past decade, pharmaceutical companies have entered a difficult period

where shareholders, the market, and regulators have created significant pressures

for change within the industry. The core issues for most of drug companies are

declining productivity of in-house R & D, patent expiration of number of block

buster drugs, increasing legal and regulatory concern, and pricing issue. As a result

larger pharmaceutical companies are shifting to new business model with greater

outsourcing of discovery services, clinical research and manufacturing. Current

global financial conditions and the threat of a broad recession accelerated the

timetable for implementing transformational changes in global organizations, as

the industry confronts lower corporate stock prices and an increasingly cost-averse

customer. Leaders of the largest global pharmaceutical companies recognize the

need for transformational change in their organizations, but will need to move

swiftly to ensure sustained growth.

Transformations in the business model of larger pharmaceutical industry

spell more opportunities for Indian pharmaceutical companies. Pharmaceutical

production costs are almost 50 percent lower in India than in western nations,

while overall R&D costs are about one-eighth and clinical trial expenses around

one-tenth of western levels.

The Indian stock market may be dreading a possible recession but Indian

pharma companies seem unfazed by slowdown fears. Riding on better sales in the

domestic and export markets, Indian pharmaceutical industry is expected to

continue with its good performance. Today Indian pharmaceutical Industry can

look forward to the years to come, with great expectations. There are opportunities

in expanding the range of generic products as more molecule come off patent,

outsourcing, and above all, in focusing into drug discovery as more profits come

from traditional plays. At the same time, the Indian pharma industry would have to

contend with several challenges, particularly the following

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Effects of new product patent

Drug price control

Regulatory reforms

Infrastructure development

Quality management and Conformance to global standards.

Future Growth

India will see the largest number of merger and acquisitions (M&A) in the

pharmaceutical and healthcare sector, according to consulting firm Grant Thornton.

A survey conducted across 100 companies has revealed that one- fourth of the

respondents were optimistic about acquisitions in the pharmaceutical sector.

The Indian pharmaceutical market is expected to grow at a CAGR of 15.3 per cent

during 2011-12 to 2013-14, according to a Barclays Capital Equity Research report

on India Healthcare & Pharmaceuticals. The growth of Indian pharma companies

will also be driven by the fastest growing molecules in the diabetes, skincare, and

eye care segment. In addition, the pharmaceutical companies such as Cipla,

Ranbaxy, Dr Reddy's Labs and Lupin might soon be part of the government's

ambitious 'Jan Aushadhi' project. In an attempt to commercialize the project, the

Government is likely to rope in the private sector to bulk-procure generic drugs

from them. There are 117 Jan Aushadhi stores across the country and the plan is to

expand to at least 600 in the next two years and 3,000 by 2016.

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CONCLUSION

Sun Pharmaceutical Industries Ltd is buying Ranbaxy Laboratories Ltd through an

all-stock merger in which five shares of Ranbaxy will fetch four shares of Sun

Pharma. Based on their closing prices on Friday, a share of Ranbaxy valued at

Rs.460 will get four-fifths of a Sun Pharma share valued at Rs.458. It seems a fair

exchange ratio but Ranbaxy’s shares have risen sharply since 27 March. The

market appears to not only have got wind of the deal but the ratio as well, since the

share levels match the ratio so well. That is something for the market regulator to

investigate, if the rise in Ranbaxy’s share price was a mere coincidence or if

somebody had insider information on the deal and acted on it. If we consider the

closing prices as on 27 March, Ranbaxy shareholders would have got a 29.3%

premium, which seems fair.

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WHO BENEFITS AND HOW

Daiichi Sankyo Co. Ltd: Daiichi is the parent company of Ranbaxy since it

bought the Indian drug maker from its earlier promoters. Daiichi faced criticism

after Ranbaxy’s plants came under the US Food and Drug Administration’s

(FDA’s) scanner shortly after the acquisition. Even after so many years, Ranbaxy’s

inability to overcome its FDA-related problems has put pressure on its promoters.

With Sun Pharma acquiring Ranbaxy, Daiichi is relieved of the burden of

managing Ranbaxy’s problems. It will hold a 9% stake in Sun Pharma, as a result

of its current stake in Ranbaxy, though one can expect it to sell that stake

eventually. On a conference call, however, Sun Pharma’s management indicated

they plan to work together with Daiichi to grow the business. Ranbaxy

Along with the acquisition news, Ranbaxy announced that it received a

subpoena dated 13 March (why this was not disclosed earlier is something that

should bother shareholders) asking for information about its Toansa facility that

recently received an import alert from the US FDA. That this is material is evident

from the fact that Daiichi has agreed to indemnify Sun Pharma from any costs or

expenses that may arise from this subpoena. Eventually, this news would have

emerged in the public domain and may have further damaged investor sentiment.

But things change now for Ranbaxy. This is the end of the road for Ranbaxy as it

exists but it perhaps is the best outcome for the company and its shareholders,

given the circumstances.

Ranbaxy is a company with a very bright future in the US generics market, with a

sizeable drug pipeline and some big product launches in the waiting, but for

frequent run-ins with the US drug regulator. The fact that these glitches continued

even after a new management was in control was a big surprise for investors. It is

now up to the new owners to ensure that the plants become and remain compliant

with US FDA norms. Sun Pharma: Sun Pharma’s managing director Dilip

Shanghvi has acquired a reputation for acquiring companies in trouble at a good

price, and then turning around their operations. Ranbaxy will certainly be a big

challenge. The merger will see Sun Pharma’s revenue jump by a healthy 40% but

its operating profit will rise by a meagre 7.5%, based on pro forma 2013 financials.

Its operating profit margin will decline from 44.1% to 29.2%. Thus, the merger

will have a negative effect on its performance in the near term. Pro forma financial

statements are designed to reflect a proposed change, such as an acquisition, or to

emphasize some figures when a company issues an earnings announcement to the

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public. In terms of size, Sun Pharma will now have a pro forma 2013 revenue of

Rs.25,911 crore and an operating profit of Rs.7,577 crore, with a net profit of

Rs.1,710 crore. Ranbaxy’s profits have been hit by provisions related to inventory

write-offs and foreign exchange-related provisions.

So, what does Sun Pharma hope to gain from this acquisition? Sun Pharma has said

it expects to get $250 million, or Rs.1, 550 crore, in merger-related synergies by

the third year after the acquisition is completed. That is fairly significant and these

savings should be from sales growth, procurement and supply chain efficiencies.

But this merger is not really about scale and its benefits. In the Indian market, the

combined entity’s portfolio becomes much larger, covering more therapeutic areas.

The challenge is that Ranbaxy’s margins have been relatively lower and that is

unlikely to satisfy Sun Pharma. The company management has said they will work

on improving its margins. In the US market, the priority will be to resolve all of

Ranbaxy’s FDA-related troubles to ensure that every major generic product in

Ranbaxy’s pipeline makes it to market. These are crucial factors, in addition to

their efforts to grow their combined business in Europe and emerging markets, to

ensure this acquisition works out in Sun Pharma’s favor.

Shareholders Ranbaxy’s share is evenly placed based on the merger ratio

and no further gains are likely to accrue to its shareholders. Ranbaxy’s

shareholders will now become Sun Pharma shareholders. They can choose to stay

invested if they believe that Sun Pharma will be able to make a much bigger and

better combination, or exit at this point. Sun Pharma’s shareholders may blink at

the immediate effect of equity dilution of 16.4% and the effect on its profitability

in the near term. This is reflected in the stock market reaction to the

announcement: On Monday, Ranbaxy’s shared declined by 3.1%, while Sun

Pharma’s share faced some volatility but closed with a decent gain of 2.7%.” There

is also the matter of uncertainty on what further lies ahead for Ranbaxy’s

regulatory troubles and how soon Sun Pharma can resolve them. Running counter

to these fears should be Sun Pharma’s ability to make this acquisition work in the

long run. The company’s successful track record in turning around acquired

companies should give investors some hope that it can pull off the same magic at

Ranbaxy as well.

The Transaction promises to bring some cheer to the Indian pharmaceutical

industry. However, post the consummation of the Transaction, Sun Pharma has

plans to gradually phase out the fifty-year old Ranbaxy brand, with Ranbaxy drugs

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sold in the United States being gradually rebranded as Sun Pharma treatments. The

brand is likely to continue to be present in other markets.

The interest of the pharmaceuticals industry in the Transaction is fueled by

two reasons – the size and reach of the resulting entity which may lead to anti-trust

issues in India as well as abroad, and the strategy to be adopted by Sun Pharma to

turn around Ranbaxy. Mr. Dilip Shanghvi, the managing director of Sun Pharma is

well known for acquiring and turning around distressed companies. The industry

waits with bated breath to see whether Mr. Shanghvi will repeat his magic, this

time with Ranbaxy. Only time will tell whether Mr. Shanghvi’s magic will convert

Ranbaxy into a ‘crown jewel’ or a ‘white elephant’ for Sun Pharma.

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LIMITATION:

As merger and acquisition is a vast topic. I have tried to limit the scope to merger

and acquisition in Indian pharma industry

I have gone through in detail a case of sun pharma taken over Ranbaxy Laboratories

And the coverage of the discussion in topic have been useful in bringing out

certain highlight however due to time and resource constraint the study has only

confined to as describe above case.

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BIBLIOGRAPHY

Books:

Mergers, Acquisition & Corporate Restructuring

Magazines:

Journal of Pharmaceutical Industry

Websites:

www.google.com

www.managementparadise.com

www.healthlibrary.com

www.wikipedia.org

www.sunpharma.com