This case was prepared with the objective to study merger synergy, valuation and how poor due diligence will have consequences on companies Balance Sheet.

1. MERGERS AND ACQUISITIONS
(TERM-IV SESSION-2012-2014)
Case Study
On
ACQUISITION OF RANBAXY BY DAIICHI SANKYO
Submitted To:
Submitted By:
Prof. Shiv NathSinha
GROUP -3 SECTION-ABC
Asst. Professor (FINANCE)
Aditya Agarwal (2012019)
IMT Nagpur
Aditya Kapoor (2012020)
AkashAgrawal (2012029)
Amit Gupta (2012037)

2. Acquisition of Ranbaxy by Daiichi-Sankyo
This case was prepared with the objective to study merger synergy, valuation
and how poor due diligence will have consequences on companies Balance
Sheet.
Background:
On 11 June 2008, Daiichi Sankyo Co. Ltd., the second largest pharmaceutical company in
Japan, signed an agreement to acquire the entire shareholding of the promoters (the Singh
family) of Ranbaxy Laboratories Ltd, the largest pharmaceuticals company in India. The total
stake amounted to 34.8% and Daiichi Sankyo expects to acquire another 9.4% through a
preferential allotment. The company has the option to acquire up to 20% of Ranbaxy‟s voting
capital through a public offer. Through this offer, Daiichi Sankyo seeks to acquire sufficient
number of outstanding shares to obtain a majority stake in Ranbaxy, that is, a minimum of
50.1%. If Daiichi Sankyo fails to meet with adequate shareholder response during the open
offer, it has the option to exercise a preferential issue of warrants that can increase Daiichi
Sankyo‟s stake in Ranbaxy by another 4.9%.
The value of the transaction is expected to range from $3.4 billion to $4.6 billion at the rate of
$17.14 per share (INR737 per share, exchange rate: 1USD=43INR), representing a premium
of 53.5% to the average daily closing price of Ranbaxy‟s shares traded on the National Stock
Exchange for the three-month period ended 10 June 2008, and 31.4% premium to the last
traded price (price on 10 June 2008). Both the company boards have approved the merger and
subsequent to the closure, which is expected by March 2009, Ranbaxy is expected to be
valued at $8.5 billion and the combined entity at roughly $30 billion.
Ranbaxy will function as Daiichi Sankyo‟s subsidiary but will retain its independent
management and continue to be led by its current CEO & Managing Director Malvinder
Singh. Daiichi Sankyo expects the merger to positively impact its EPS (after goodwill
amortization) in the fiscal year ending 31 March 2010 (fiscal 2010). Daiichi Sankyo will
benefit from Ranbaxy‟s low-cost manufacturing infrastructure and supply chain strengths
while this deal will award Ranbaxy with access to the research and development expertise of
Daiichi Sankyo to further its own growing branded drugs business. Daiichi Sankyo is already
the result of the combination of Daiichi Pharmaceutical and Sankyo Company, a merger
initiated in October 2005 and completed in April 2007.
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3. Acquisition of Ranbaxy by Daiichi-Sankyo
The present study discusses the implications of the merger between Ranbaxy and Daiichi
Sankyo, from an intellectual property as well as a market point of view. This analysis is
particularly important at this point because of a variety of reasons including the growing
preference for generics, increasing dominance of emerging markets such as India, fast
approaching patent expiry etc. Also, given the fact that this involves 2 players who are among
the largest in their respective markets, the deal is of great significance.
Daiichi Sankyo Background:
Daiichi Sankyo is a Japanese pharmaceutical stock company with head / registered office at
Tokyo, Japan .On September 28, 2005, Daiichi Pharmaceutical Co., Ltd, Japan („Daiichi‟),
and Sankyo Company, Limited, Japan („Sankyo‟) formed a joint holding company, Daiichi
Sankyo by way of share transfer. Thereafter, in April 2007, Daiichi and Sankyo merged into
Daiichi Sankyo. Daiichi Sankyo is engaged in the business of research & development,
manufacturing, import, and sales & marketing of pharmaceutical products globally. Daiichi
Sankyo Company, Limited was established in 2005 by way of share transfer by two leading
century-old Japanese pharmaceutical companies, Daiichi and Sankyo. Sankyo was
established in 1899 while Daiichi was established in 1915. Currently, Daiichi Sankyo has
directly marketed its products among major markets as well as emerging markets through its
subsidiaries located in 21 countries worldwide. Daiichi Sankyo‟s vision is to establish a
strong presence in the international arena as a Global Pharma Innovator, by consistently
developing new world-class drugs, and manufacturing and marketing them through its own
hands. Daiichi Sankyo uses its cumulative knowledge and expertise in the fields of
cardiovascular disease, cancer, metabolic disorders, and infection as a foundation for
developing an abundant product line-up and R&D pipeline. Daiichi Sankyo's products are
used not only in Japan but also in many parts of the world including Asia, Europe and the
United States. In recent history, Daiichi Sankyo has successfully launched three major
products widely used globally, an antihypertensive Olmesartan (Benicar®, Olmetec®), a
synthetic antibacterial agent Levofloxacin (Levaquin®, Tavanic®, Cravit®), and an
antihyperlipidemic agent Pravastatin (Pravachol®, Mevalotin®). To pick up on global needs
all over the world and have these reflected in global pharmaceutical operations, Daiichi
Sankyo is active in promoting information exchange in a number of areas including research
and development, supply chain management and marketing. In recent years, concern for
health has grown more and more. People naturally take constant care of their health to
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4. Acquisition of Ranbaxy by Daiichi-Sankyo
prevent illness in advance, but it is also noticeable that people are now engaging in selfmedication, from using over-the-counter drugs at their own discretion to alleviate the
symptoms of a mild cold or fever, to taking supplements to compensate for nutritional
deficiencies. In addition to over-the-counter medicines, Daiichi Sankyo has set up consumer
health operations, including functional foods and skin care, as one of its core operations, and
through one of its group companies, Daiichi Sankyo Healthcare Co., Ltd., it is making further
efforts to develop self-medication.
Daiichi Sankyo contributes to the health of people
everywhere by creating new medicines in popular use throughout the world, and delivering
them to places where medical treatment is required, transcending national borders. The equity
shares of Daiichi Sankyo are currently listed on the Tokyo, Osaka and Nagoya Stock
Exchanges in Japan. The total paid-up capital of Daiichi Sankyo as on March 31, 2008 was 5,
00,000 lakh Yen. Under the Japanese corporate law, the face value system for equity shares
was abolished in the Year 2001. Hence, outstanding equity shares of all Japanese corporate,
including Daiichi Sankyo, are expressed as total paid-up capital without any indication for
face value. The closing price of Daiichi Sankyo on the Tokyo Exchange on June 26, 2008
was Japanese Yen 2,910 (Source: Bloomberg). As on June 26, 2008 Daiichi Sankyo has a
market capitalization of Yen 213,88,830 lakh. Daiichi Sankyo is a professionally managed
company. The shares of Daiichi Sankyo are widely held by institutional and individual
shareholders. Hence, there are no promoters or controlling shareholders over Daiichi Sankyo.
Exhibit 3 provides details of financial statements of company for 3 years pre-merger.
Corporate Governance:
The structure of the governance organization consists of directors and auditors. The directors
carry out tasks stipulated in laws, regulations and our company articles, and make decisions
on important matters relating to management and business operations, while mutually
supervising the performance of their duties. There are also established internal rules,
including a Corporate Conduct Charter and a code of conduct to ensure sound, flexible
management based on regulatory compliance and observance of these corporate rules. The
auditors are independent and operate under the mandate of the shareholders. They audit the
performance of directors‟ duties for soundness of decisions and compliance with the law.
There is also a corporate officer system where Corporate Officers are appointed by the Board
of Directors to perform specific duties under the direction and supervision of the President as
representative director. The President is advised by the Management Committee, which
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5. Acquisition of Ranbaxy by Daiichi-Sankyo
meets regularly to discuss basic management policies and plans and receive reports on
important aspects of business operations. Internal audits play an important role in the
effective achievement of management goals. They are conducted according to plans drawn up
by the Internal Audit Department. Audit perspectives include the effectiveness and efficiency
of business operations, the reliability of financial reports, regulatory compliance in business
operations, and asset protection. Internal audits cover all the divisions and departments, and
affiliates. Where necessary, business partners are also audited.
Ranbaxy Background:
RLL is a public limited company with its registered office in Mohali ,Punjab, India. RLL was
incorporated on June 16, 1961 as Lepetit Ranbaxy Laboratories Limited. On August 24,
1966, it changed its name to Ranbaxy Laboratories Limited and on October 28, 1970 changed
its constitution from a public limited company to a private limited company. -52- Thereafter,
the Target Company reverted to its constitution of a public limited company on September
27, 1973 and was publicly listed on the BSE on February 9, 1974. The equity shares of RLL
are currently listed in India on the BSE and the NSE. The Global Depository Receipts of RLL
are listed on Luxembourg Stock Exchange and the Foreign Currency Convertible Bonds
(„FCCB‟) are listed on the Singapore Exchange Securities Trading Limited. RLL, a public
limited company, together with its subsidiaries, joint venture and associates (collectively
referred to as the „Group‟) operates as an integrated international pharmaceutical organisation
with businesses encompassing the entire value chain in the marketing,production and
distribution of dosage forms and active pharmaceutical ingredients. The Group is also
engaged in the business of consumer healthcare products. The Group presently has
manufacturing facilities in eleven countries, namely India, the United States of America,
Brazil, China, Ireland, Japan, Malaysia, Nigeria, Romania, South Africa and Vietnam. The
Group's major markets include the United States of America, India, Europe, Russia/CIS, and
South Africa. The United States of America is the largest market and major products are
Simvastatin, CoAmoxyclav, Amoxycillin, Ciprofloxacin, Isotretinon and Cephalexin. The
research and development activities of the Group are principally carried out at its facilities in
Gurgaon, near New Delhi, India. RLL is one of the leading pharmaceutical companies in
India and is ranked amongst the top ten global generic pharmaceutical companies. It has
marketing presence in 49 countries, manufacturing facilities in 11 countries and a diverse
product portfolio. RLL‟s promoters are Mr. Malvinder Mohan Singh and Mr.
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6. Acquisition of Ranbaxy by Daiichi-Sankyo
ShivinderMohan Singh along with their family members and associates. As on date of the
public announcement, the total paid-up share capital of the arget Company was Rs. 186.62
crores consisting of 373,237,870 fully paid-up shares of par value Rs 5/- per equity share.
There were no partly paid-up shares in the Target Company. Shareholding Pattern of RLL as
on date of public announcement (i.e. June 16, 2008).The Target Company had raised US$
440,000,000 in the year 2006 through zero coupon FCCBs. The Bonds are convertible any
time on or after April 27, 2006 upto March 8, 2011 by the holders into fully paid Equity
Shares of Rs. 5 each of the Target Company, which may subject to certain conditions, be
represented by Global Depository Shares („GDS‟) with each GDS representing one share at a
conversion price of Rs. 716.32 per share, which is subject to adjustment in certain
circumstances. In case if the Bonds are not converted into shares, the Target Company will
redeem each Bond at 126.765% of its principal amount on the maturity date i.e. March 18,
2011. Number of equity shares underlying the possible conversion of zero coupon FCCBs
have been calculated on the basis of an adjusted conversion price of Rs. 559.64 per share.
Nature of operations:
RLL, a public limited company, together with its subsidiaries, joint venture and associates
(hereinafter collectively referred to as the „Group‟) operates as an integrated international
pharmaceutical organization with businesses encompassing the entire value chain in the
marketing, production and distribution of dosage forms and active pharmaceutical
ingredients. The Group is also engaged in the business of consumer healthcare products.
The Group presently has manufacturing facilities in eleven countries, namely India, the
United States of America, Brazil, China, Ireland, Japan, Malaysia, Nigeria, Romania, South
Africa and Vietnam. The Group's major markets include the United States of America, India,
Europe, Russia/CIS, and South Africa. The United States of America is the largest market
and major products are Simvastatin, CoAmoxyclav, Amoxycillin, Ciprofloxacin, Isotretinon
and Cephalexin. The research and development activities of the Group are principally carried
out at its facilities in Gurgaon, near New Delhi, India. RLL's shares are listed for trading on
the National Stock Exchange and the Bombay Stock Exchange in India and its Global
Depository Receipts (covering equity shares of RLL) are listed on the Luxembourg Stock
Exchange and Foreign Currency Convertible Bonds are listed on Singapore Stock Exchange.
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7. Acquisition of Ranbaxy by Daiichi-Sankyo
Financial:
The financial statements have been prepared to comply with the Accounting Standards
referred to in the Companies (Accounting Standards) Rule 2006 issued by the Central
Government in exercise of the power conferred under subsection (I) (a) of section 642 and
the relevant provisions of the Companies Act, 1956 (the 'Act'). The financial statements have
been prepared under the historical cost convention on accrual basis. The accounting policies
have been consistently applied by the Group unless otherwise stated. Exhibit 2 provides the
details of consolidated financial statement for 3 years.
Corporate Governance:
The following are the relevant details with regards to RLL‟s compliance with the provisions
of Corporate Governance. RLL has complied with the conditions of Corporate Governance as
stipulated in the listing agreement for the year ended December 31, 2007. M/s. Walker,
Chandiok& Co., statutory Auditors of RLL vide their certificate dated March 28, 2008, has
certified the same. The Corporate Governance Report as well as the certificate from the
statutory Auditors forms a part of the Annual Report of RLL for the year ended December
31, 2007.
Rationale of merger:
Both Daiichi Sankyo and Ranbaxy expect the transaction to create substantial synergies in the
long term. The companies benefit from their strikingly complementary businesses, which
they believe would bring considerable cost savings in their diversification initiatives, which
will be aimed at establishing a strong presence in all pharmaceutical therapeutic areas. For
instance, Daiichi Sankyo‟s strength in proprietary medicine is believed to be complemented
by Ranbaxy‟s leadership in the generics segment, thus providing the combined business with
a broader product base, therapeutic focus areas and well distributed risks. Additionally, both
companies have a wide global reach, which is expected to further expand after the merger.
Ranbaxy‟s addition can boost Daiichi Sankyo‟s position from 22 to 15 by market
capitalization in the global pharmaceutical market. Daiichi Sankyo sees this step as critical to
the achievement of its objectives outlined in its Mid-term Management Plan.
As part of the plan, Daiichi Sankyo envisages to become a major global innovator by 2015, at
the back of the growth of its Olmesartan drug during the period 2007-2009. The company
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also plans to expand its Levoflaxin product to export markets. Realization of synergies from
the complete integration of Daiichi and Sankyo (2005) is also a major goal of the
management plan. Many new products including the successor of its Venofer drug is
expected to propel growth.
Daiichi Sankyo has targeted $13.1 billion (JPY1.5 trillion, 1USD=114.2JPY) in sales by
2015 and to increase its operating profit margin by at least 25% and overseas sales ratio by at
least 60%. Strengthening its ability to discover new drugs and bolstering its R&D pipeline
also feature as objectives in Daiichi Sankyo‟s Mid-term Management Plan. The sales target
for fiscal 2010 is $7.5 billion (JPY860 billion, exchange rate: 1USD=114.2JPY) and an
operating profit of $2.10 billion (JPY240 billion, exchange rate: 1USD=114.2JPY), of which
25% of its expected sales is in local currency. Daiichi Sankyo expects that its return on equity
will increase from 6% to 10% in fiscal 2010 as a result of the merger.
SWOT ANALYSIS OF THE DEAL:
Strengths:
Ranbaxy
Largest pharmaceutical company in India
Localized operations in 49 countries; sales in 125 countries
Sales CAGR of 16.2% in 2002-2007 based on dollar sales
Balanced geographic sales distribution
Strong expertise in intellectual property and global regulatory affairs
180-day marketing exclusivity for four drugs with an annual sales potential of $8
billion
“First to file” status for 18 drugs with annual sales potential of $27 billion
98 ANDA filings pending approval
Focus on innovative research in anti-infectives, anti-malaria, metabolic disorders,
respiratory diseases and urology
Strong alliances with major global proprietary drugs manufacturers (such as the
ongoing drug development collaboration with GlaxoSmithKline, which was expanded
in 2007; and the joint research partnership with Merck in the anti-infectives segment;
the co-marketing agreement with Ferring International for its endocrine drug;
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marketing agreement with NatcoPharma in Yemen; alliances with Krebs and Jupiter
for fermentation-based products and peptides respectively)
Affiliate Zenotech‟s experience in biologicals
Strong marketing expertise in one of the most competitive markets viz. India
Manufacturing efficiencies – labor, infrastructure, quality
R&D expertise – scientists, strong generics business, developing innovative drugs
business, expertise in process chemistry
Daiichi Sankyo
Strong presence in the Japanese prescription drugs market
Growth driver potential in blockbuster Olmesartan (anti-hypertensive), Loxonin (antiinflammatory) and Levoflaxacin (anti-bacterial) drugs
Research collaborations with global pharmaceutical majors, such as the collaboration
with Eli Lilly for developing the high-potential Prasugrel anti-platelet agent for the
treatment of acute coronary syndrome due for launch in fiscal 2008
Highly integrated supply chain network
Sales force comprising 850 medical representatives
Opportunities:
Daiichi Sankyo has committed a maximum of 20% of its annual sales towards research and
development. The company has hitherto conducted research only with antibody (proteinbased) drugs, which have limited applicability despite their effectiveness in the targeted
location. However, Daiichi Sankyo has now shifted its focus towards low molecular
(chemical-based) compounds, which have wider applicability, for all its new drugs. Daiichi
Sankyo is also striving to bind antibody drugs on to low molecular compounds and deliver
them into the body so that the benefit of targeted effectiveness is realized for a wider range of
ailments. Daiichi Sankyo plans to implement this approach in many of its therapeutic areas,
including cancer. The shift towards low molecular compounds is in line with Daiichi
Sankyo‟s integration plan that has been outlined in its overall R&D strategy.
Daiichi Sankyo‟s forthcoming activities in the cancer area include conventional low
molecular drugs as well as chemotherapy drugs. In the future, Daiichi Sankyo strives to
conduct research on molecular targets, mainly in biologicals and antibodies, and extend to
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low molecular-type molecularly targeted drugs. However, many of the targets are in the early
stages of the research pipeline across therapeutic areas. This status will not allow Daiichi
Sankyo‟s cancer antibody products to hit the market before 2015, by when the market for
these products is likely to saturate further. Daiichi Sankyo hopes to catch up sooner by
implementing platform technology for antibody drugs and targets through collaborations and
deploying external resources.
Weakness:
Daiichi Sankyo, at the other end, has suffered a heavy increase in selling, general and
administrative (SGA) expenses to the tune of 10% from fiscal 2006 levels to JPY357,330
million ($3128.9 million). During this period, the sales growth was a mere 0.4% and
excluding one-time effects, was still only 1.5%. Over the five-year period to fiscal 2007,
Daiichi Sankyo recorded a decline in sales by a CAGR of 0.7% while the CAGR for SGA
expenses was 0.74% in the same period. There also were unused R&D expenses to the tune
of JPY8 billion ($70 million) in fiscal 2008. Although the company‟s SGA expenses declined
by about 9% in fiscal 2008, sales in the year witnessed a 5% decline due to a stagnant market
and sales erosion from generic drugs.
Threats:
Despite possessing many competitive advantages, Ranbaxy faces allegations by the US FDA
for repetitive fraudulent conduct. According to the FDA, Ranbaxy‟s move to use APIs from
unapproved sources has resulted in the availability of misbranded and counterfeit drugs in the
market. Subsequently, the FDA questioned Ranbaxy on the potency of its drugs, which are
alleged to be adulterated, and called for an internal review of the company‟s Indian
manufacturing operations. Ranbaxy has been under FDA scrutiny for about three years now
and its operations for the US market at the Paonta Sahib plant have been suspended since
2006. Although Ranbaxy claims that this is a routine investigation and there is no cause for
concern, the issue has eroded its market capitalization significantly. As a culmination of this
problem, Ranbaxy faced a ban in September 2008 on the import of over 30 of its drugs
produced in India with regards to concerns over its manufacturing practices at a few of its
facilities. Aside from this, Ranbaxy faces patent infringement lawsuits by global branded
drug manufacturers AstraZeneca and Pfizer.
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Post-merger Synergy Analysis:
Daiichi Sankyo and Ranbaxy launch hybrid business in Brazil to expand business of both
companies:
Daiichi Sankyo Company, Limited (hereafter, Daiichi Sankyo) and Ranbaxy Laboratories
Limited (hereafter, Ranbaxy) on April 17, 2013 announced synergy in Brazil to expand the
business of both companies in the country. As part of this synergy, Ranbaxy will support
Daiichi Sankyo‟s Brazilian subsidiary, Daiichi Sankyo BrasilFarmaceutica Ltd. (Hereafter,
Daiichi Sankyo Brazil), to enter the branded generics market, in addition to its established
business of providing innovative products. Ranbaxy‟s Brazilian subsidiary, Ranbaxy
Pharmaceutical Ltd. (hereafter, RFL) would continue to independently promote Ranbaxy‟s
generic products and also enter into branded generics in Brazil. The pharmaceutical market in
Brazil is the biggest in Latin America, and it is expected to become the fourth biggest in the
world in 2016. In Brazil, Daiichi Sankyo has built up its market presence with innovative
pharmaceuticals through Daiichi Sankyo Brazil. On the other hand, Ranbaxy markets its
generic products in Brazil through its subsidiary, Ranbaxy Pharmaceutical Ltd. With the
announced synergistic collaboration, the Daiichi Sankyo Group will expand its presence in
Brazil through its hybrid business model promoting innovative, branded generic and generic
pharmaceuticals. Daiichi Sankyo has not been able to manage Ranbaxy.
The whole picture is not that bright, as former Ranbaxy Laboratories chairman Malvinder
Singh has rubbished Daiichi Sankyo's claim that crucial facts about the US authorities' probe
were concealed at the time the company was sold by his family, and attacked the Japanese
firm for mismanaging the Indian drug maker. Singh also described the testimony of the
whistleblower that formed the basis of the US investigations as 'sensational', and said he
denied and rejected these charges. Ranbaxy agreed to pay a fine of $500 million for selling
adulterated drugs in the US market and pleaded guilty to seven criminal counts, including
fudging of drug data, intention to defraud, and failing to report that its drugs did not meet
specifications. These violations were committed when the company was owned by the Singh
family, and it was Dinesh Thakur, a former company executive, who alerted the US
authorities about these charges. The $500-million fine is the largest financial penalty paid by
any generic drug maker in the US for violating provisions of the federal Food, Drug and
Cosmetic Act (FDCA).
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Ranbaxy‟s management described as 'baseless' Daiichi Sankyo's allegation about 'certain
Ranbaxy shareholders' concealing and misrepresenting critical information concerning the
investigations conducted by the US authorities.
Structure of the Deal:
On 11th June 2008, Daiichi Sankyo made an offer to purchase more than 50.1% voting right
in Ranbaxy which included 34.83% stake of promoters, 9.4 % of preferential shares and an
open offer in which they are going to acquire the voting rights up to 20%. Daiichi offered a
share price of INR 737 with a transaction value of around $4.6 billion, valuing Ranbaxy at
$8.5 billion. Daiichi ended up acquiring 63.92% shares of Ranbaxy by Nov, 2008. Including
transaction costs the deal costs Daiichi $4.98 billion and they recorded goodwill of
$4.17billion. If Daiichi Sankyo fails to meet with adequate shareholder response during the
open offer, it has the option to exercise a preferential issue of warrants that can increase
Daiichi Sankyo‟s stake in Ranbaxy by another 4.9%. (Exhibit-1: Structure of Deal Summary)
For Daiichi Sankyo, in addition to the traditional high-risk/high-return business model
employed in developed-country markets, Ranbaxy‟s generic business model would help them
build a “hybrid business model” with a mix of patented and generic drugs. The deal also
required the current CEO/Promoter Malvinder Singh to stay with the company for 5 years.
The deal financing was through a mix of debt and existing cash resources of Daiichi Sankyo.
With the acquisition Daiichi got access to Ranbaxy‟s basket of 30 drugs for which the
company had approvals in the US, including 10 drugs for which Ranbaxy had exclusive sales
right to sell for six months after the expiry of their patents. The deal gave Daiichi an access to
best FTF 180 day exclusivity pipelines in the industry. Ranbaxy had already de-risked its
FTF pipeline through a series of settlement with innovator companies; this in-turn lowered
the litigation expense and removed uncertainty with regard to the launch date of these generic
drugs. It also helped in better planning of inventory, launch quantities and supply agreement.
From the perspective of Ranbaxy it is considered as the intelligent deal because as they had
held their shares for more than 50 years and shows the handsome growth till 2006 i.e. 16%
but then their business model started struggling with high litigation costs and rupee
devaluation against USD add the further problems and because of this in 2007 the growth fell
to 7% and for the next 2 years after acquisition they have expected to grow by 9%.
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From the perspective of Daiichi-Sankyo they need new market as they are planning to expand
their business in the generic medicines as result of Japanese govt. decision to reduce their
health budget by shifting on to the generic drugs. And on acquisition of Ranbaxy it will
provide Daiichi the strong base for the generic or low cost medicine drug production and due
to this deal it will take Ranbaxy-Daiichi to the 15th position in pharmaceuticals industry form
25th and Ranbaxy to the 5th position in the generic medicine production.
The Deal: Financing
On June 11, 2008, the Acquirer entered into a Share Purchase and Share Subscription
Agreement (the „SPSSA‟) with (a) Mr. Malvinder Mohan Singh; (b) Mr. Shivinder Mohan
Singh; and (c) Others (collectively referred to as the „Sellers‟) and RLL.Under the SPSSA,
the Sellers have committed to sell to the Acquirer their collective holding of 129,934,134fully
paid-up equity shares (the „Sale Shares‟) representing 34.81% of the total current issued,
subscribedand fully paid-up equity capital of RLL at a price of Rs. 737/- (Rupees Seven
Hundred Thirty-Sevenonly) (the „Negotiated Price‟) per fully paid up equity share in cash
(the „Acquisition‟). The totalconsideration payable for the Sale Shares is Rs. 95,761,456,758
(Rupees Ninety-five billion sevenhundred sixty-one million four hundred fifty-six thousand
seven hundred fifty-eight only). As per thestock exchange filings by RLL, the Sellers belong
to the promoter group of the Target Company.The SPSSA also provides for the issue and
allotment by RLL to the Acquirer (the „Subscription‟) of46,258,063 fully paid-up equity
shares of face value Rs 5/- each (the „Subscription Shares‟) representing11.03% of the postequity-issuance, subscribed and fully paid-up equity capital of RLL and the issuanceof
23,834,333 warrants of RLL (the „Warrants‟), each Warrant exercisable for one equity share
of facevalue Rs 5/- each of RLL. The subscription price for each Subscription Share and the
exercise priceof each Warrant is Rs. 737/- (Rupees Seven Hundred Thirty-Seven) (the
„Subscription Price‟) (includinga premium of Rs. 732/- per share). Pursuant to the signing of
the SPSSA, the Acquirer proposes to acquire up to 92,519,126 fully paid-upequity shares of
face value Rs. 5/- each from the remaining shareholders (other than the parties to theSPSSA)
of the Target Company (the „Offer Size‟), representing 20% of the Emerging Voting
Capitalof RLL at a price of Rs. 737/- (Rupees Seven Hundred Thirty-Seven only)(the „Offer
Price‟) for each fully paid-up equity share of RLL, payable in cash and in accordance withthe
Regulations, subject to the terms and conditions mentioned in the Offer. This Offer is neither
conditionalnor subject to any minimum level of acceptance. The Acquirer will acquire all the
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shares that are validlytendered in accordance with the terms of the Offer, up to 92,519,126
equity shares at the Offer Price.
Valuation:
Daiichi Sankyo followed the DCF method to value the Ranbaxy stocks in June 2008, with the
following assumptions:
Sales will grow at 12% for 10 years (McKinsey projections for Indian Pharmaceutical
industry) and then slowed down to 8% for 5 years. In order to account for the losses caused
due to FDA (Foods and Drugs Association) action against Ranbaxy we have lowered the
growth rates for 2008 and 2009 to 10% because Ranbaxy had made alternative arrangements
through its US its subsidiary Ohm Labs in the US. NOPAT Margin maintained at 14% for 10
years and then lowered to 10%. The company is making continuous efforts to decrease the
working capital so we assume they would decrease it till 25%. The Net Long Term Assets to
Sales ratio would fall down to 45%.
DCF Valuation = 254.6
FTF Value = 106
Investment in Associates = 5.03
Total = 365.63
With these assumptions we came to a value of INR 254.6; however this value does not
incorporate the value the strong FTF pipeline that Ranbaxy had. This FTF pipeline is valued
at around INR106/share. Going further we also need to adjust the value for investment in
associates for market value wherever information is available. The effective price as per our
calculation for Ranbaxy in June 2008 should be INR 365.63.
This shows how much premium Daiichi paid above the intrinsic value of Ranbaxy, with an
acquisition price of INR 737, they paid almost a premium of 100% over the intrinsic value.
Exhibits 4, 5, 6, 7 give the shareholding pattern, valuation multiples, offer price as per SEBI
SAST and Share price chart of both the companies.
Table: Valuation of Ranbaxy
Assets and Liabilities
Book Value of Assets and Liabilities
14 | P a g e
Value
Cr)
3470
Attributed
(Rs.
Section-ABC

15. Acquisition of Ranbaxy by Daiichi-Sankyo
Inventories
Tangible Assets (Land)
Intangible Assets (Leasehold Land)
Intangible Assets (Increase in Current Products etc. to fair value)
In process R&D expenses
Deferred Tax Liability
Minority Interest
Goodwill
Total Consideration
Goodwill in USD
Total Consideration (in USD)
88
440
260
1805
304
-881
-1981
17995
21500
$ 4.01 Billion
$ 4.9 Billion
Shareholder’s Reaction:
The market reaction to this announcement was positive only during the open offer period,
post that both the stocks plunged to almost 50% of their pre-transaction values. In Feb 2009
in response to FDA‟s action against Ranbaxy share price of Ranbaxy was almost 1/3 of what
Daiichi Sankyo had paid. Later the Ranbaxy stock moved up considerably but Daiichi was
still trading a low levels.
To reflect the fact that the market price for the shares of consolidated subsidiary Ranbaxy
was way lower than the acquisition price, Daiichi recorded ¥351.3 billion one-time writedown of goodwill associated with the investment in Ranbaxy. This led to a considerable net
loss for Daiichi in fiscal 2008.
The write down itself signifies that the shareholders money, the retained earnings were wiped
out in this acquisition and hence the southwards movement of stock price was as expected.
The market expectations from Daiichi were low due to this write-down.
Conclusion:
Initially the Ranbaxy deal seemed a win-win, allowing both companies to use each other‟s
networks and technological power. The deal seemed very lucrative for Daiichi Sankyo due to
the access to best FTF pipeline, access to the generics product line, access to new markets
and an opportunity to diversify away from Japan into the emerging markets. However
looking at the post acquisition financial statements of these companies we realize that this
deal was a failure and Daiichi is trying its best to make the acquisition work in its favour.
15 | P a g e
Section-ABC

16. Acquisition of Ranbaxy by Daiichi-Sankyo
In the immediate year after the acquisition Ranbaxy reported a loss of INR 9,512.05 million
and Daiichi in spite of diversifying its geographic footprint booked a loss of ¥215,499 million
and they also made a onetime goodwill write-down of ¥351.3 billion for investment in
Ranbaxy. These losses were mainly rooted in Ranbaxy‟s poor performance owing to the FDA
ban and bad decision in hedging currency risks.
The pre-acquisition due diligence should have understood that Emerging markets are
lucrative but corporate governance and integrity are surely not to be assumed in these
markets. Valuations in these markets are way higher than their real potential and valuation in
strongly regulated industries like pharmaceutical is strongly linked to regulations in the major
markets. For the export oriented companies developed markets with stricter regulations are
the main revenues streams due to higher margins; however the regulations in these markets
are stricter unlike merging nations. Ranbaxy also had ease in clearing the Indian drug
regulations but failed to clear the US FDA regulations and hence its US subsidiary Ohm Labs
had to pitch in.
Other factors such as top-management retention rates, organizational structure, internal
firewalls and proper use of financial instruments to hedge risks should have been analyzed
before the deal.
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Section-ABC

17. Acquisition of Ranbaxy by Daiichi-Sankyo
Exhibit 1: Structure of Deal Summary
Promoters of
Ranbaxy
Transfer of 34.80% shares
Daiichi-Sankyo
Transfer of 20% shares
Equity + Warrants = 63.92%
through open offer
of stake in Ranbaxy
Public
Shareholdes
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Ranbaxy
Section-ABC

18. Acquisition of Ranbaxy by Daiichi-Sankyo
Exhibit 2: Consolidated financial statements of Ranbaxy Ltd
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Section-ABC

19. Acquisition of Ranbaxy by Daiichi-Sankyo
Exhibit 3: Consolidated financial statement of Daiichi Sankyo- Income Statement
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Section-ABC

20. Acquisition of Ranbaxy by Daiichi-Sankyo
Balance sheet of Daiichi Sankyo:
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Section-ABC

21. Acquisition of Ranbaxy by Daiichi-Sankyo
Exhibit 4: Shareholding Pattern
SHARES HELD BY
SINGH
SINGH FAMILY
MUTUAL FUND
BANKS
INSURANCE COMPANY
F.I.I
GENERAL PUBLIC
DAIICHI SANKYO
PRE %
34.82
19
5.56
1.71
14.39
12.32
12.1
-
POST %
2.58
0.32
9.19
4.41
19.53
63.92
CHANGE %
(100)
(100)
(53.59)
(58.47)
(36.13)
(64.49
61.40
63.92
Time line of Acquisition of shares:
DATE
OF PARTICULARS
ACQUISATION
NO
OF % OF SHARE VALUE(in
SHARES
HOLDING
crores)
15 Oct 2008
Acquisition
of 91277598
shares under open
offer pursuant to
regulation 10 & 12
of SEBI @ Rs 737
per share
20
6727
20 Oct 2008
Acquired
by 41622585
preferential
allotment
of
warrant @Rs 737
Acquisition from 93513899
promoter
company(first
tranche)
Acquisition
of 65309121
shares from the
promoter
@
Rs737(2nd
Tranche)
9.12
3068
20.49
6892
14.31
4813
20 Oct 2008
7 Nov 2008
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Section-ABC

22. Acquisition of Ranbaxy by Daiichi-Sankyo
Exhibit 5 – Valuation Multiples
EV/EBITDA
Pharmaceuticals
EV/EBIT
EV/EBIT(1-t)
9.57
11.98
18.99
Ranbaxy Laboratories Ltd. Peer
group
Enterprise Value
(in
EV/EBITDA
thousands 2014
USD)
next
12
mth
Ranbaxy Laboratories Ltd
2 326 840
6.85
7.64
Novartis AG
199 985 334
11.1
11.23
Dr. Reddy's Laboratories
6 797 816
12.98
13.91
Lannett Co Inc
605 681
14.28
19.17
Impax Laboratories Inc
1 100 159
14.92
16.34
DepomedInc
361 733
N/A
N/A
Salix Pharmaceuticals Ltd
4 231 684
9.15
9.77
Exhibit 6: The offer price
The Offer Price of Rs. 737/- per equity share is justified in terms of Regulation 20(4) of the
SEBI (SAST) Regulations as it is higher of the following:
A) The negotiated Price
Rs 737
B) The subscription Price
Rs 737
C) The highest price paid by the acquirer for any
acquisition[including by the way of allotment in a public or
rights or preferential issue] of equity shares of the target
company during the 26 weeks period prior to the date of the
public announcement
D) The average of the weekly high and low of closing prices of the
equity shares of the target company on NSE during the 26 weeks
preceding the date if public announcement
E) The average of the daily high and low prices of the equity shares
of the target company on NSE during the two weeks preceding
the date of the public announcement
Nil
22 | P a g e
Rs 444.08
Rs 533.51
Section-ABC

23. Acquisition of Ranbaxy by Daiichi-Sankyo
Exhibit 7- Share price chart of both companies: Ranbaxy
Ranbaxy
700
600
500
400
300
Close Price
200
100
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
Jan-09
May-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
0
Daiichi Sankyo
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Section-ABC

24. Acquisition of Ranbaxy by Daiichi-Sankyo
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Section-ABC