The Dynamics of major Indian Takeovers – Their Causes

The Dynamics of major Indian Takeovers – Their Causes

The Dynamics of major Indian Takeovers – Their Causes, Consequences & Valuation

Akarsh Agarwal
Post Graduate Diploma in Management
Institute for Financial Management and Research (IFMR)
Apart from the efforts of me, the success of any project depends largely on the encouragement and guidelines of many others. I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project.
I would like to show my greatest appreciation to Professor Kamal Ghosh Ray I can’t say thank you enough for her tremendous support and help. I also want to thank Ishan Shanker, without his encouragement and guidance this project would not have materialized.

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The guidance and support received from all the members who contributed and who are contributing to this project, was vital for the success of the project. I am grateful for their constant support and help.


Acquisition of Ranbaxy by Sun Pharma 4
Acquisition of Centurion Bank by HDFC About HDFC About Centurion Bank of Punjab Merger of HDFC bank with Centurion Bank of Punjab Main Highlights of Merger Synergies of Merger Stock Market Reaction Addition in Key Business Metrics Valuation References INTRODUCTION TO THE PLAYERSSun PharmaSun Pharmaceuticals an Indian multinational pharmaceutical company headquartered in Mumbai, Maharashtra, was established by Mr. Dilip Shanghvi  in 1983 in Vapi with five products to treat psychiatry  ailments.
It’s Cardiology products were introduced in 1987 followed by gastroenterology  products in 1989. Today it is the largest company in chronic prescription and a market leader in psychiatry, neurology, cardiology, orthopaedics etc.

The 2014 acquisition of Ranbaxy will make the company the largest manufacturer of pharmacy products in India and the 5th largest in generics products globally
Over 72% of the Company’s Sales come from markets outside India. The US is the single largest market accounting for around 60% of the total revenues. Manufacturing operations are in 26 locations including countries like US, Canada, Brazil 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).

The company was listed on the stock exchange in 1995 and was back then oversubscribed 55 times. Today it is one of the most profitable pharma companies in India.

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 VenturesIn 1996 Sun Pharma purchased a bulk drug manufacturer Kohli pharmaceuticals. In 1998 Sun Pharma acquired a number of respiratory brands from Natco pharma.  In 2010, the company acquired a large stake in Taro Pharma, Inc. amongst the largest generic derma companies in the US, with operations across Canada and Israel. In 2011, Sun Pharma entered into a joint venture with MSD to bring complex or differentiated generics to emerging markets
RanbaxyIt’s an Indian multinational pharmaceutical company that was incorporated in 1961.The Company went public in 1974 and Japanese pharmaceutical company Daiichi Sankyo acquired a controlling share in 2008. The company was started by Ranbir Singh and Gurbax Singh as a distributor for a Japanese company in 1937.

As of 2013, Ranbaxy was exporting 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 2012, 2013 and 2014 Brand Trust Reports, Ranbaxy was ranked 161st, 225th and 184th respectively among India’s most trusted brands.

In 1998, Ranbaxy entered the United States, the world’s largest pharmaceuticals market and a significant market for Ranbaxy, accounting for 28% of Ranbaxy’s sales in 2005
Ranbaxy has been involved in several issues with FDA. In 2009 the US Food and Drug Administration said it halted reviews of all drug applications including data developed at Ranbaxy’s  HYPERLINK “” o “Paonta Sahib” Paonta Sahib plant in India because of a practice of falsified data and test results in approved and pending drug applications. In 2012 Ranbaxy halted production and recalled forty-one lots of atorvastatin due to glass particles being found in some bottles. In 2013 US FDA fined 500 million for manipulation generic data and selling adulterated drugs to United States.

AcquisitionIn June 2008, Daichi Sankyo acquired a 34% stake in Ranbaxy for 2.4 billion USD. In November 2008 Daichi Sankyo completed the takeover of the company from the Singh family. Ranbaxy’s Malvinder Singh remained as CEO after the transaction. In the same year, it reached settlement on the world’s two highest selling drugs – Lipitor (with Pfizer) and Nexium (with Astra Zeneca).

INDUSTRY BACKGROUNDIndia’s pharmaceutical sector has seen unwavering growth in the past few years, going up to 23 billion USD in 2012 from 23 billion USD in 2002. The pharmaceutical sector in India has been growing consistently at the rate of 13-14 % every year since the last five years and is expected to touch 55 billion USD by 2020. Generics are expected to continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the market till 2015.

 Indian pharmaceutical industry companies can broadly be classified as domestic companies and foreign companies (MNCs). Some of the major players include GlaxoSmithKline, Cipla, Dr. Reddy’s Laboratories, Ranbaxy, Pfizer etc. Financial year 2013 was challenging on the domestic front and witnessed sluggish growth owing to acute competition from unlisted players and so on. Growth in the sector is expected to be boosted this year due to increasing consumer spending, rapid urbanization et al.

Over the past few years, there has been a paradigm shift in the attitude of people in India towards healthcare. Alarming rise in cases of cardiovascular problems, nervous system disorders, diabetes and many other diseases as well as disorders has created more awareness in the growing population about the need of improvement in medical sector. Therefore, there is a great need for pharmaceutical companies to invest their time and resources in research and development of new, efficient and cost effective drugs.

 India has an organized pharmaceutical market of its own, which is being considered as a potential partner by other countries. The Indian Pharma Market is ranked number 3 in terms of volume and 10th in terms of market value. Indian pharma companies are also proving to be global leaders in production of generics and vaccines.

 India has attracted Direct Foreign Investment of US$ 11,391.03 million from April 2000-2013 and will see an upsurge in the years to come.  Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition.

 The domestic pharmaceutical market has seen a growth of 13.5 % and recorded total sales of Rs 6,883 crore (US$ 1.12 billion) in the month of July 2013. The major reasons for this growth can be attributed to continual growth in prolonged therapies, increasing sales of generic medicines and strengthening hold over rural markets.

The need of skilled manpower in the pharmaceutical industry ranges widely from R;D, Quality Assurance (QA), Intellectual Property (IP), manufacturing to even sales and marketing. What the pharma industry needs is to have better policies to retain and nurture the existing talent and equip them with necessary skills. However, this sector is emerging as a popular choice amongst Gen Y, since the nature of work, primarily treating patients and research for new drug discoveries plays an integral role in meeting their key career aspirations.

SUN PHARMA’S M&A ACTIVITYSun Pharma has gone through a number of domestic and international M&A activities through its inception. Some of the activities have been listed in the table below. Exhibit 1 shows successful turnaround of 16 acquisitions.

Year Target Company Acquisition Details
2013 Generics Business of URL Pharmaceuticals Acquired a comprehensive list of ANDAs and generic products from Takeda Pharmaceuticals
2012 Dusa Pharmaceuticals Acquired a developer of a dermatological device used to treat actinic keratoses
2011 Joint Venture with MSD Joint Venture with a focus on emerging markets
2010 Caraco Pharmaceutical Laboratories Initial stake investment in 1997, 100% takeover in 2010
2010 Taro Pharmaceutical Industries Limited Acquired majority stake in a multinational generic manufacturer with established North America presence and a strong dermatology franchise
2009 Products from Forest Lab’s Inwood Division 2008 Chattem Chemicals Incorporated Acquired a manufacturer of controlled substances with an API facility
2005 Assets of Able Laboratories Acquired controlled substance manufacturing assets.

2005 Hungarian Operations and Formulation Plant of ICN Acquired Alkaloida’s controlled substance APIs and dosage form manufacturing plant.

2004 Products from Women’s first Healthcare 2004 Phlox Pharma Acquired manufacturer of cephalosporin API holding USA and European approvals
2002 MJ Pharma Initial stake investment in 1996, 100% takeover in 2002. Acquired plant with USFDA and UKMHRA approvals for oral dosage forms
2000 Pradeep Drug Company Chennai based API manufacturer is merged with Sun Pharma.

1999 Milmet Laboratories Helped initiate entry in ophthalmology
1999 Gujarat Lyka Organics Initial stake investment in 1996, 100% takeover in 1999. Acquired Cephalexin and 7ADCA actives manufacturing site
1998 Products from NatcoPharmaHelped initiate entry in chest and respiratory therapy areas
1997 TamilnaduDadha Pharmaceuticals Limited Helped initiate entry in oncology and gynaecology1996 Bulk Drugs Plant from Knoll Pharma Acquired an API plant in Ahmednagar, Maharashtra
THE ANNOUNCEMENT AND MARKET REACTIONThe announcement by Sun Pharma on 6th April, 2014 that it would acquire 100% of Ranbaxy Laboratories Ltd. In an all-stock transaction, valued at $4 billion, marked one of the landmark deals of Indian Pharmaceutical industry which resulted in making Sun Pharma the largest pharmaceutical company in India, the largest Indian Pharma company in the US and the 5th largest generic company worldwide. On a pro forma basis, the combined entity’s revenues are estimated at US$ 4.2 billion with EBITDA of US$ 1.2 billion for the twelve month period ended December 31, 2013.The transaction value implies a revenue multiple of 2.2 based on 12 months ended December 31, 2013.

Investor response to the announcement was lukewarm, with the stock prices moving in opposite direction. As an immediate effect, shares of Sun Pharma went up to 2.7% in the morning trade after the acquisition announcement while that of Ranbaxy went down by 3.1%.
The swap ratio of 8 shares of Sun pharma for every 10 shares of Ranbaxy works to the advantage of the new entrants into Ranbaxy Laboratories Ltd. as at the prevailing price they now needs to pay 5% less for getting the shares of sun pharma as compared to buying them directly from the market.

There also lies a matter of uncertainty regarding the regulatory troubles facing Ranbaxy and how soon sun pharma with a record of acquiring troubled companies at good price and later turning them around, can resolve these troubles facing Ranbaxy. Sun pharma’s good track record regarding turning around the acquired companies can instil some hopes among the investors.
The move is seen to improve Sun pharma’s global presence by providing it access to new and emerging markets and product portfolios with Sun pharma having a presence in chronic diseases while Ranbaxy having relevant presence in acute and OTC segments. Besides with the acquisition of Ranbaxy, Sun pharma will add to its overall manufacturing base that is expected to reap benefits in the long run. Overall, market perceived the deal as a win-win situation for all the parties involved.

The Sun Pharma Ranbaxy Merger /Acquisition Process can be majorly divided into two stages viz. 1) Pre-acquisition stage and 2) Post-acquisition stage
Pre-Acquisition Stage:Making Decision to Buy -Ranbaxy Laboratories Limited is an Indian multinational pharmaceutical company with a sizeable drug pipeline, a very promising future and has announced some big product launches in future in the US generics market, but for frequent run-ins with the US drug regulator. It has been facing regulatory issues for the last 3years and now has ceased to make some profits. However, the company has a big business and huge product portfolio across various markets including India which makes it an attractive deal for Sun Pharma to acquire this company. Daiichi (a Japanese company), the promoters of Ranbaxy was struggling to manage its plants when came under the US Food and Drug Administration’s scanner after the acquisition. Ranbaxy was unable to overcome these issues and increased pressure on its promoters.
Dilip Shanghvi, Managing Director, Sun Pharma has a reputation for turning around companies in trouble by acquiring them at a good price. Sun Pharma and Ranbaxy deal has many promising benefits as listed below. The combination of Sun Pharma and Ranbaxy:
Creates the 5th largest specialty generics company in the world and the largest pharmaceutical company in India.

Gets leadership position in 13 specialty segments
Operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant platform of specialty and generic products marketed globally
Ranbaxy’s branded derma business in the US adds to Sun’s already strong derma franchise
Provides Sun Pharma access to strong human capital and reach in tier-II/III markets in India, where it currently lacks presence, according to Edelweiss Securities.
Due Diligence/ Company Evaluation –
Next stage is business valuation or assessment. It involves evaluation of both the present and future value of the target company. A thorough research on the company’s capital gains, culture, market share, capital structure, organizational structure, vendors, distribution channel, specific business strengths and weaknesses, and brand name in the market.
This process has revealed details about Ranbaxy and the merger as mentioned below:
Sun Pharma’s revenue will jump by a healthy 40% but its operating profit will rise by a just 7.5%, based on pro forma 2013 financials.

Ranbaxy’s profits have been hit by provisions related to foreign exchange and inventory write-offs. Sun Pharma has said it expects to get 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 procurement, sales growth and supply chain efficiencies.
The merger will have a negative effect on Sun Pharma’s performance in the short term reducing its operating profit margin from 44.1% to 29.2%.
In terms of size, Sun Pharma will 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.
Process Initiation/ Proposal Phase -In process initiation, acquiring company sends a proposal for a merger or an acquisition to the target company with complete details of the deal including the commitments, amount and the strategies. It is a non-binding offer document which is not available in open public forum. Sun Pharma has hired McKinsey ; Company to facilitate the merger of the two leading pharmaceuticals in the domestic market. McKinsey had been given a clear mandate, including “integration, rationalisation and capacity utilisation”.
Structuring Business Deal –
Once the merger is finalized i.e. either forming a new entity or the take-over, acquiring company has to take initiatives for creating strategies to announce the launch, enhance deal’s credibility and its marketing. This stage emphasize on giving a proper structure to the business deal. The road map includes,
Regulatory approvals from various bodies such as SEBI, CCI, Stock Exchanges, High Courts of Gujarat, Haryana and Punjab, and the stakeholders of both companies
Streamlining of teams
Resolving regulatory issues at Ranbaxy plants under US import alert
Restructuring of product portfolios to align with the interests of Sun Pharma
Benchmark the staff-productivity ratio
Financial Settlement/ Exchange of Stocks –
Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of Ranbaxy. The exchange ratio represents an implied value of Rs 457 per Ranbaxy share and the transaction has a total equity value of approximately $3.2bn. After the deal, Daiichi will hold a stake of about 9% in Sun Pharma. Hence, the deal is cashless.
Post-Acquisition Stage:Merger Closing Phase and Post-Merger Integration Plans to Operate the Venture –
This stage includes the process of preparing the official documents, signing the agreement on which both the companies have agreed upon, and negotiating the deal. It includes integration of the companies differing on various parameters. It also defines the parameters of the future relationship between the two. After signing the agreement and entering into the venture, Sun Pharma has various plans as listed below:
It has a detailed turnaround plan for its new purchase.
The company’s basic structure and functions could be managed in the first year. There is a plan to streamline and rationalise functions. While it will take at least two to three years to turn-around the merged entity and to ensure contributions from the buyout.
It has prepared a three-pronged strategy which includes:
Resolution of regulatory issues
Integration of supply chain and field force for enhanced efficiency and productivity
Higher growth through synergy in domestic and emerging markets.

It is targeting to engineer the full turnaround of Ranbaxy in three-year to four-year period after the closure of the transaction.
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.

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.

VALUATIONSun Pharmaceutical Industries Ltd. and Ranbaxy Laboratories Ltd on April 06, 2014 announced that they have entered into definitive agreements pursuant to which Sun Pharma will acquire 100% of Ranbaxy in an all-stock transaction. Under these agreements, Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each share of Ranbaxy. This exchange ratio represents an implied value of Rs.457 for each Ranbaxy share, a premium of 18% to Ranbaxy’s 30-day volume-weighted average share price and a premium of 24.3% to Ranbaxy’s 60-day volume-weighted average share price, in each case, as of the close of business on April 4, 2014.

On a pro forma basis, the combined entity’s revenues are estimated at US$ 4.2 billion with EBITDA of US$ 1.2billion for the twelve month period ended December 31, 2013.The transaction value implies a revenue multiple of 2.2 based on12 months ended December 31, 2013.

REGULATORY ISSUESTypically, CCI takes decisions related to mergers and acquisitions (M&As) within 30 days, though it can do so within 210 days of the filing of application in this regard. After that a proposed deal is deemed to have been approved.

The proposed merger also requires approvals from stock exchanges, Sebi, the high courts of Gujarat, Punjab and Haryana, creditors and shareholders of both companies. As cited by a CCI official: “It is an important case and there are various complexities involved. It requires close evaluation”
Four domestic manufacturing facilities of Ranbaxy have been banned from supplying products to the US, following the US Food and Drug Administration finding serious violations of its norms at these units. Resuming supplies from these plants to the US is important for Sun Pharma, as the US is the largest export market for both companies. When the proposed acquisition was announced in April, Shanghvi had addressing the concerns of regulatory agencies worldwide were a priority.

In the last week of August, India’s antitrust regulator has ordered a second-stage investigation into the merger of Sun Pharmaceutical Industries Ltd and Ranbaxy Laboratories Ltd, citing the risk that the deal could harm “national interest” by resulting in significant market domination by the combined entity.This is the first time the Competition Commission of India (CCI) has decided on a second-stage inquiry, which follows a preliminary investigation of a deal, and raised such an objection. The watchdog will deliver a final ruling after hearing from the companies again and seeking public feedback on the transaction. The possible ripple effect of the merger on prices of life-saving, essential medicines in the Indian market had prompted the antitrust body to issue a show-cause notice in July, asking the two companies why a public investigation should not be ordered into the dealThe merger will create India’s biggest drug maker with an 8.5% share of the pharmaceutical market, worth an annual Rs.76,000 crore by sales. Under India’s merger and acquisition (M;A) rules, companies need CCI’s approval if the combined assets of the two entities are worth more than Rs.1,500 crore or their combined revenue amounts to more than Rs.4,500 crore in India. The CCI approval is also mandatory if the companies have assets outside India, or their combined assets are worth more than $750 million (Rs 4,566 crore), or if their turnover is more than $2,250 million (Rs 13,700 crore).

This is also the first M&A deal where the Competition Commission of India (CCI) has ordered a public scrutiny of after forming a “prima facie opinion that the combination is likely to have an appreciable adverse effect on competition”.The antitrust body’s main concerns are about the 46 drug formulations that will constitute the merged entity’s portfolio and in which it will have a significant presence in the market. Out of these 46 drug segments, the prices of five are regulated by the government. “In the rest of the segments, market domination is a genuine worry,” said a government official familiar with the development. “The commission has decided to monitor the prices of other crucial drug segments to ensure the company does not stop manufacturing the drug altogether if the price is too low or increase prices further in case of expensive drugs.”Section 29 of the Competition Act says CCI can proceed to investigate a combination where it is of the opinion that the same ” is likely to cause, or has caused an appreciable adverse effect on competition within the relevant market in India”.On 11 July, the National Stock Exchange and BSE cleared the deal.
Though CCI asked the companies to restructure the deal so as to support the competition law. The Competition Commission of India (CCI) is likely to take the final decision in the $4-billion Sun Pharma-Ranbaxy deal by the end of this month. CCI asked them (the two companies) to come up with some remedial measures which they have submitted and CCI is studying the same.

Investment bankers for the two companies are reworking the deal to allay the Competition Commission’s concerns, and the decision on a new structure would likely be made in December.

ANTICIPATED POST MERGER INTEGRATION ISSUESA major upside from the deal could be for Ranbaxy’s product portfolio. Though many of the first-to-file applications of the company are pending in the US, they have the potential to give a major boost to revenues once approval comes through. While the deal has got thumbs up from most, even with all the positives this merger brings on challenges that Sun will have to face on the ground:.
Achieving Compliance With the baggage of regulatory issues, the biggest challenge for Sun Pharma will be to restore and regain trust and confidence of the regulators, especially in the US. Four of Ranbaxy plants are banned by USFDA and is under an ongoing consent decree
Reputational RisksIt will be a challenging ride for Sun Pharmaceutical Industries Ltd to align Ranbaxy Laboratories Ltd with its business given the regulatory hurdles and cultural differences.The reputation which Dilip Shanghvi, founder and managing director of Sun Pharma, has earned for turning around distressed businesses will once again be put to test. The investor community will be closely watching each and every move he makes in order to integrate Ranbaxy with Sun Pharma.

Integrating Marketing Forces
The two companies operate across different geographies and their objectives may differ. The synergies get difficult to extract. Procedures and technology have to be integrated.
There can be two kinds of synergies. One could be product synergy: there could be some therapeutic segments where Sun Pharma is strong while Ranbaxy could be strong in other areas. Similarly, there could be some geographical synergies as well: for instance, Ranbaxy is struggling in the US and Sun Pharma’s ground presence in that country could prove to be useful.The combined Sun-Ranbaxy entity will be the undisputed leader in the Indian market with 9.2percent market share.
While the merger will pump up the feet on ground presence for Sun Pharma in India to an enviable presence — a combined strength of 9000 medical representatives – this will lead to the biggest operational challenge. Marrying the two culturally different marketing entities will be a key task for Sun. The two companies have operated under different work cultures, giving different margin bonuses and streamlining the two to a common platform will be crucial for Sun to maximize on the merger’s India advantage. Sun though is confident and says the complimentary portfolios will see USD 250 million synergies by the end of third year.
Managing Multiple Units
The merger gives Sun grand global exposure. The combined entity will have 47 manufacturing facilities across 5 continents. This diverse number of plants would mean increase oversight ; could be a regulatory nightmare. Experts point out that Sun may eventually have to look at hiving off or consolidating some of them the manufacturing capacities. Also because there could be some overlaps and not all capacities may be needed.
Ranbaxy Brand
The Ranbaxy brand will cease to exist. Though this is not a challenge really, but one of the oldest generic drug brand, one with the highest recall value will cease to exist eventually. Experts say this may lead to some confusions in the market space and impact the morale of the Ranbaxy employees and will be on Sun Pharma to rebuild on that.

Exhibit 1: Acquisitions by SunPharma over the years
(Source: Sun-Ranbaxy Investor Presentation)
What is the strategic motive for the merger /acquisition from the buyer’s perspective?
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. Analysts felt that this is a good acquisition for Sun Pharma as it will help it fill therapeutic gaps in the US, get better access to emerging markets and strengthen presence in the domestic market. Some of the motives behind the merger is summarized below-
The merger would create the world’s 5th largest specialty generic pharma company
No. 1 pharma company in India, one of the fastest growing markets
No. 1 Indian pharma company in US market
-Over US$ 2 billion in sales
-Pipeline of 184 ANDAs including high-value FTFs
-No. 1 in generic dermatology, No. 3 in branded
Approaching US$ 1 billion sales in high-growth emerging markets including Russia, Romania, South Africa, Brazil & Malaysia
Expanding presence in Western Europe; merged entity to have global footprints in over 55 key markets
Extensive Product Basket – largely Branded business with minimal overlap
Strong Doctor Relationships and opportunities to leverage market presence to cross-sell products
US$ 250 million of revenue &operational synergies by 3rd year primarily derived from top-line growth, and procurement & supply chain efficiencies
The US Food and Drug Administration’s approval to Nexium and Diovan could provide benefits of $300-400 million net income in the short term
Synergies that can be realised and value of the synergiesAccording to the analysts at Sun pharma, it expects to realise its merger related synergies by the third year of acquisition. The synergies that it expects to obtain are the revenue and operational synergies resulting from sales growth, procurement and supply chain efficiencies.
The expected value of the synergies is $250 million or 1550 crore from merger related synergies by third year after the acquisition is completed.

NAV method for Valuation

The deal has no tax implications for the shareholders of Ranbaxy.
The transaction is expected to represent a tax-free exchange to Ranbaxy shareholders who are expected to own 14% of the combined company. The share-swap transaction, wherein for one share of Ranbaxy shareholders will get 0.8 shares of Sun Pharma, is not considered as a ‘transfer’ under tax laws and no capital gains will arise in the hands of the Ranbaxy shareholders. Long term capital gains are exempt from tax and only a nominal security transaction tax is payable.

The conditions under which the deal could fail are the followingSun Pharma has to check the FDA issues that are linked with Ranbaxy. The US authority has placed four of Ranbaxy’s key plants in India under an import ban that could last another year or two
EBIDTA of Ranbaxy is very low around 10%, way below industry standards and Sun Pharma has to increase the EBIDTA
Sun Pharma has to increase the profitability in emerging markets like Romania where Ranbaxy is doing bad
There may be an issue with the Competition Commission of India as there are nearly 25 drugs in which the combined entity holds more than 40% market share
Ranbaxy has high debt on its balance sheet and Sun Pharma needs to come out with ways to reduce the debt going forward. The deal is USD 4 billion an may limit the Sun Pharma from entering the speciality business for some time
However, Sun Pharma will have tough task to shelve high overheads in Ranbaxy and improve profitability in business – something it has done in case of Taro
It will be really challenging to integrate the 9000 plus marketing personnel of both the companies given that he culture are different
The regulatory issues that can come up are
There are around 46 drugs in which the combined entity becomes a dominant player. Competition Commission of India is currently watching whether the company increases the prices or cuts production in these categories
The companies have shortlisted 37 molecules out of 246 molecules in which their combined market share is more than 15 per cent while in some cases it stands above 90 per cent.

The individual market share of the companies in these 37 molecules is greater than 5 percent.

CCI has said that public consultation has been launched in order to determine whether the combined entity has any adverse impact on competition in relevant market in India.

The roadmap for integration should beRegulatory approvals from various bodies such as SEBI, CCI, Stock Exchanges, High Courts of Gujarat, Haryana and Punjab, and the stakeholders of both companies
Streamlining of teams
Resolving regulatory issues at Ranbaxy plants under US import alert
Restructuring of product portfolios to align with the interests of Sun Pharma
Benchmark the staff-productivity ratio
Acquisition of Centurion Bank by HDFC
About HDFC
Promoted in 1995 by housing development finance corporation (HDFC), India’s leading housing finance company, HDFC Bank is one of India’s premier banks providing a wide range of financial products and services to its over 11 million customers across over three hundred cities using multiple distribution channels including a Pan-India network of branches, ATMs, phone banking, net banking and mobile banking. Within a relatively short span of time, the bank has emerged as a leading player in retail banking, wholesale banking, and treasury operations, its three principal business segments. The bank’s competitive strength clearly lies in the use of technology and the ability to deliver world-class service with rapid response time. Over the last 13 years, the bank has successfully gained market share in its target customer franchises While maintaining healthy profitability and assets quality. As on December 31, 2007, the bank had a network of 754 branches and 1,906 ATMs in 327 cities. For the quarter ended December 31, 2007, the bank reported a net profit of Rs. 4.3 billion, up 45.2%, over the corresponding quarter of previous year. Total balance sheet size too grew by 46.7% to RSA, 314.4 billion.
About Centurion Bank of Punjab
Centurion Bank of Punjab is one of the leading new generation private sector banks in India. The bank serves individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning. The bank offers its customers an array of wealth management products such as mutual funds, life and general insurance and has established a leadership ‘position’. The bank is also strong player in foreign exchange services, personal loans, mortgages and agricultural loans. Additionally, the bank offers a full site of NRI banking products to overseas Indians. On August 29, Lord Krishna Bank merged with Centurion Bank of Punjab, post obtaining all statutory and regulatory approvals. This merger has further strengthened the geographical reach of the bank in major town and cities across the country, especially in the state of Kerala. Centurion Bank of Punjab now operates on a strong nationwide franchise of 394 branches and 452 ATMs in 180 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the Indian stock exchanges, the bank’s shares are also listed on the Luxembourg stock exchange. Centurion Bank is India’s fourth largest private-sector bank, after the significantly larger ICICI Bank, HDFC Bank and UTI Bank balance sheet is of modest scale, much smaller than those of major private-sector banks. The bank is capitalized to support rapid growth, and its high fixed operating costs suggest that profitability is leveraged to asset growth. Centurion’s acquisition of Bank of Punjab has substantially enhanced its distribution franchise, widened its product and customer mix, and gives it the platform to aggressively expand its balance-sheet. It is predominantly a consumer bank — With almost of its loans are in relatively high yield segments. Its distribution concentration is largely in the Western and Northern Parts of the country, and it is seeking to acquire a mid-sized bank in the Southern Parts of the country, to broaden and expand its distribution franchise. Bank Muscat is the largest shareholder in the bank post-merger with a 20.5% stake; Keppel Corp holds 9.0% and 18.6% is held through GDRs. Sabre Capital and BOP promoters hold 4.4% and 5 0%stakes in the bank, respectively.

HDFC Bank and Centurion Bank of Punjab have decided to merge. It is the largest merger in the space in recent times and perhaps the beginning of the consolidation wave in the BFSI sector. The HDFC Bank-CBOP merger is a smooth exercise when it comes to the marriage of technology at banks. The merger comes as no surprise. With competition gearing up, Indian Banks will have to gear up to compete with their global counterparts in terms of products, technology and people.
Merger of HDFC bank with Centurion Bank of Punjab
The boards of both HDFC Bank and Centurion Bank of Punjab (CBOP) have approved the merger between the two banks in the ratio of share of HDFC Bank for 29 shares of CBOP) HDFC bank would also considered selling shares to HDFC in order to maintain its holding. We rate this merger as neutral for HDFC Bank on as a long-term perspective. However, on a short-term basis, it is slightly positive for HDFC Bank’s stand-alone financials and at the current price, the CBOP’s rich value compared with that of HDFC bank despite CBOP’s lower banking franchise, inferior return ratios and higher NPA’s CBOP’s asset book constitutes about 20% of that of HDFC Bank; while its profit is merely 11%.
Following is a summary of the key business parameters across HDFC Bank and CBOP.

Shareholding pattern of HDFC on 31 Dec 2007
Face Value 10 Shareholding Pattern
No. of Shares % of Holding
Indian Promoters 82443000 23.28
Sub Total 82443000 23.28
Non-Promoter’s Holding
Institutional Investors
Banks finance inst. and Insurance 10068939 2.84
FII’s 94087619 26.57
Sub Total 116142534 32.80
Other Investors
Private Corporate Bodies 28598234 8.08
NRI’s/OCB’s/Foreign Others 6019811 1.70
Govt. 3841342 1.80
Others 78110019 22.06
Sub Total 116569406 32.92
General Public 38920380 10.99
Sub Total 354075320 100

Shareholding pattern of CBoP on 31 Dec 2007
Face Value 1.00 Shareholding Pattern
No. of Shares % of Holding
Indian Promoters Sub Total Non-Promoter’s Holding
Institutional Investors
Banks finance inst. and Insurance 1142025 0.06
FII’s 501898631 26.80
Sub Total 512107247 27.34
Other Investors
Private Corporate Bodies 782415732 41.77
NRI’s/OCB’s/Foreign Others 13299320 0.71
Govt. 11080829 0.59
Others 28734156 15.34
Sub Total 1093907310 58.40
General Public 266724046 14.24
Sub Total 1872738603 99.99
Main Highlights of Merger
The bank’s main task was to harmonize the accounting policies after merger and, as a result, HDFC Bank took a hit of Rs. 7 billion to streamline the policies of erstwhile CBOP itself of this Rs. 7 billion, around 70% went toward the harmonization of accounting policies relating to loan- loss provisioning and depreciation of assets, and the balance 300/0 reserves write-offs were toward the related restructuring costs like stamp duty, HR and IT integration expenses. The loan book size of erstwhile CBoP was close to Rs. 150 billion, largely constituted by retail loans with only around 15% of corporate loans. In terms of asset quality, the gross NPAs at the end of March-2008 were around 3.8% and net NPAs at around 1.7%. The harmonizing was done to bring in more stringent provisioning requirements for identifying NPAs as the existing norms of the erstwhile CBoP were comparatively more relaxed. The duration of CBoP’s lending portfolio is around 18-20 months so the risk of incremental slippage would continue in near future; however, the bank was confident of its strong recovery management process and anticipates lesser pain.
The CASA ratio at the end of June 2008 was 45% This in line with expectations of analysts as CBoP had a much lower CASA ratio of around 25% compare to 56% of Pre-merged HDFC Bank. By the end of the year, the target CASA ratio is around 47-48%. This would primarily be driven by an increasing contribution of low-cost deposits from the erstwhile CBoP’s branches. Of the total non- interest income of CBoP, fee income constituted around 50% which was generated mainly through distribution of insurance products (Aviva) and from processing fees. In line with regulatory and operational issues, these streams of income have temporarily been discounted. This aspect act as a drag on the ‘other income’ of the merged entity and it took 2-3 quarters for the issues to be addressed. Till these issues were resolved positively, the ‘other income’ growth (primarily the fee income) remained muted for the merged entity. The cost/income ratio of the merged entity had increased to around from levels for standalone HDFC Bank, increase was expected as CBOP’s C/I ratio was around 60%. HDFC Bank has retained almost all the employees of CBOP and expects to achieve full synergies and efficiencies, in terms of the restructured HR and IT processes, in the next 2-3 quarters. This means that by the entire workforce would be working at full efficiency levels as that of the existing bank and the technology and IT-platforms would be completely integrated to support efficient performance. The aim is to reduce C/I ratio to around 52-53% by the end of FY-09.

Synergies of Merger
Pan-India presence for HDFC with formidable network of over 1,100 branches. Largest branch distribution for a private bank
This would bring ‘scale’ to HDFC. Because of inorganic growth of Centurion bank
Merger will bring in skilled personnel’s
Strong SME portfolio of CBoP will be acquired by HDFC
High productivity will help HDFC to bring down of cost/income ratio. It managed to lower it, currently it is 44%.
Analysis of Merger
Stock Market Reaction
To ascertain the stock market reaction to the announcement of merger and its impact on acquiring and target banks’ shareholder wealth, the Cumulative Abnormal Returns – CARs (that are interpreted as prima facie evidence of market’s reaction to announcement of an event) of both the banks. The results are depicted below:

Analyzing the trend of CARs from above graphs, it is clear that before the announcement of merger, both HDFC Bank and CBoP were experiencing negative CARs. But four days before the immediate announcement of merger, the stock prices of both the banks start gaining positive CARs. The CARs for the day – 4 to day – 1 were 1.75 (0.56) for HDFC Bank, while the same were 16.32 (1.46) for CBoP.

The CAR on the immediate announcement day (that is on the day 0) was –1.69 (–0.94) for HDFC Bank, while the same was 1.01 (0.28) for CBoP. The three-day announcement impact (from day –1 to day +1) was positive for CBoP (1.93, 0.17), while it was negative for HDFC Bank’s (–3.38, –1.08) shareholders.

The major cause of fall in returns of CBoP may be attributed to the unfavorable swap ratio that was fixed at 1:29, though shareholders were expecting it at 1:26, keeping in view the growth of the bank. On the contrary, HDFC Banks’ shares recovered two days after the announcement on the expectation of huge economic and managerial synergies that the merged entity would enjoy.

Thus, shareholders of CBoP earned positive returns on the immediate announcement of the merger. Whereas HDFC Bank shareholders earned positive returns few days after the announcement. The reason for the immediate negative market reaction to HDFC Bank could be that it was stock-financed merger and also the market felt that HDFC Bank had paid more price than the real worth of the target bank, keeping in view the quality of assets of CBoP Net Non-Performing Assets (NNPAs) level and productivity of CBoP are low as compared to that of HDFC Bank. HDFC Bank’s chairman Aditya Puri rightly remarked that one should consider the long-term share price performance to judge the worth of an acquisition instead of one day’s share price of acquiring banks.

Addition in Key Business Metrics
Result of the merger, CBoP conferred huge convergence advantage in key business variables to the merged entity. The merger expanded the size of the merged entity by 23% and enabled the merged entity leapfrog from its current 10th to 7th position among all commercial banks in India. Further, deposit base of the merged entity grown by 24% while the business grown 25%. Major attraction of the merger was CBoP’s pan Indian branch network and it enabled the merged entity to increase the branch network by 61%. Besides, on the profitability front, fee-based income grown by 29%, NIM showed a growth of 63% and net profit grown by 11%. Thus, the merger immediately provided huge muscle to the merged entity in terms of size, deposits, customers, business and profitability.

Impact on Overall Profitability: Below table depicts the ratios measuring overall profitability of HDFC Bank (acquirer), merged entity, its peer (IDBI Ltd.) and its rival bank (ICICI Bank).

Analyzing various profitability ratios from the above table, it was observed that the merged entity would be ahead of its peer as well as the rival bank even after merger in terms of various profitability ratios, though these would decline compared to the stand-alone performance of HDFC Bank. For instance, NIM/Total advances ratio would be 7.00 for the merged entity while the same was 1.05 for IDBI Ltd. and 3.39 for ICICI Bank. Similarly, NIM/Total assets ratio was 3.72 for the merged entity while the same was 0.63 for IDBI Ltd. and 1.92 for ICICI Bank. Besides, the ratio measuring shareholders’ wealth creation that is, RONW would not be much diluted for the merged entity. RONW was 15.81 for the merged entity, which would be still better when compared to 10.61 for IDBI Ltd. and 12.63 for ICICI Bank. Furthermore, the merger would enable the merged entity to improve its fee based income with immediate effect not only when compared to the performance of its peer and the rival but also to that of the stand-alone entity. The ratio of fee-based income to total assets would be 1.50 for the merged entity as compared to 1.42 for the stand-alone HDFC Bank; the corresponding figure was 0.26 for IDBI Ltd. and 1.25 for ICICI Bank.

Impact on Efficiency: The efficiency ratios of HDFC Bank (acquirer), merged entity, its peer (IDBI Ltd.) and its rival bank (ICICI Bank) are given in Table.

Analysis of various efficiency ratios from above Table shows that except for the ratio of operating cost/total assets, all other efficiency ratios was better for the merged entity as compared to that of the stand-alone entity, its peer and the rival bank. The cost to income ratio was 49 for the merged entity while the same was 57.83 for the stand-alone entity, 89.63 for IDBI Ltd. and 71 for ICICI Bank. The cost of deposit ratio would be 3.72 for the merged entity while it was 3.91 for the stand-alone HDFC Bank, 4.60 for IDBI Ltd. and 5.89 for ICICI Bank. Thus, it can be stated that the merger enabled the merged entity to improve its efficiency with immediate effect. Impact on Branch Productivity: The branch productivity ratios of HDFC Bank (acquirer), merged entity and its peer (IDBI Ltd.) and its rival (ICICI Bank) are
shown in below Table.

Above table shows that as a result of merger, the branch productivity of the merged bank deteriorated in terms of all ratios as compared to the stand-alone performance of HDFC Bank as well as when compared to the performance of its peer and rival bank. For instance, the loans per branch declined from
Rs. 73.58 cr to Rs. 57.00 cr for the merged entity which would be far below the corresponding figure for IDBI Ltd. and ICICI Bank for which these stand at Rs. 141.66 cr and Rs. 274.71 cr, respectively. Similar would be the plight of other branch productivity ratios that declined as a result of merger for the merged entity.

Impact on Employee Productivity: Below table depicts the ratios measuring employee productivity of HDFC Bank (acquirer), merged entity, its peer (IDBI Ltd.) and its rival (ICICI Bank).

Analysis of various employee productivity ratios of the merged entity again yield results similar to those of branch productivity. The productivity per employee declined for the merged entity not only when compared to the stand-alone performance of HDFC Bank but also when compared to that of IDBI Ltd., and ICICI Bank. For example, loans per employee was Rs. 2.04 cr for the merged entity while these were Rs. 8.35 cr for IDBI Ltd., and Rs. 5.88 cr for ICICI Bank. Similarly, deposits per employee declined to Rs. 2.93 cr as compared to that of Rs. 5.79 cr for IDBI Ltd. and Rs. 6.92 cr for ICICI Bank. From the analysis of various categories of ratios, it was evident that the merger of CBoP would enable the merged HDFC Bank gain size, scale and business reach along with the improvement in the profitability and efficiency with immediate effect. Branch productivity as well as employee productivity would deteriorate as a result of the merger but proper branch and employee rationalization (more products and services being pushed through the enlarged branch network and workforce) in the post-merger period would help it in improving these ratios. Also, realization of potential synergies in the form of economies of scale and scope would further help in improving efficiency and reducing costs that in turn would increase profitability and create better value for shareholders in the post-merger period.

2007-08 2007-08   2008-09   HDFC Centurion   HDFC Change Comment
Price per Share 1331.25 51 973  
Number of Shares 3544 15668 4253  
Market Capitalization 4717950 799068 4138169 -29%  
Book Value 325.46 8.91 345.42 3%  
P/BV 4.090 5.724 2.817 -1.71 Lower is better
  in Lacs  
Equity Share Capital 35443 15669 42538 -24%  
Reserve and Surplus 1114280 123941 1422094 17%  
Total Equity 1149723 139610 1464632 15%  
Face Value 10 1 10 -10%  
Number of Shares 3544 15668 4253  
Earning After Tax 159018 12138 224930 34% Increased
Earning Per Share 44.87 0.77 52.89 16% Improved
P/E 29.67 65.83 18.40 -260%  
ROE(%) 13.83% 8.69%   15.36% -52% Improved
Net Asset Valuation              
Total Assets 13317660 1848278 18327077  
Less: Loan Funds 2091077 222296 2540645  
Net Asset Value 11226583 1625982 15786432 26% Improved
Number of Outstanding Shares 3544 15668  
NAV 3167.77 103.78 1  
P/E*EPS 1331.25 51 1  
Current Market Price 1425 51 1  
Weighted Average 1974.67 68.59  
SWAP RATIO 28.8          
EPS Method              
SER = EPS HDFC/EPS CBoP0.0172656   17 shares of HDFC for 1000 shares of CBoP     


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