Merger, in common parlance, is a combination of two or more commercial organizations into one. It is a tool for expanding activities of a company or to augment their future profits. The terms Mergers and Acquisitions are used inter-changeably. However there is a difference between the two- a friendly takeover is addressed as a merger whereas a hostile takeover is termed as an Acquisition.
Takeovers used to be mainly concentrated on stable and profitable industries like steel, automobiles, banks etc. But the past few years have seen the trend digressing towards newer and more competitive sectors. The onset of the 21st century initiated a drift toward unexplored territories like the pharmaceutical sector.
In the last year of the decade, the world saw the biggest merger of this industry i.e. the Pfizer buyout of Wyeth for a staggering $68bn. The combined company will create one of the most diversified companies in the global health care industry. Operating through patient-centric businesses that match the speed and agility of small, focused enterprises with the benefits of a global organization's scale and resources, the company will respond more quickly and effectively to meet changing health care needs. The combined company will have product offerings in numerous growing therapeutic areas, a strong product pipeline, leading scientific and manufacturing capabilities and a premier global footprint in health care.
Further the takeover of Solvay pharmaceuticals by US drug maker Abbot Laboratories and the proposed merger of Novartis AG and Alcon Inc.2 has sent the share markets on a high tide. The reason behind such bullish response is mainly the excitement among investors that the imminent merger of these companies will create a multi-national drug maker in India3. Other major global takeovers in the pharmaceutical sector are shown in the following table:
|Sr. No||Company (Acquirer)||Company (Target)||For Amount||Segment Involved|
|1.||Roche (Swiss)||Genentech (USA)||$46.8bn||R&D, Cancer Drugs|
|2.||Daiichi Sankyo (Japan)||Ranbaxy (India)||$4.2bn||Generic Drugs|
|3.||Fresenius Kabi (German)||Dabur Pharma (India)||Rs.1000 Cr.||Oncology|
|4.||Abbot (USA)||Wockhardt (India)||$22.5mn||Nutrition|
|5.||Merck (USA)||Schering Plough (USA)||$41.1bn||Cardiovascular Meds|
The Indian Pharmaceutical industry is a favourite one when it comes to cross border M&A. This is hugely due to the fact that such takeovers are beneficial in-house quick growth strategies. The desire to gain foothold in the market of another country is another major reason behind such mergers. Such transactions help the company save itself from the pain-staking procedure of establishing a noveau entity in an alien country. Entry into a domestic market is a key driver of cross-border mergers. It helps companies save significant time that may be needed to build the green-field businesses of similar scale.4 At times M&A also cater as ego enhancers of MNCs. Other factors associated to such transactions include lack of research and development, productivity, expiring patents and generic competition.
The Indian pharmaceutical industry is known for its generics, cost effectiveness and competitiveness5. The nature of diseases in India is varied and the market is ever expanding. Large global pharmaceutical companies aim towards establishing a low-cost base out of the country. A number of Indian companies have made acquisitions in the global market. With domestic drug sales of almost $5bn, Indian companies have also developed a considerable service industry for the global pharmaceutical market. Approximately 32 cross border transactions worth $2000mn have been executed by domestic pharmaceutical companies.6 There are likely to be more acquisitions in regulated markets in the US and Europe.7 A few examples of outbound M&A are illustrated in the following table:
|Sr. No.||Company (Acquirer)||Company (Target)||For Amount||Segment Involved|
|1.||Biocon||Axicorp (German)||$ 30 million||Biosimilars|
|2.||Dr. Reddy’s Labs||Trigenesis Therapeutics (USA)||$ 11 million||Specialty Drugs|
|3.||Wockhardt||Esparma (German)||$ 11million||Branded Generics|
|4.||Wockhardt||C. P. Pharmaceuticals (UK)||Rs. 83 crore||Healthcare Products|
|5.||Wockhardt||Negma Laboratories (France)||$ 265 million||R&D|
|6.||Wockhardt||Morton Grove Pharma (USA)||$38 million||Liquid Generics|
|7.||Zydus Cadilla||Alpharma (France)||5.5 million Euros||Formulation Business|
|8.||Ranbaxy||RPG Aventis (France)||$ 70 million||Generic Drugs|
|9.||Nicholas Piramal||Biosyntech (Canada)||$4.85mn||Regenerative-Heel Pain|
Now the Indian companies face a threat of takeover under the new IPR regime8 which makes product patents finally available for the Indian Pharmaceutical industry. The advent of pharmaceutical product patent recognition in January 2005 changed the ground rules for Indian companies. In the run up to the new post-patent era and since, the Indian industry has been evolving. R&D departments are moving away from reverse-engineering in favour of developing novel drug delivery systems and discovery research.* This has resulted in the need of new investments and R&D. It also provides for compulsory licensing which allows countries to import cheaper generic versions of patented drugs in the interest of public health. This reduces the profitability of the Indian drug companies. A few more takeovers in the generic industry will lead to neutralization of the India's generic revolution which in itself is a stumbling block for the Indian economy. The reason for such interest of foreign companies in the generic market is the strategy for the innovators to retain the innovation potential while acquiring huge generic potential.9
The year 2009 saw the biggest merger in the generic market when Japan's 3rd largest drug maker Daiichi Sankyo took over India's Ranbaxy Laboratories. Daiichi purchased 63.9% of the stake at Ranbaxy's for $4.2 billion. This was done by way of tender offer, private placement of new share and purchase of outstanding shares from the founding family.10 The Japanese firm bought Ranbaxy seeking to secure revenue over a long run amongst intensifying competition and price pressure in the branded drug market globally.
This deal is speculated to be a win-win for Ranbaxy and Daiichi Sankyo. Daiichi Sankyo will be able to leverage the low cost advantage offered by India complimented by world class infrastructure while Ranbaxy will benefit from product pipeline of Daiichi. said Sarabjit Kaur Nangra- VP Research, Angel Broking. According to Frost and Sullivan's, Daiichi Sankyo will be amongst the largest generic manufacturers globally after the merger. The company would be a strong contender in both the generic as well as innovator space.
However the Daiichi-Ranbaxy merger has sent out alarms in the pharmaceutical industry. In a letter to the department of pharmaceuticals, Indian Pharmaceutical Alliance has said lack of available funding is the main reason for the recent spurt in the sale of stakes in domestic companies. This has urged the Government to fund R&D activities of the pharmaceutical companies in order to safeguard their businesses from takeovers.
The challenges faced by companies in executing a merger can be broadly categorized under the following applicable laws:
1. The Companies Act, 1956
2. Securities and Exchange Board of India (SEBI) Takeover Code
3. Foreign Exchange Management Act, 1999.
4. Competition Act, 2000
While the Indian Companies Act, 1956, usually governs mergers in India, international deals involve additional compliances with rules laid down under the FEMA (Foreign Exchange Management Act, 1999) and associated law.11 Further, listed companies are also subject to the rules and regulations laid down by the SEBI (Securities and Exchange Board of India). Compliances under the Companies Act require the Acquirer Company to prepare a scheme of amalgamation under section 393 of Companies Act, 1956. The draft scheme has to be agreed to by Target Company and submitted to the High Court. Both company's Board of Directors should approve the scheme and authorize the directors to make an application to the High Court under section 391 of Companies Act, 1956. The copy of order is to be filed with the Registrar of companies within 30 days of passing of orders by the court.
The compliances under SEBI involve the following steps:1. Acquirer must make a public announcement of- the offer price, the number of shares to be acquired from the public, identity of acquirer, purpose of acquisition, plans of acquirer, change and control over the target company and period within which the formalities would be completed.
2. The acquirer must make a public announcement through a merchant banker within 4 working days of entering into an agreement of acquiring shares or voting rights of the target company.
3. Relevant documents should be filed with the SEBI which include a copy of the public announcement in the newspaper, the draft, letter of offer and a due diligence certificate.
4. Correct and adequate information must be disclosed and comments should be incorporated by SEBI.
5. Letter of offers to shareholders of the target company must be sent within 45 days of the public announcement. The offer remains open for 30 days for acceptance by the shareholders.
6. The acquirer should determine the offer price after considering the relevant parameters.
Once an offer is made an acquirer cannot withdraw it except unless the statutory approvals have been refused, the sole acquirer has died or if the SEBI merits the withdrawal of the offer.
In case of cross-border mergers, the Foreign Exchange Management (Transfer or Issue of Security by a person Resident outside India) Regulations 2001 will be applicable.
Although the compliance of these rules and regulations seems easy, a lot of difficulties are faced during the actual application of those rules n procedures, and a lot more when the merger is a cross-border one. There are often occasions when interplay between SEBI regulations and those of FEMA can make it difficult for deals to be structured. said Mr. Diljeet Titus, Titus and Titus Co., Delhi.
There are numerous challenges faced by companies during cross-border mergers. A major obstacle is the legal disparity between the two merging entities, since these companies follow statutes of different countries. Hence even if the merger is a friendly one, the legal disparity creates a major road-block in structuring and finalizing the deal. Another issue is that of the complex legal set up especially in the financial sectors of any of the merged entities, thereby causing a problem in decision making processes.
Misuse of supervisory powers by the shareholder of the merged entity may also put the new business model at risk. There are other barriers like lack of funds, economical imbalance at the time of execution, political interference, shareholder's reluctance, labour issues etc.
Apart from this, there are extra costs incurred like the off-costs and on-going costs during any cross border merger which are absent in domestic mergers. Consumer protection rules, differences in employee legislations, different accounting systems, data protection directives, cross-border business policies employed in different countries could cause obstructions to cross border M&A and can further escalate the cost. Exchange of share mechanism also proves to be more expensive in case the 2 merged entities are listed in different stock exchanges.
These fundamental intricacies of the cross border M&A make it a Byzantine deal.
Cross-border mergers place Indian companies on the global map. Being a significant part of the global pharmaceutical sector will help the Indian companies to take further steps in maintaining the global pharmaceutical standards which would be beneficial for them in all segments including exports, increased profitability, increase in the R&D laboratories, funding received by the companies, increased number of patented products, expansion of their market share etc. This in turn will be beneficial to the global pharmaceuticals as well since the cost effective techniques used by Indian companies and the huge market India provides to this sector can help enhance the research and creation of newer and improved drugs.
Although there always remains the risk of losing individual identity of such companies or exposing the industry to a threat of rampant takeovers, on the whole Mergers elevates the economic graph of the country.
The technicalities involved in an M&A transaction are humongous and often falls apart midway. If the SEBI and the RBI (Reserve Bank of India) each establishes an effective legal cell to respond to questions raised by the parties to a merger on a timely basis, it can help make the M&A a lesser painful process. Regarding the Indian Pharmaceutical industry cross-border mergers are healthy only so long as it does not take away its innovation revolution.
* Espicom, 5th May 2009- 'The Indian Pharmaceutical Industry 2009- Diversification, Expansion & Ambitions'
1. Pfizer.com, 26th January 2009.
2. Wall Street Journal, 30th September 2009- 'Abbot Solvay Rise On Takeover'; Aurora Sentinel, 04th Jan 2010- 'Novartis Looks To Buyout Alcon for $38.5 billion'.
3. Wall Street Journal, 30th September 2009- 'Abbot Solvay Rise On Takeover'.
4. ExpressPharmaOnline.com, 1-15 October 2008- 'The Making of a Merger'
5. Express Healthcare Management, 1st-15th September 2005- 'Mergers and Acquisitions in Pharma'.
6. ExpressPharmaOnline.com, 1-15 October 2008- 'The Making of a Merger'
8. Financial Express, 5th May 2009
9. Financial Express, 5th May 2009- 'Indian Drug Firms Face Takeover Threats'
10. Financial Express, 7th Nov 2008
11. The Hindu Business Line, 17 October 2006.
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