What Motivtes Phrma Companies To Go For M&amp Q

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Acknowledgement
The process of making this thesis has been a great learning experience for me and I would like
to thank all people who have give me their precious time, share their experience, knowledge
and helping me understand the “WHAT MOTIVATES PHARMACEUTICAL COMPANIES
TO GO FOR MERGERS AND ACQUISITIONS”
I am thankful to the Dean and the Management of IIPM for providing me with great pool of
resources through knowledge, encouragement, facilities and services throughout my MBA
course.
I am greatly indebted to my guide, Mr. V. VAMSI KRISHNA (M.S.), Executive Director for
giving me the opportunity to do the thesis and for this timely help and co-operation during the
completion of my study. It was my pleasure to be associated with such as esteemed person. I
am grateful to him for his co-operation and helping me in completion of the thesis.

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DECLARATION
I hereby declare that all the information that have been collected, analyzed and Documented
for the project is authentic possession of me. I would like to categorically mention that the
work here has neither purchased nor acquired by any other unfair means. However for the
purpose of the project, information already compiled in many sources has been utilized
(K.RAVI BABU)

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CONTENTS
Page No.
CHAPTER 1
THESIS SYNOPSIS............................................................................................... 07
1.1 Objective of the Study
1.2 Need of the study
1.3 Methodology of the Study
1.4 Scope of the Study
1.5 Justification for choosing a particular research proposal
CHAPTER 2
INTRODUCTION................................................................................................. 11
2.1 Definition of Mergers & Acquisition
2.2 Types of Mergers & Acquisition
2.3 Distinction between Mergers and Acquisitions
2.4 Indian Top Ten Mergers and Acquisition Deals
2.5 Different Types of Valuation Matters
CHAPTER 3
INDUSTRY PROFILE.......................................................................................... 29
3.1 Pharma Industry
3.2 The Key Players in the Pharma Industry
3.3 The Growth Scenario
3.4 Investment in the Industry
3.5 Profitability and Cost Structure
3.6 Exports
3.7 Larger Deals in the Pharma Industry
CHAPTER 4
COMPANY PROFILE.......................................................................................... 53
4.1 Introduction
4.2 Promoters Profile
4.3 Financial highlights

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4.4 Associates of Group of companies
CHAPTER 5
REVIEW OF LITERATURE..................................................................................... 61
THEORETICAL APPROACH OF THE THESIS....................................................66
CHAPTER 6
THE MAIN MOTIVES OF MERGERS AND ACQUISITIONS............................73
CHAPTER 7
DATA ANALYSIS AND INTERPRETATION........................................................78
CHAPTER 8
FINDINGS AND SUGGESTIONS...............................................................................85
8.1 Findings
8.2 Suggestions
CHAPTER 9
CONCLUSION............................................................................................................. 88
BIBLIOGRAPHY......................................................................................................... 90
ANNEXURE..................................................................................................................91
Questioner
Response Sheets
CONTENTS

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TABLES AND GRAPHS

LIST OF TABLES PAGE NO
1. The top 10 acquisitions made by Indian companies’ world wide...........................18
2. The key players in the Indian pharmaceutical industry...........................................33
3. Indian major players financial information.............................................................34
4. Major deals announced/ completed by Indian companies in 2007.........................35
5. R & d expenditure (2006-07)..................................................................................39
6. Market growth in acute and chronic segment.........................................................41
7. Capex in the Industry..............................................................................................43
8. FDI inflow in the Industry......................................................................................43
9. Projected Pharmaceutical Market (2004-2009).......................................................47
10. Major Foreign Acquisitions by Indian Companies (2006, 2007& 2008)...............50
11. Large Deals in the Pharma Industry.......................................................................50
12. The financial highlights of the company for the last 3 years..................................56
13. Steps Involved in an Acquisition Valuation...........................................................75
LIST OF CHARTS
1. Graphical Representation of Indian out bound deals since 2000.........................19
2. Concentration of Industry Turn over....................................................................32
3. Indian Pharmaceutical market..............................................................................32
4. FDA approved Manufacturing.............................................................................38
5. Formulation: Broad Segmentation.......................................................................40
6. Market share of top 10 players.............................................................................41
7. Pharma Industry: Growth breakup.......................................................................42
8. Profitability and cost structure..............................................................................43
9. Indian pharma- capex over 2002-05.....................................................................45
10. India has the most FDA – approved Mtg, sites outside the U S...........................45
11. Exports value (Rs bn)...........................................................................................46
12. Export to regulated Market (Rs bn)......................................................................46
13. Future Outlook......................................................................................................52
14. Theoretical Approach of the Thesis......................................................................66
15. The process view of Mergers and Acquisitions....................................................70
16. Financing Mergers................................................................................................76

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CHAPTER 1
THESIS SYNOPSIS
SYNOPSIS

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STATEMENT OF THE PROBLEM:
“Will the companies really get the benefit out of Merges and Acquisitions” If they really get
the benefit out of it, what kinds of advantages they have it and how? .This research mainly
focuses on the why companies prefer to go, and what benefits they got out of it.
OBJECTIVES OF THE STUDY:
1. To find the motives behind the Mergers and Acquisition concentrating on

pharmaceutical sector.
2. To analyze the factors that will influence the companies to go for Merges and
Acquisition.
3. To examine the relevance of M&A for the pharmaceutical companies.
4. To find the benefit of the pharmaceutical companies for going to this strategy of
M&A.
5. To identify the setbacks of M&A.
INTRODUCTION
The phrase Mergers and Acquisitions refers to the aspect of corporate strategy, corporate
finance and management dealing with the buying, selling and combining of different
companies that can aid, finance, or help a growing company in a given industry grow rapidly
without having to create another business entity.
In business or economics a merger is a combination of two companies into one larger

company. Such actions are commonly voluntary and involve stock swap or cash payment to the
target. Stock swap is often used as it allows the shareholders of the two companies to share the
risk involved in the deal. A merger can resemble a takeover but result in a new company name
(often combining the names of the original companies) and in new branding in some cases,
terming the combination a "merger" rather than an acquisition is done purely for political or
marketing reasons.
Need for the study:

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The dominant rationale used to explain M&A activity is that acquiring firms seek improved
financial performance. The following motives are considered to improve financial
performance:
 This refers to the fact that the combined company can often reduce its fixed costs by
removing duplicate departments or operations, lowering the costs of the company
relative to the same revenue stream, thus increasing profit margins.
 Increased revenue increased market share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing
increased market share) to set prices, cross selling, economies of sale, taxes,
geographical diversification etc.
Research Methodology and Data Base
RESEARCH DESIGN
 Data Sources: The data will be collected for the study by using two broad sources viz.,
primary and secondary A major portion of the data needed for the study has been
collected through the secondary sources and that data has been thoroughly researched
and finally presenting the findings and conclusions to prove the research objectives set
in the study.
 The primary data can be collected by using a structured questionnaire which helps the
researcher to collect by direct interaction of the employees. The data can also be
collected by interviewing the officials who are into pharmaceutical sector and their
views on the sector and also the fact sheets and other literature available in the
companies. The Interviews are with………
Mr. V. Venugopal Reddy

Mr. V. Vamsi Krishna
Mr. D. Venkateswara Reddy
 For secondary data can be collected from the magazines of the related industry,
websites, and journals. The reason for selecting this mode of research for this type is
that it’s a probably quickest and most economical way for research to find possible
hypothesis and to take advantage of the work of to others and utilize their own earlier
efforts. Most large companies that have maintained marketing research programs over a

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number of years have accumulated significant libraries of research organizations

furnishing continuing data.
2. Research Approach
 This data has been collected through news papers, search engines, articles, bulletins etc.
SAMPLE:
The size of the research is about 50 questioners.
SCOPE OF THE THESIS WORK

The scope of the thesis work is extremely significant which finds the causes for Merges and
Acquisition. To identify the need for an organization to go for M&A, what motives them to go
for M&A.? The research is purely based on the M&A happened in Pharmaceutical industry and
Health Care industry. This research covers some of the M&A taken place during lost 5 to 10
years.
JUSTIFICATION FOR CHOOSING A PARTICULAR RESEARCH

PROPOSAL
In the field of business many changes have been taken place due to certain changes in all over
the country and as well in the world. Some companies which are not having sufficient resource
like man power, finance, marketing network etc, can plan to go for M&A. It is not only on
these areas but also some companies voluntarily going for this, because of long run survival
and continuity. Taken example of Sandoz and Cibagaiki they two merged and started a new
company under the brand name of Novartis. But in India M&A takes place because of R&D
problem or unable to concentrate on R&D etc., Many of the Private sector companies feel that
investing in R&D is an unproductive expenses if it fails so they are planning to buy the
manufacturing rights or imitating the existing products to add a new product in their existing
product lines.

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CHAPTER 2: INTRODUCTION

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Background
In business debate today, we could find that the frequency of M&As is sustainable
high and M&As seem to be a commonly used strategic tool for companies. It is said that
one of three employees will, during the course of their working life, undergo a merger or
acquisition (Hubbard, 1999). At the same time, we find from Rydén (1971) that M&As are
not a new phenomenon and many of the large firms owe their origin in whole or in part
to mergers that occurred long before. However, as the number of mergers and acquisitions
increases, statistics also show that approximately half of the acquisitions did not turn
out to be successful. Consequently, many of the accomplished M&A transactions do not meet
their expectations and do not produce expected results. Actually, research shows that M&As
rarely result in more positive economic effects than other strategic investments in firms
(Rydén, 1971). Hence, there seems to be a paradox situation, where M&As are used as a
strategic alternative for creating positive economic effects for the company, but it is
hardly ever that the outcomes are in line with the expected benefits.
Parallel to M&A transactions conducted in traditional industries, which often have been
subjects for prior research, we can see that M&As becomes more and more frequent in
emerging industries. Today, M&As also seem to become a common strategic tool for
companies in new lines of business. The question therefore arises, if there are other conditions
for these companies to be successful with M&A activities. For instance, if there, for
companies in this environment, are new threats and possibilities that will change the conditions
for achieving wanted results. Furthermore, if this will result in new drivers and ways of
managing the process by these companies
2.1 Defining M&A
The Main Idea one plus one makes three: this equation is the special alchemy of a merger or
an acquisition. The key principle behind buying a company is to create shareholder value over
and above that of the sum of the two companies. Two companies together are more valuable
than two separate companies - at least, that's the reasoning behind M&A. This rationale is
particularly alluring to companies when times are tough. Strong companies will act to buy
other companies to create a more competitive, cost-efficient company. The companies will
come together hoping to gain a greater market share or to achieve greater efficiency. Because

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of these potential benefits, target companies will often agree to be purchased when they know
they cannot survive alone.
Acquisitions
An acquisition may be only slightly different from a merger. In fact, it may be different in
name only. Like mergers, acquisitions are actions through which companies seek economies of
scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve
one firm purchasing another - there is no exchange of stock or consolidation as a new
company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other
times, acquisitions are more hostile. In an acquisition, as in some of the merger deals we
discuss above, a company can buy another company with cash, stock or a combination of the
two.
Another possibility, which is common in smaller deals, is for one company to acquire all the
assets of another company. Company X buys all of Company Y's assets for cash, which means
that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y
becomes merely a shell and will eventually liquidate or enter another area of business. Another
type of acquisition is a reverse merger, a deal that enables a private company to get publicly-
listed in a relatively short time period. A reverse merger occurs when a private company that
has strong prospects and is eager to raise financing buys a publicly-listed shell company,

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usually one with no business and limited assets. The private company reverse merges into the
public company, and together they become an entirely new public corporation with tradable
shares. Regardless of their category or structure, all mergers and acquisitions have one
common goal: they are all meant to create synergy that makes the value of the combined
companies greater than the sum of the two parts. The success of a merger or acquisition
depends on whether this synergy is achieved.
2.2 Types of Mergers

From the perspective of business structures, there is a whole host of different
mergers. Here are a few types, distinguished by the relationship between the two companies
that are merging:
 Horizontal merger - Two companies that are in direct competition and share the same
product lines and markets.
 Vertical merger - A customer and company or a supplier and company. Think of a cone
supplier merging with an ice cream maker.
 Market-extension merger - Two companies that sell the same products in different
markets.
 Product-extension merger - Two companies selling different but related products in the
same market.
 Conglomeration - Two companies that have no common business areas. There are two
types of mergers that are distinguished by how the merger is financed. Each has certain
implications for the companies involved and for investors:
 Purchase Mergers - As the name suggests, this kind of merger occurs when one company
purchases another. The purchase is made with cash or through the issue of some kind of
debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger
because it can provide them with a tax benefit. Acquired assets can be written-up to the
actual purchase price, and the difference between the book value and the purchase price of
the assets can depreciate annually, reducing taxes payable by the acquiring company. We
will discuss this further in part four of this tutorial.
 Consolidation Mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are the same as
those of a purchase merger.

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2.2 Types of acquisition
 The buyer buys the shares, and therefore control, of the target company being
purchased. Ownership control of the company in turn conveys effective control over the
assets of the company, but since the company is acquired intact as a going business, this
form of transaction carries with it all of the liabilities accrued by that business over its
past and all of the risks that company faces in its commercial environment.
 The buyer buys the assets of the target company. The cash the target receives from the
sell-off is paid back to its shareholders by dividend or through liquidation. This type of
transaction leaves the target company as an empty shell, if the buyer buys out the entire
assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the
assets that it wants and leave out the assets and liabilities that it does not. This can be
particularly important where foreseeable liabilities may include future; un quantified
damage awards such as those that could arise from litigation over defective products,
employee benefits or terminations, or environmental damage. A disadvantage of this
structure is the tax that many jurisdictions, particularly outside the United States,
impose on transfers of the individual assets, whereas stock transactions can frequently
be structured as like-kind exchanges or other arrangements that are tax-free or tax-
neutral, both to the buyer and to the seller's shareholders.
2.3 Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous,
the terms merger and acquisition mean slightly different things. When one company takes over
another and clearly established itself as the new owner, the purchase is called an acquisition.
From a legal point of view, the target company ceases to exist, the buyer "swallows" the
business and the buyer's stock continues to be traded. In the pure sense of the term, a merger
happens when two firms, often of about the same size, agree to go forward as a single new
company rather than remain separately owned and operated. This kind of action is more
precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new
company stock is issued in its place. For example, both Daimler-Benz and Chrysler or Arcellor
and Mittal ceased to exist when the two firms merged, and a new company, DaimlerChrysler
and Arcellor-Mittal, was created. In practice, however, actual mergers of equals don't happen
very often. Usually, one company will buy another and, as part of the deal's terms, simply
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allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically
an acquisition. Being bought out often carries negative connotations, therefore, by describing
the deal as a merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is
in the best interest of both of their companies. But when the deal is unfriendly - that is, when
the target company does not want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the
purchase is friendly or hostile and how it is announced. In other words, the real difference lies
in how the purchase is communicated to and received by the target company's board of
directors, employees and shareholders.
Synergy
Synergy is the magic force that allows for enhanced cost efficiencies of the
new business. Synergy takes the form of revenue enhancement and cost savings. By merging,
the companies hope to benefit from the following:
 Staff reductions - As every employee knows, mergers tend to mean job losses. Consider
all the money saved from reducing the number of staff members from accounting,
marketing and other departments. Job cuts will also include the former CEO, who typically
leaves with a compensation package.
 Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new
corporate IT system, a bigger company placing the orders can save more on costs. Mergers
also translate into improved purchasing power to buy equipment or office supplies - when
placing larger orders, companies have a greater ability to negotiate prices with their
suppliers.
 Acquiring new technology - To stay competitive, companies need to stay on top of
technological developments and their business applications. By buying a smaller company
with unique technologies, a large company can maintain or develop a competitive edge.
 Improved market reach and industry visibility - Companies buy companies to reach
new markets and grow revenues and earnings. A merge may expand two companies'
marketing and distribution, giving them new sales opportunities. A merger can also

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improve a company's standing in the investment community: bigger firms often have an
easier time raising capital than smaller ones.
That said, achieving synergy is easier said than done - it is not automatically realized once two
companies merge. Sure, there ought to be economies of scale when two businesses are
combined, but sometimes a merger does just the opposite. In many cases, one and one add up
to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate
leaders and the deal makers. Where there is no value to be created, the CEO and investment
bankers - who have much to gain from a successful M&A deal - will try to create an image of
enhanced value. The market, however, eventually sees through this and penalizes the company
by assigning it a discounted share price. We'll talk more about why M&A may fail in a later
section of this tutorial.
2.4 INDIAN MERGERS AND ACQUISITIONS – TOP TEN DEALS
Until up to a couple of years back, the news that Indian companies having acquired American-
European entities was very rare. However, this scenario has taken a sudden U turn. Nowadays,
news of Indian Companies acquiring a foreign business is more common than other way round.
Buoyant Indian Economy, extra cash with Indian corporate, Government policies and newly
found dynamism in Indian businessmen have all contributed to this new acquisition trend.
Indian companies are now aggressively looking at North American and European markets to
spread their wings and become the global players.
The Indian IT and ITES companies already have a strong presence in foreign markets;
however, other sectors are also now growing rapidly. The increasing engagement of the Indian
companies in the world markets, and particularly in the US, is not only an indication of the
maturity reached by Indian Industry but also the extent of their participation in the overall
globalization process.

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Here are the top 10 acquisitions made by Indian companies worldwide:
Country Deal value ($

Acquirer Target Company Industry
targeted ml)
Tata Steel Corus Group plc UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel

Daewoo Electronics
Videocon Korea 729 Electronics
Corp.
Dr. Reddy’s
Betapharm Germany 597 Pharmaceutical
Labs
Suzlon Energy Hansen Group Belgium 565 Energy
Kenya Petroleum
HPCL Kenya 500 Oil and Gas
Refinery Ltd.
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical
Tata Steel NatSteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
If you calculate top 10 deals it self account for nearly US $ 21,500 million. This is more than
double the amount involved in US companies’ acquisition of Indian counterparts.
Graphical representation of Indian out bound deals since 2000.

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Have a look at some of the highlights of Indian Mergers and Acquisitions scenario as it
stands (Source: http://ibef.org)
Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3
billion in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be
remembered in India’s corporate history as a year when Indian companies covered a lot of new
ground. They went shopping across the globe and acquired a number of strategically significant
companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in
India in 2006. And almost 99 per cent of acquisitions were made with cash payments.
Mergers and Acquisitions
The total M&A deals for the year during January-May 2007 have been 287 with a value of
US$ 47.37 billion. Of these, the total outbound cross border deals have been 102 with a
value of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India.
The total M&A deals for the period January-February 2007 have been 102 with a value
of US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value
of US$ 21 billion. There were 111 M&A deals with a total value of about US$ 6.12 billion in
March and April 2007. Of these, the number of outbound cross border deals was 32 with a
value of US$ 3.41 billion. There were 74 M&A deals with a total value of about US$ 4.37

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billion in May 2007. Of these, the number of outbound cross border deals was 30 with a value
of US$ 3.79 billion.
The sectors attracting investments by Corporate India include metals, pharmaceuticals,

industrial goods, automotive components, beverages, cosmetics and energy in manufacturing;
and mobile communications, software and financial services in services, with pharmaceuticals,
IT and energy being the prominent ones among these.
2.5 Different Types of Valuation Matters
Investors in a company that is aiming to take over another one must determine whether the
purchase will be beneficial to them. In order to do so, they must ask themselves how much the
company being acquired is really worth.
Naturally, both sides of an M&A deal will have different ideas about
the worth of a target company: its seller will tend to value the company at as high of a price as
possible, while the buyer will try to get the lowest price that he can. There are, however, many
legitimate ways to value companies. The most common method is to look at comparable
companies in an industry, but deal makers employ a variety of other methods and tools when
assessing a target company. Here are just a few of them:
1. Comparative Ratios - The following are two examples of the many comparative metrics on
which acquiring companies may base their offers:
 Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes
an offer that is a multiple of the earnings of the target company. Looking at the P/E for all
the stocks within the same industry group will give the acquiring company good guidance
for what the target's P/E multiple should be.
 Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes
an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of
other companies in the industry.
2. Replacement Cost
In a few cases, acquisitions are based on the cost of replacing the target
company. For simplicity's sake, suppose the value of a company is simply the sum of all its
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equipment and staffing costs. The acquiring company can literally order the target to sell at that
price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble
good management, acquire property and get the right equipment. This method of establishing a
price certainly wouldn't make much sense in a service industry where the key assets - people
and ideas - are hard to value and develop.
3. Discounted Cash Flow (DCF)

A key valuation tool in M&A, discounted cash flow analysis
determines a company's current value according to its estimated future cash flows. Forecasted
free cash flows (operating profit + depreciation + amortization of goodwill – capital
expenditures – cash taxes - change in working capital) are discounted to a present value using
the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get
right, but few tools can rival this valuation method.
Synergy: The Premium for Potential Success

For the most part, acquiring companies nearly always pay a substantial
premium on the stock market value of the companies they buy. The justification for doing so
nearly always boils down to the notion of synergy; a merger benefits shareholders when a
company's post-merger share price increases by the value of potential synergy. Let's face it; it
would be highly unlikely for rational owners to sell if they would benefit more by not selling.
That means buyers will need to pay a premium if they hope to acquire the company, regardless
of what pre-merger valuation tells them. For sellers, that premium represents their company's
Future prospects For buyers, the premium represents part of the post-merger synergy they
expect can be achieved. The following equation offers a good way to think about synergy and
how to determine whether a deal makes sense. The equation solves for the minimum required
synergy:
In other words, the success of a merger is measured by whether the value of the buyer is
enhanced by the action. However, the practical constraints of mergers, which discussed often,

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prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal
makers might just fall short.
What to Look For - It's hard for investors to know when a deal is worthwhile. The burden of
proof should fall on the acquiring company. To find mergers that have a chance of success,
investors should start by looking for some of these simple criteria given as below.
 A reasonable purchase price - A premium of, say, 10% above the market price seems
within the bounds of level-headedness. A premium of 50%, on the other hand, requires
synergy of stellar proportions for the deal to make sense. Stay away from companies that
participate in such contests.
 Cash transactions - Companies that pay in cash tend to be more careful when calculating
bids and valuations come closer to target. When stock is used as the currency for
acquisition, discipline can go by the wayside.
 Sensible appetite – An acquiring company should be targeting a company that is smaller
and in businesses that the acquiring company knows intimately. Synergy is hard to create
from companies in disparate business areas. Sadly, companies have a bad habit of biting off
more than they can chew in mergers.
Mergers are awfully hard to get right, so investors should look for acquiring companies with a
healthy grasp of reality.
Doing the Deal

Start with an Offer When the CEO and top managers of a company decide that they want to
do a merger or acquisition, they start with a tender offer. The process typically begins with the
acquiring company carefully and discreetly buying up shares in the target company, or building
a position. Once the acquiring company starts to purchase shares in the open market, it is
restricted to buying 5% of the total outstanding shares before it must file with the SEC. In the
filing, the company must formally declare how many shares it owns and whether it intends to
buy the company or keep the shares purely as an investment.
Working with financial advisors and investment bankers, the acquiring
company will arrive at an overall price that it's willing to pay for its target in cash, shares or
both. The tender offer is then frequently advertised in the business press, stating the offer price
and the deadline by which the shareholders in the target company must accept (or reject) it.

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The Target's Response

Once the tender offer has been made, the target company can do one of
several things:
 Accept the Terms of the Offer - If the target firm's top managers and shareholders are
happy with the terms of the transaction, they will go ahead with the deal.
 Attempt to Negotiate - The tender offer price may not be high enough for the target
company's shareholders to accept, or the specific terms of the deal may not be attractive. In
a merger, there may be much at stake for the management of the target - their jobs, in
particular. If they're not satisfied with the terms laid out in the tender offer, the target's
management may try to work out more agreeable terms that let them keep their jobs or,
even better, send them off with a nice, big compensation package. Not surprisingly, highly
sought-after target companies that are the object of several bidders will have greater
latitude for negotiation. Furthermore, managers have more negotiating power if they can
show that they are crucial to the merger's future success.
 Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme
can be triggered by a target company when a hostile suitor acquires a predetermined
percentage of company stock. To execute its defense, the target company grants all
shareholders - except the acquiring company - options to buy additional stock at a dramatic
discount. This dilutes the acquiring company's share and intercepts its control of the
company.
 Find a White Knight - As an alternative, the target company's management may seek out
a friendlier potential acquiring company, or white knight. If a white knight is found, it will
offer an equal or higher price for the shares than the hostile bidder.
Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two
biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal
would require approval from the Federal Communications Commission (FCC). The FCC
would probably regard a merger of the two giants as the creation of a monopoly or, at the very
least, a threat to competition in the industry.
Closing the Deal
Finally, once the target company agrees to the tender offer and
regulatory requirements are met, the merger deal will be executed by means of some

24
transaction. In a merger in which one company buys another, the acquiring company will pay
for the target company's shares with cash, stock or both. A cash-for-stock transaction is fairly
straightforward: target company shareholders receive a cash payment for each share purchased.
This transaction is treated as a taxable sale of the shares of the target company. If the
transaction is made with stock instead of cash, then it's not taxable. There is simply an
exchange of share certificates. The desire to steer clear of the tax man explains why so many
M&A deals are carried out as stock-for-stock transactions. When a company is purchased with
stock, new shares from the acquiring company's stock are issued directly to the target
company's shareholders, or the new shares are sent to a broker who manages them for target
company shareholders. The shareholders of the target company are only taxed when they sell
their new shares. When the deal is closed, investors usually receive a new stock in their
portfolios - the acquiring company's expanded stock. Sometimes investors will get new stock
identifying a new corporate entity that is created by the M&A deal.
Break Ups
As mergers capture the imagination of many investors and companies, the idea of getting
smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very
attractive options for companies and their shareholders.
Restructuring Methods
There are several restructuring methods: doing an outright sell-off, doing an
equity carve-out, spinning off a unit to existing shareholders or issuing tracking stock. Each has
advantages and disadvantages for companies and investors. All of these deals are quite
complex.
Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of a company
subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into the parent
company's core strategy. The market may be undervaluing the combined businesses due to a
lack of synergy between the parent and subsidiary. As a result, management and the board
decide that the subsidiary is better off under different ownership. (IPO) of shares, amounting to
a partial sell-off A new publicly-listed company is created, but the parent keeps a controlling
stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take

25
when one of its subsidiaries is growing faster and carrying higher valuations than other
businesses owned by the parent. A carve-out generates cash because shares in the subsidiary
are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances
the parent's shareholder value. The new legal entity of a carve-out has a separate board, but in
most carve-outs, the parent retains some control. In these cases, some portion of the parent
firm's board of directors may be shared. Since the parent has a controlling stake, meaning both
firms have common shareholders, the connection between the two will likely be strong.
That said, sometimes companies carve-out a subsidiary not because it's doing well, but because
it is a burden. Such an intention won't lead to a successful result, especially if a carved-out
subsidiary is too loaded with debt, nor had trouble even when it was a part of the parent and is
lacking an established track record for growing revenues and profits. Carve-outs can also create
unexpected friction between the parent and subsidiary. Problems can arise as managers of the
carved-out company must be accountable to their public shareholders as well as the owners of
the parent company. This can create divided loyalties.
Spin-offs
A spin-off occurs when a subsidiary becomes an independent entity.
The parent firm distributes shares of the subsidiary to its shareholders through a. Since this
transaction is a dividend distribution, no cash is generated. Thus, spin-offs are unlikely to be
used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes
a separate legal entity with a distinct management and board. Besides getting rid of an
unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late
1980s and early 1990s, corporate would use debt to finance acquisitions. Then, after making a
purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders'
method certainly makes sense if the sum of the parts is greater than the whole. When it isn't,
deals are unsuccessful.
Equity Carve-Outs
More and more companies are using equity carve-outs to boost shareholder value. A
parent firm makes a subsidiary public through a raider’s initial public offering stock dividend

26
meaning they don't grant shareholders the same voting rights as those of the main stock. Each
share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of
tracking stock have no vote at all. Like carve-outs, spin-offs are usually about separating a
healthy operation. In most cases, spin-offs unlock hidden shareholder value. For the parent
company, it sharpens management focus. For the spin-off company, management doesn't have
to compete for the parent's attention and capital. Once they are set free, managers can explore
new opportunities. Investors, however, should beware of throw-away subsidiaries the parent
created to separate legal liability or to off-load debt. Once spin-off shares are issued to parent
company shareholders, some shareholders may be tempted to quickly dump these shares on the
market, depressing the share valuation.
Tracking Stock
A tracking stock is a special type of stock issued by a publicly held company to track
the value of one segment of that company. The stock allows the different segments of the
company to be valued differently by investors. Let's say a slow-growth company trading at a
low (P/E ratio) happens to have a fast growing business unit. The company might issue a
tracking stock so the market can value the new business separately from the old one and at a
significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-
off or carving-out its fast growth business for shareholders? The company retains control over
the subsidiary; the two businesses can continue to enjoy synergies and share marketing,
administrative support functions, a headquarters and so on. Finally, and most importantly, if
the tracking stock climbs in value, the parent company can use the tracking stock it owns to
make acquisitions. Still, shareholders need to remember that tracking stocks are price-earnings
ratio class B
Why They Can Fail

It's no secret that plenty of mergers don't work. Those who advocate mergers will
argue that the merger will cut costs or boost revenues by more than enough to justify the price
premium. It can sound so simple: just combine computer systems, merge a few departments,
use sheer size to force down the price of supplies and the merged giant should be more
profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.

27
Historical trends show that roughly two thirds of big mergers will disappoint
on their own terms, which means they will lose value on the stock market. The motivations that
drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In
many cases, the problems associated with trying to make merged companies work are all too
concrete.
Flawed Intentions
For starters, a booming stock market encourages mergers, which can spell
trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic
thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate:
somebody else has done a big merger, which prompts other top executives to follow suit. A
merger may often have more to do with glory-seeking than business strategy. The executive
ego, which is boosted by buying the competition, is a major force in M&A, especially when
combined with the influences from the bankers, lawyers and other assorted advisers who can
earn big fees from clients engaged in mergers.
Most CEOs get to where they are because they want to be the biggest and the best, and many
top executives get a big bonus for merger deals, no matter what happens to the share price
later. On the other side of the coin, mergers can be driven by generalized fear. Globalization,
the arrival of new technological developments or a fast-changing economic landscape that
makes the outlook uncertain are all factors that can create a strong incentive for defensive
mergers. Sometimes the management team feels they have no choice and must acquire a rival
before being acquired. The idea is that only big players will survive a more competitive world.
The Obstacles to making it Work

Coping with a merger can make top managers spread their time too thinly and
neglect their core business, spelling doom. Too often, potential difficulties seem trivial to
managers caught up in the thrill of the big deal. The chances for success are further hampered
if the corporate cultures of the companies are very different. When a company is acquired, the
decision is typically based on product or market synergies, but cultural differences are often
ignored. It's a mistake to assume that personnel issues are easily overcome. For example,
employees at a target company might be accustomed to easy access to top management,
flexible work schedules or even a relaxed dress code. These aspects of a working environment

28
may not seem significant, but if new management removes them, the result can be resentment
and shrinking productivity. More insight into the failure of mergers is found in the highly
acclaimed study from McKinsey, a global consultancy. The study concludes that companies
often focus too intently on cutting costs following mergers, while revenues, and ultimately,
profits, suffer. Merging companies can focus on integration and cost-cutting so much that they
neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue
momentum is one reason so many mergers fail to create value for shareholders. But remember,
not all mergers fail.

29
CHAPTER 3
PHARMACEUTICAL INDUSTRY
3.1 PHARMA INDUSTRY
The pharmaceutical industry is the world’s largest industry due to worldwide

revenues of approximately US$2.8 trillion. Pharma industry has seen major changes in the

30
recent years that place new demands on payers, providers and manufacturers. Customers now
demand the same choice and convenience from Pharma industry that they find in other
segment. Indian Pharmaceutical Industry is poised for high consistent growth over the next
few years, driven by a multitude of factors.
Top Indian Companies like Ranbaxy, Arbindo Pharma, Sun Pharma, CIPLA and Dabur
have already established their presence. The pharmaceutical Industry is a knowledge driven
industry and is heavily dependent on Research and Development for new products and growth.
However, basic research (discovering new molecules) is a time consuming and expensive
process and is thus, dominated by large global multinationals. Indian companies have only
recently entered the area. The Indian pharmaceutical industry came into existence in 1901,
when Bengal Chemical & Pharmaceutical Company started its maiden operation in Calcutta.
The next few decades saw the pharmaceutical industry moving through several phases,
largely in accordance with government policies. Commencing with repackaging and
preparation of formulations from imported bulk drugs, the Indian industry has moved on to
become a net foreign exchange earner, and has been able to underline its presence in the global
pharmaceutical arena as one of the top 35 drug producers worldwide. Currently, there are more
than 2,400 registered pharmaceutical producers in India. There are 24,000 licensed
pharmaceutical companies. Of the 465 bulk drugs used in India, approximately 425 are
manufactured here. India has more drug-manufacturing facilities that have been approved by
the U.S. Food and Drug Administration than any country other than the US. Indian generics
31
companies supply 84% of the AIDS drugs that Doctors without Borders uses to treat 60,000
patients in more than 30 countries.
India’s pharmaceutical industry is one of the fastest growing sectors in the Indian economy
with the growth rate (CAGR) of 11.9 per cent during 2004-2008. The industry has emerged as
one of the strongest and most successful examples of knowledge-based industries in the world
and it has made tremendous progress in terms of development of technology, products and
infrastructure. Its large pool of skilled technical workforce, low production costs and
government support has enabled its transformation from an import-dependent country to a
major exporting country.
The domestic turnover of the industry stood at Rs 525.6 billion in 2008, accounting for 1.6
percent of GDP. Out of this turnover, domestic branded formulations sales were worth Rs
327.7 billion (as per ORG IMS June 08 retail sales data). The remaining portion is estimated to
have come from unorganized players & their contribution is estimated at 25 per cent of the
domestic industry’s turnover. The Indian pharmaceutical industry ranks fourth in the world in
terms of volume (8 per cent global share) and fourteenth in terms of value (1.9 per cent global
share).
Industry Overview
As per the Organization of Pharmaceutical Producers of India (OPPI) estimates, currently there
are around 10,000 pharmaceutical units in India that produce around 400 bulk drugs and more
than 60,000 formulations (falling under 60 therapeutic categories). Despite high fragmentation
in the industry, a substantial portion of the industry’s turnover is contributed by few players.
As per ORG-IMS (MAT June 2008), of the 451 companies, the top 20 companies constitute
around 56.6 per cent of the industry’s retail sales (of 451 companies), the next 20 companies
have a 20 per cent share and the remaining 411 companies have a 24 per cent share.
Chart: Concentration of industry turnover

32
The pharmaceutical products can be broadly classified into bulk drugs and formulations. The
formulations can be categorized under various therapeutic groups. Indian pharmaceutical
market accounts for 1-2% of the global pharmaceutical market in value terms and 8% in
volume terms. In 2007 it has grown by 12.9% to reach USD8.16 billion. Market growth during
2007 was driven by a number of new product launches by both Indian and foreign companies.
The pharmaceutical market has grown at a compounded annual growth rate (CAGR) of 13%
during the last five years. The market size comprises of domestic consumption of bulk drugs
and formulations and does not include exports of the same.
3.2 THE KEY PLAYERS IN THE INDIAN PHARMACEUTICAL INDUSTRY

33
Dr. Reddy Ranbaxy
Cipla Sun Pharma
Glaxo SmithKline Nicholas Piramal
Aurobindo Pharma Torrent Pharma
Aventis Pharma Lupin
Cadila Health Novartis
Alembic Pfizer
Aarti Drugs Wockhardt
Elder Pharma Wyeth Ltd
Ajanta Pharma Sterling Biotech
Abbott India Ipca Laboratories
Astrazeneca Pharma Unichem Lab
Ind Swift Lab Panacea Biotech
Strides Arcolab Orchid Chemicals
Major players
India's top ten pharmaceutical companies have reported a record of 24.57% growth in their net
profits during 2007-08 where as their bottom-line grew by 14.68% over 2006-07. The top ten
listed companies based on consolidated net sales include Ranbaxy Laboratories, Dr Reddy's
Laboratories Cipla, Sun Pharma Piramal health care, Lupin, Wockhardt, Jubilant Organosys,
Aurobindo Pharma, Cadila Healthcare; posted strong growth during 2007-08 (Table 3).The
consolidated sales of the top ten companies rose to Rs349.01bn in 2007-08 from Rs304.34bn
reported in the previous year where as the net profit was Rs54.87bn in 2007-08 as compared to
Rs44.05bn in 2006-07. Ranbaxy occupied the first place with Rs69.82bn followed by Dr
Reddy with Rs 49.14bn.

34
Growth drivers
1. Mergers & Acquisitions
The year 2006-07 saw only a few outbound acquisitions and instead of bigwigs like Ranbaxy,
mid-size firms like Sun Pharma and oncology drug maker Dabur Pharma hogged the limelight.
Sun Pharma acquired Israel's Taro Pharmaceutical Industries, a multinational generic
manufacturer for about INR18 billion in the year's biggest in the sector. Sun Pharma, Jubilant
Organosys, Ranbaxy and Zydus Cadila are the major firms that came out with high valued
acquisitions. (See table)

35
Sun Pharma acquired Israel's generic manufacturer Taro Pharma for USD 454m
(approximately INR18, 370m). This is the second largest overseas acquisition by an
Indian drug company after Betapharm acquisition by Dr Reddy's for USD572m.
Jubilant Organosys Ltd acquired the US-based Hollister-Stier Laboratories for
USD122.5m. The acquisition would provide Jubilant with fast growing contract
injectables manufacturing business and also a stable and profitable allergy business.
Ranbaxy has acquired Be-Tabs for USD70m, which will make it the fifth-largest
generic pharma company in South Africa. Ranbaxy acquired 14.9% stake in Jupiter
Biosciences, a Hyderabad-based company.
Zydus Cadila bought Brazilian company, Quimica e Pharmaceutical Nikkho do Brasil
Ltd (Nikkho), which is purely into the market of 'branded generics', for USD26m after

36
signing an agreement to acquire 100% stake. With this acquisition, the companies will
basket generic products across various therapeutic segments such as general medicine,
paediatrics, gynecology, neurology, gastroenterology, otolaryngology, dermatology
and others. Zydus Cadila will strengthen its base in Japan and be accessible to the
USD3 billion Japan's generics market from its acquired Nippon Universal
Pharmaceuticals Ltd.
Ranbaxy Laboratories Inc, the wholly-owned US subsidiary of the Indian pharma
major, acquired the rights to 13 dermatology products from Bristol-Myers Squibb
(BMS) for a value of USD26m (INR1,050m). These 13 products totalled USD15m
(INR600m) in 2006 and are used in the treatment of dermatitis, psoriasis, fungal
infections, scabies and acne. This acquisition will strengthen Ranbaxy's franchise in
dermatology arena.
Lupin Limited acquired a majority stake in Japanese generic drug maker Kyowa
Pharmaceutical Industry Co Ltd. Lupin Limited acquired Rubamin Laboratories Ltd
(RLL), part of the Baroda-based Rubamin group, for an undisclosed amount. The
pharmaceutical business of the Rubamin group, RLL focuses largely on advanced
intermediates for active pharmaceutical ingredients under the contract research and
manufacturing model.
The year 2007 witnessed only 25 M&As with 15 cross border transactions with an
estimated value of about USD600-700m in the Indian pharmaceutical sector. The
industry restricted itself to consolidation on the domestic turf rather than looking for
acquisitions abroad.
2. CRAMS
The Indian pharmaceutical outsourcing market was valued at USD1.27 billion in 2007 and is
expected to reach USD3.33 billion by 2010, growing at a CAGR of 37.6%. The Indian
CRAMS market stood at USD1.21 billion in 2007 and is estimated to reach USD3.16 billion
by 2010. The Indian contract research industry has grown tremendously over the past few
years. It has witnessed the emergence of several CROs in the area of drug discovery and
development over the last decade. Contract research in India is estimated to be USD345m in
2007 and is likely to grow at a CAGR of 22.7%. In 2006, clinical trials accounted for 52% of
the total outsourcing market of CROs in India, followed by pre-clinical trials, which
constituted about 30%. Research chemistry and research biology together constituted 18%.

37
The Indian CMO market stood at USD869m in 2007. It is expected to see a CAGR of 41.7%
to reach USD2.4 billion by 2010. Chemical synthesis constituted 60% of the total outsourcing
market by CMOs in India, followed by formulation and packaging which constituted about
40%. India is emerging as one of the most competitive CRO markets with more than 70
clinical research organizations and central labs available. Local CROs providing the full
spectrum of services are Vimta Labs, which is India's largest provider, Asian Clinical Trials
(ACT) and ClinInvent Research, headquartered in Mumbai Clinigene International in

Bangalore is a Biocon subsidiary and specialises in clinical trial, regulatory and accredited
central reference laboratory services. Siro Clinpharm, Mumbai offers clinical services, data
management, clinical quality assurance and regulatory consultation.
3. USFDA Plants
India has the highest number of USFDA approved manufacturing facility outside the US.
Therefore it is in a good position to manufacture bulk drugs and export to regulated markets in
the coming years. There are over 80 USFDA-approved manufacturing facilities in India
(2007) and the number is estimated to grow at the rate of 30% by the end of 2008. This would
make India the only country having the largest number of such plants outside the US. As per
2006 figures, even China, supposedly the biggest threat to Indian business in CRAMS, had 27
FDA-approved manufacturing sites. India has almost three times the number of FDA-
approved plants than China has. This is one of the most vital factors for outsourcing
manufacturing services to India by the multinationals and global pharmaceutical companies.
Indian companies have been at the forefront, both in terms of DMF and ANDA filings with
approximately 35% share in DMFs and about 25% share in ANDAs. Over the last two to three
years, several second/third tier Indian companies have aggressively scaled up their
ANDA/DMF filings in the US market. India is also leading in terms of the number of DMF
filings. While India has filed 1,155 DMFs between January 2000 and June 2007, China filed
only 329. In 2007 itself, India has filed 110 DMFs, which is almost three times that of China's
38 filings.

38
4. High Growth of Generics / Patent expiries

The Indian pharma industry is well positioned to capture much of the USD65 billion new
businesses expected to open up globally in coming years. Indian pharma industry accounts for
22% of the global generics market. Bearing in mind that USD65 billion of prescription
medicines in Europe (USD25billion) and the US (USD40billion) are to lose their patents in
2007-08; India is ideally positioned to sweep up much of that new business. Indian firms are
likely to take around 30% of the increasing global generics market in the coming years. The
generics market is taking on increasing importance globally, in contrast with the branded
pharmaceutical market which has got stagnated in the last few years. The loss of patent
protection by 2009 of almost USD80 billion worth of top selling drugs will be the main driver
of this growth. Low production costs give India an edge over other generics-producing
nations, especially China and Israel.

39
R&D
With a number of blockbuster drugs getting off patent in the coming years and increasing R&D
costs coupled with low R&D productivity, major pharmaceutical companies worldwide are
finding it difficult to maintain their bottom lines. The major pharmaceutical companies in India
are the main R&D investor in the country. The R&D expenditure of these 15 major companies
has grown up by 8.9% to INR21.01 billion in 2006-07 from INR19.27 billion in 2005-06.
Moreover the top Indian pharmaceutical companies have started the new business strategy of
de-merging of their R&D activities into a separate company. So now companies can focus
40
more on NCEs and NDDS. The model of R&D investment by Indian companies is shifting
from core process research to new drug development and novel drug delivery systems
(NDDS).The number of Drug Master File (DMF) filings made by Indian firms has increased
considerably from 14% in 2000 to 50% in 2007 (Jan- Jun). In 2007, the pharmaceutical
company Cadila Healthcare Pharma has topped the table by 25 DMF filings followed by Dr
Reddy with 20, Aurobindo at 15, and Sun Pharmaceutical with 15 DMFs.
Formulations: Broad segmentation
In India, the chronic

segment, which
constitutes only 28 per
cent of the market, is
considered a high value
segment and market
growth is mostly related
to value growth; whereas
the acute segment which
constitutes as much as
72 per cent of the market is low value segment in which growth is driven by volumes.
Chronic diseases relate to long-term illnesses that require long-term medical care. Most of
these diseases are caused by lifestyles changes, eating habits and rise in stress. In recent years,
India has witnessed a rise in lifestyle related diseases such as cardiovascular diseases and
central nervous system diseases. Acute diseases, on the other hand, are related to short-term
illnesses and require short-term care. Diseases caused by infections, parasitic attacks,
gastrointestinal disorders, etc fall under this category. As medicines in acute segment are of
mass consumption, most of them qualify for price control.
Table: Market growth in acute & chronic segment

41
Value represents retail sales of formulations in domestic market during 12 months

ended June 2008 Due to high level of fragmentation none of the players had a market
share of more than 6 % (even the top players Cipla & Ranbaxy commands only 5.24 &
5.09 per cent market share on the basis of retail sales respectively).
Chart: Market share of top players
3.3 THE GROWTH SCENARIO

42
The Industry is a largely fragmented and highly competitive with a large number of players
having interest in it. The following chart shows the breakup of the growth (YoY) of Indian
pharmaceutical industry in last six years ending 2003.
Vol. growth of existing products

Indian contract research industry growing at 40-50 per cent
The Indian contract research Industry has grown tremendously over the past few years. It has
witnessed the emergence of several CROs in the area of drug discovery & development over
the last decade.
India to capture US$ 250-300 million or 10 per cent of global clinical trials by 2010
India is emerging as a favored global destination for global drug development companies.
Recent changes in India’s healthcare policies and a maturing regulatory environment have
significantly brought down the risk of shifting more clinical research from the developed
countries to India. The clinical research industry in India is presently estimated at over US$
100 million.
3.4 INVESTMENT IN THE SECTOR
Most of the capital investment plans announced by the domestic players relate to expansion or
setting up of formulations projects, followed by new bulk drug manufacturing projects.
Moreover, a considerable amount of investments are expected to be utilized for setting up
R&D centers, SEZs and pharma parks. In June 2008, project under implementation were 272
with the project cost of Rs 165.2 bn.
Table: Capex in the sector

43
During April 07- Feb 08, FDI worth Rs 93 bn infused in the domestic industry. In December
2007 alone, FDI infused was Rs 5.3 bn.
Table: FDI Inflow in the sector
Demand drivers
India’s per capita drug expenditure has been growing at a CAGR of 12.1 per cent during 1981 -
2006. The key drivers in demand in pharma sector are:
 Rise in population accompanied with favorable change in age structure
 Emerging middle class and growing urbanization will create strong demand
 Improving healthcare infrastructure
 Growing healthcare insurance market
 Growing health awareness
3.5 PROFITABILITY AND COST STRUCTURE

44
Sour
ce: Business Today
Mar – 05 Mar – 04 YoY% Change

Name Net PAT (Rs Net PAT (Rs Net Sales PAT
Sales(Rs Millions) Sales(Rs Millions) (%) (%)
Millions) Millions)
Ranbaxy 7735 677 8125 1485 -4.80% -54.4 %
Cipla 5350 1056 5994 1017 -10.70% 3.80%
Dr.Reddy’s 3560 -88 3969 -351 -10.30% NA
Sun Pharma 3048 921 2349 887 29.80% 3.80%
Wockhardt 2015 380 1943 411 3.70% -7.50%
Divis Lab 1095 230 983 220 11.40% 4.50%
E Merck 733 93 828 144 -11.50% 35.40%
Novartis 791 4 1023 209 -22.70% -98.10%
Overall results of most pharma companies fell below expectations. Uncertainties over
VAT, increasing operating expenses, product patent issues and pricing pressures in US
and Europe hit the bottom lines of most companies.
Indian pharma companies have undertaken combined total capex of over US$ 1 billion
between FY05 and FY05, and the net fixed assets of Indian pharma companies have
grown by 50 per cent to US$ 1.6 billion during this period.
Most of the capex has been in USFDA-approved plants in anticipation of the large
wave of patent expiries in 2006. There has also been a surge in the number of plants
receiving USFDA approval in India.

45
Source Company Annual Reports; Citigroup Investment research.

This includes - Ranbaxy, Reddy, Cipla, Sun Pharma, Wockhardt, Cadila, Jubilant,
Matrix, Glenmark, Aurobindo, Nicholas and Biocon.
3.6 EXPORTS
Exports of pharmaceutical products from India have grown at a CAGR of 17.62 per cent during
the last 5 years ended FY 08 at Rs 291 billion. Sharp rise in exports can be attributed to
changes in the industry market dynamics both at the domestic as well as the international level.

46
Chart: Export Value (Rs bn)
Indian pharmaceutical exports are increasingly being directed to developed and highly
regulated markets, which is growing at 7-8 per cent during past few years. The proportion of
exports to developed and highly-regulated markets (USA, Germany, and UK) to India’s total
pharmaceutical exports has risen from 24.5 per cent in FY 04 to 27.4 per cent during FY 08.
Chart: Export to regulated market
In addition, Indian pharmaceutical companies are also catering to developing markets, which
are recording high growth during the past few years. In comparison to 7-8 per cent growth in
regulated markets, developing countries in the Latin American region recorded a growth rate of
11 per cent during 2007 in terms of domestic sales value.

47
Challenges faced by the Indian pharmaceuticals industry:

 Government policies regarding range of price increase
 Increase in prices of raw materials
 Increasing competition
Over the next few years, the industry is expected to continue its robust growth. Industry
research services estimate the Indian pharmaceutical industry to grow at over 18 per cent in FY
09 to reach at Rs 888 billion due to fast rise in revenues from exports and CRAMS. Industry
research services also estimate the CRAMS revenue of the Indian pharmaceutical industry to
grow at CAGR of 40 per cent per annum during the next 2 years. This will give way for
expansion of the generic market and will also boost outsourcing activities. The Indian CRAMS
business is set to grow given the sizeable amount of drugs going off patent. The increase in
generics market worldwide will lead to increased outsourcing activities.
Estimates suggest that the domestic market in acute & chronic segments will grow over 14 per
cent till FY 09 to reach near Rs 486 billion. Of this, chronic segment (CVS, CNS and Diabetes)
is likely to witness faster growth at 19 per cent while acute segment would witness near 13 per
cent growth during this period. Domestic demand for medicines is set to rise substantially in

48
the years to come. Rising population, expanding economy, favorable economic policies,
changing pattern of diseases, increased spending on healthcare and better health infrastructure
are likely to provide the required impetus to the Indian pharmaceutical industry to sustain its
growth at double digit rates over the next few years.
Projected Pharmaceutical Market, 2004-2009
Market (US$
Year millions)
2004 8,200
2005 8,790
2006 9,423
2007 10,102
2008 10,829
2009 11,609
Source: Epsicom
A new development in the area of outsourcing is that the outsourcing activities are
progressively moving out of U.S. and Europe to others, notably, China, India, Korea, Russia
and Taiwan. Over the years some of the premier companies in the U.S. such as Albany
Molecular research Inc, J-Star Research of New Jersey and many others have seen a decline in
revenues due to more companies going off-shore primarily due to lower costs. For example,
it has been reported that while the cost to a company of a Ph.D. scientist in a CRO is $ 250,000
in U.S. the corresponding figures in these countries will be between $ 45000 to 70,000.
Indian pharmaceutical industry does not figure among the top markets in the world although it
has the second largest population in the world. Indian pharmaceutical industry has not lived up
to its potential due to economic and regulatory reasons. In fact, the list of problems is endless.
Health insurance sector is in its infancy. The consumption rates are too low. Large parts of
population do not have access to health care facilities. Yet no other market holds as much
promise as India does. There are several reasons behind this optimism. GDP growth of Indian
economy has been consistently been above 5.5 per cent in the past five years. Indian economy
is expected to grow at a fast rate in the coming years leading to a rise in real incomes. Higher
incomes will improve demand for medical products and services.
Indian market may also see new concepts such as pharmaceutical benefit management or
healthcare solutions. Market growth will be accompanied by structural changes. The ageing of
49
Indian population presents a unique set of opportunities to pharmaceutical companies.

Research is an area calling for big decisions. Indian companies have been so far concentrating
on process research plundering molecules invented by others at will. But introduction of
product patents will curb such piracy. Now Indian companies have to figure out ways of lying
their hands on new chemical entities. Some Indian companies have forayed into basic research
and met with mixed success. A big market is opening up in contract production and contract
research. Multinationals are looking at outsourcing as a way of cutting costs.
With strengths in low cost production and a large pool of technical and scientific
personnel, India could develop as a manufacturing base for global pharmaceutical
industry.
Contract research is another area offering plenty of opportunities. Indian players will also
have to decide on their export strategy. Indian companies have made money by exporting
products to countries where product patents were not in force.
But this market will progressively shrink with more and more countries embracing product
patents. With India embracing product patents, production of patented drugs will cease. This
leaves Indian players with export markets in either generic markets or outsourcing. Once in a
lifetime opportunity is set to unfold in the generic markets in the next few years. Patented
products worth US$40-50 billion will lose patent protection in the couple of years.
But exploiting this opportunity will mean sizeable commitment of funds in terms of filing
Abbreviated New Drugs Applications (ANDAs). Rising health care expenditures all over the
world are also forcing substitution of prescription drugs with cheaper generics. Global generic
markets definitely hold a lot of promise, but the competition will be intense and the margins
are thin. Indian companies have the capability to succeed in this space.
Mergers and Acquisition

50
Currently, as the generics business is weighed down by stiff competition and declining R&D
productivity, alliances and partnerships is the need of the hour for the pharmaceutical industry
rather than the preference. In recent times, most of the leading players have inked M&A deals
across the globe. In 2006, the domestic pharma sector executed more than 40 deals with 32
cross border transaction worth US$ 2000 mn and it includes deals like Dr Reddy’s acquisition
of Betapharm of Germany for Euro 480 mn (Rs 2550 cr) and Ranbaxy Terapia buy in Romania
for US$ 324 mn (Rs 1250 cr approx). In 2007, Indian pharma sector witnessed 25 Mergers &
acquisition deals, with 15 cross border transaction worth US$ 600-700 mn. There were a total
of eight acquisitions in the Jan-March period of 2008 with a total announced valuation of $152
million; while in April 2008; Indian drug firms acquired six overseas companies, including the
$255 million acquisition of US-based Draxis Health Inc by Jubilant Organosys. Hyderabad-
based Dr Reddy's Laboratories was the most aggressive company during the four-month
period, buying three companies in Europe and the US.
Table: Major Foreign Acquisitions by Indian Companies (2006, 2007 & 2008)

51
Thus, mergers and acquisitions has proven tool to seize growth opportunities and is widely
resorted to by players by either moving up the value chain or by integrating downstream
production. More mergers & acquisitions and consolidation activity in near future is expected
which is driven in the medium term by implementation of the new patent regime and generic
companies looking to establish a low-cost base out of the country.
3.7 LARGE DEALS IN THE PHARMA SECTOR
Target Buyer Value ($ million)

Betapharm Dr Reddy’s 570
Doc Pharma Matrix 400
Terapia Ranbaxy 324
Solutia’s Pharma Business Dishman Pharma 74.5
Pfizer’s Morpeth Facility Nicholas Piramal 50
Further, companies also entered into marketing tie-ups with foreign companies or set up their
subsidiaries. The acquisition is not only in the other parts, but these companies are spreading
their business by acquiring domestic companies also. According to analysts the acquisition root
is saving tremendous efforts and time of these companies and M&A activity will increase in
the near future. The Indian pharma companies have entered very aggressively into international
52
market giving tough competition to international giants. Major players are concentrating on
advanced profitable markets like USA and Europe.
Indian pharma companies, of late, are spending heavily on R&D to meet the new challenges
and overcome competition. Ranbaxy is spending over $ 100 million for capacity expansion in
the current year. Nicholas Piramal planning investment of Rs 200 crore on R&D and up
gradation Lupin is investing Rs 20 crore in Aurangabad for manufacturing anti-TB products.
Ranbaxy is set to launch 20 new products and Lupin is launching herbal products. Dr Reddy
launched Ibuprofen and Nefazodone in North America. Ranbaxy's US subsidiary received
tentative approval from USFDA for manufacture of Auinapril Hydrochloride tablets for
hypertension drugs.
The future of the pharma companies, however, to a great extend depend on the government
policies such as DPCO, VAT and implementation of new patent law. Thus with Mergers and
Acquisitions and the spending on R&D would lead to change in the market structure of
the pharmaceutical industry. Taking into account the scenario of the pharmaceutical industry
in the global market, we would take short and long term planning to overcome the crisis in the
industry brought about by increasing cost, reduced productivity in R&D, dropping net selling
prices. It’s been seen that new revenue equations will favor the pharma industry in the coming
five years.
We will focus on targeted treatment solutions with health care kiosk, integrated network
approach. The kiosk will aim at the managed care model along with personalized drugs. New
revenue models are favoring pharma companies despite the fall of block busters. We need to
significantly cut down costs, by as much as 13.5% of the revenues, and offset future loss of
revenues caused by withdrawing block busters. The winning proposition will come in the form
of short and long term strategies. Short term strategies are mainly geared towards pre and post
patent expiry directives and the launch of semi block busters. Long term strategies revolve
around owned health care kiosks and consistent improvement in efficiency and cost reduction
with the help of the integrated network model.
The deciding factors for profitable growth and survival of this industry will be
 Efficient use of Knowledge engineering techniques

53
 Structured management of innovation

 Setting up systems to enforce the acquired rights and
 At the same time evolving creative process of cooperative working and sharing of benefits
Outlook
India has had a strong domestic pharmaceutical industry and a rapidly expanding market with
a population of over a billion and a rapidly expanding economy. Prevalence values of many
diseases are likely to increase with expansion of population, urbanization and with higher
identification rates in the coming decade. As per the Cygnus estimates the Indian (in the
figure) pharmaceutical industry is likely to double its value to USD14.70billion in 2011. The
investment in R&D, filling of higher number of ANDAs and DMFs in highly regulated
market, mergers & acquisitions, in-licensing, skilled labour force, high standard scientific base
and revenues from CRAMS will give necessary edge to Indian companies in the coming years.
India has over 80 FDA-approved manufacturing facilities in 2007, which is estimated to grow
at the rate of 30% by the end of 2008.

54
CHAPTER 4 COMPANY PROFILE
KRR DRUGS & INTERMEDIATES PVT LTD.
(FORMERLY MEDEVA LABORATORIES PVT LTD)
Name of the Company : KRR DRUGS & INTERMEDIATES PVT. LTD.
Constitution : Private Limited Company

55
Date of Incorporation : 30th January,2002
Registered Office : 406, Aditya Trade Centre,

Maitri Vihar, Ameerpet,
Hyderabad-500 038
Manufacturing Facilities : Unit –I (Existing)

Kazipally, Jinnaram Mandal
Medak Dist
Andhra Pradesh
Unit II( Proposed )

Plot No 78, survey No 37p,46p & 40p, Thanam
Village,
Jawaharlal Nehru Pharma City,
Parawada,
Visakhapatnam
Andhra Pradesh
Proposed Capacity (Per Annum) :

Mebeverin - 36840 KGS
Entacapone - 18420 KGS
Fluconazole - 36840 KGS
Tramadol - 90840 KGS
Citerazine - 90840 KGS
Biperiden HCI - 324 KGS
Cefdinir & Cefexime Side Chains – 36840 KGS
Nature of Industry : Manufacturing of Bulk Drugs & Bulk Drugs

Intermediates
Promoters : Mr. V. Venugopal Reddy

4.1 INTRODUCTION
KRR Drugs & Intermediates Pvt. Ltd. (formerly known as MEDEVA Laboratories Pvt. Ltd.) is a part of
FINE GROUP OF COMPANIES, a group involved in diversified fields of business. KRR Drugs is in

56
the activity of manufacturing Bulk Drugs and Bulk Drug intermediates. Initially it was manufacturing
Omeprozole, which is an active pharmaceutical ingredient (API). The company has entered into an
agreement with M/s. Orchid Chemicals & Pharmaceuticals Ltd. which is a 100% Export Oriented
Unit (EOU) and is one of the leading Pharmaceutical companies in India. Orchid Chemicals is a well
known company engaged in the manufacture of tablet, capsule and injectibles in a huge way. The
understanding with Orchid Chemicals is to manufacturing certain products on a conversion basis
initially for a certain period of time and then gradually changes to total sales of the same products. The
company is now proposing to start producing the products on a sale basis which will enable the
company to take off in the growth path.
1. Promoters
The promoters are Mr. V. Venugopal Reddy, Mr. V. Vamsi Krishna and Mr. D. Venkateswara Reddy.
The promoters are dynamic and have rich experience in the business and are men of means. They have
proven track record of establishing and profitably managing Bulk Drugs and Bulk Drug intermediates
businesses.
3. General Commercial Capability

With over 15 years of experience in the industry, Fine Group has exhibited sound commercial
capabilities in terms of manufacturing of Bulk Drugs and Bulk Drug intermediates. Successfully
running and making continuous profit indicates a sound commercial capability and soundness of
business operations sustained over the period.
4. Credibility
Good Commercial capability and also longevity of relationships with Pharma Majors and other
Industries indicates a healthy market credibility and soundness of business operations.
5. Financial Strength
Credit Facilities and timely repayment and continued financial support indicate excellent financial
strength of the Company. The promoters are men of means and are capable of mobilizing the required
resources.
6. Track Record
The promoters of KRR Drugs have a successful track record of manufacturing Bulk Drugs and Bulk
Drug intermediates for over 10 years.

57
7. Products
The existing products are production and conversion of Cephalosporin-G, Vinyl Ester, and TP-Acid.
The company intends to manufacture the proposed products:
Mebeverin - 36840 KGS

Entacapone - 18420 KGS
Fluconazole - 36840 KGS
Tramadol - 90840 KGS
Citerazine - 90840 KGS
Biperiden HCI - 324 KGS
Cefdinir & Cefexime Side Chains - 36840 KGS
8. Risk Analysis and Mitigation

The parameters, which significantly influence the project viability, are identified as:
 Raw Material Price and
 Selling price of the drugs.
4.2 THE FINANCIAL HIGHLIGHTS OF THE COMPANY FOR THE LAST THREE
YEARS ARE AS BELOW:-.
(Rs. In Lakhs)
2005-06 2006-07 2007-08
Particulars Aud. Aud. Prov.
Gross Sales 292.49 463.02 543.73
Operating profit -26.79 22.10 39.33
Interest 45.59 65.75 45.59
Depreciation 35.63 41.33 -26.79
Profit Before Tax -26.79 10.12 39.33
Profit After Tax -17.16 4.19 30.56
4.3 PROMOTERS BACKGROUND
The Company is managed by a Board of Directors consisting of the following members:
Mr. V. Venugopal Reddy

58

PROMOTERS
1. V.VENUGOPAL REDDY, (M.Tech), Managing Director: Mr. Venugopal Reddy is a

postgraduate from REC-WARANGAL, in the field of power systems. He has over 30 years of
experience in various fields and is also a class-A civil contractor. He enjoys a huge goodwill
among his peers and is well known for his social endeavors. He is a true entrepreneur and has
successfully executed various projects. He was also a well renowned sportsman during his
academic years. He is also Managing Director in Fine Fab Pvt. Ltd.
2. V.VAMSI KRISHNA, (M.S.) Executive Director: Mr. Vamsi Krishna has completed his
graduation as a bachelor of engineer in the field of electronics and communication. He has also
completed his masters’ degree in the field of computer science, in Northern Illinois University,
Chicago, U.S.A. He has also worked in the U.S.A. for over 2 years in one of the most reputed
companies in the U.S.A., before returning back to India. He has since been instrumental in
developing the various companies & firms in the group. He is also Executive Director in Fine
Fab Pvt. Ltd and Managing Director of Hexagon Constructions, Indira Dairy Pvt. Ltd.
3. D.VENKATESWARA REDDY (B.E.), Director: Mr. Venkateswara Reddy has completed

his graduation as a bachelor of engineer in the field of Mechanical Engineering. He has over
17 years of experience in the field of steel fabrication and is known to lead by example with
respect to work ethics. He is also Director in Fine Fab Pvt. Ltd and Managing Director of Fine
Alloy Castings Pvt. Ltd.
4.4 ASSOCIATES

59
Hexagon Constructions is in the field of quality construction for about one year and has already
completed many buildings. More projects are in the offing. Some of the prestigious projects
taken up in the recent past include:
Several blocks at the Orchid Research Laboratotries Ltd. At Shollinganallur, Chennai

Several blocks in the M/s. Orchid Health Care, formulation campus at Irrungatukotai,
Tamil Nadu.
Several blocks at the Aurangabad campus of M/s. Orchid Chemicals & Pharmaceuticals
Ltd. ,
Entire campus of Parle Agro products Ltd. At Pashamailaram, Hyderabad.
Financial Highlights
Rs in Lakhs
PARTICULARS 2005-06 2006-07 2007-2008
(Audited) (Audited) (Prov)
Sales 1073.54 2077.95 2654.86
Operating Profit (PBDIT) 115.40 192.16 276.08
Interest 25.55 30.14 27.39
Profit before Depreciation 89.85 162.02 248.69
Depreciation 12.66 19.66 20.70
Profit Before Tax (PBT) 77.19 142.35 227.99
Profit After Tax (PAT) 77.19 142.35 227.99
The company is engaged in the activity of manufacturing stainless steel, mild steel and ferrous
aluminum castings. The plant is currently producing around 1700 metric tonnes of castings per
annum. The plant is ISO 9001:200 certified. The company has been rated SE-3B by CRISIL.
Summarized Financial Position Rs in Lakhs
PARTICULARS 2005-06 2006-07 2007-2008

(Audited) (Audited) (Prov)
60
Sales 99.79 495.66 677.08

Operating Profit (PBDIT) -5.86 47.10 79.59
Interest 12.19 31.01 38.55
Profit before Depreciation -18.05 16.09 41.04
Profit Before Tax (PBT) -23.94 5.07 29.63
Profit After Tax (PAT) -15.97 2.03 16.72
A milk chilling plant near Kavali town is set up... The plant has started production in the FY
2006-07. The plant has a capacity to chill about 20,000 liters of milk per day. A marketing tie-
up has been made with M/s. Vyshnavi Foods Pvt. Ltd. Another unit is being at up at Kaligiri,
Nellore Dist. This is slated for production in the first haly of the current year having a capacity
of 15,000 litres per day The Company has been rated SE-2B by CRISIL.
Summarized Financial Position (Rs. In lacs)

PARTICULARS 2006-2007 2007-2008
(Audited) (Provisional)
Sales 354.21 775.57
Operating Profit (PBDIT) 21.92 55.88
Interest 13.50 17.47
Profit before Depreciation 8.42 38.42
Depreciation 7.08 7.47
Profit Before Tax (PBT) 1.34 30.94
Profit After Tax (PAT) 0.34 20.86
Fine Fab Pvt. Ltd., an ISO 9001:2000 certified company, is primarily into steel fabrication of
primarily chemical equipment which are used in bulk drugs and pharmaceutical companies,
like Chemical Reactors, Heat Exchangers, Receivers, Storage Tanks, Nutch Filters, and Driers
etc. Other equipments which are manufactured include Radial gates, hot mix plants etc. The
equipments are also exported to Middle East and East Asia. Finefab has also received the
excellence award for best exporter by the All India Small scale industries counsel during the
year 1997. The company has been credit-rated SE-2B by CRISIL.
Summarized Financial Position
(Rs. in Lakhs)
61
PARTICULARS 2005-06 2006-2007 2007-2008

(Audited) (Audited) (Provisional)
Sales 507.40 648.30 787.95
Operating Profit (PBDIT) 12.76 16.17 38.02
Interest 5.47 17.10 38.55
Profit Before Tax (PBT) 7.03 10.10 31.88
Profit After Tax (PAT) 2.87 5.03 20.72
CHAPTER 5

62
REVIEW OF LITERATURE
“The new economy”, “the information economy”, “the digital economy”, “and The network
economy” The list of different names of the business environment, or economy that is
emerging today could be very long. But, what is really new with this economy? From
literature, it is possible to identify at least three different areas that drive and shape new
conditions in business today. These areas are knowledge, globalization and technology.
According to Blomgren & Kuikka (1998), the new economy is described as knowledge-
intensive, where the focus has shifted from physical assets to brain capacity. The most
valuable asset within knowledge companies is the intellectual capital, which gives the
power to the employees. These companies are evaluated according to the intellectual
capital rather than physical investments. The major goal within these companies
becomes to generate, develop and spread knowledge and innovations. Tapscott (1996)
argues that brain rather than muscles will create more of the economy’s value and
knowledge work becomes the basis of value, revenue and profit. Companies have to add
knowledge through the whole value chain. Additionally, Bohlin (1992) states that, besides
experience, humbleness and power of initiative, knowledge becomes one of the
crucial factors for creating competitive advantage.

63
Tapscott (1996) further argues that, since knowledge and technology know no boundaries,
globalization becomes even more important in the new economy. New economic and
political regions and structures will lead to a decline in the importance of national borders
and increase the interdependencies among countries. Blomgren & Kuikka (1998) mean
that different regions will be more important than national borders. In addition, Kelly (1998)
also points out that the new economy is extremely world-wide, meaning that
companies are competing in an open market without any national borders. Furthermore,
also Blomgren & Kuikka constitute that the key success factor for companies in this economy
is, in the end, to act globally.
Finally, Tapscott (1996) points out that the main characteristic of the new economy is
technological changes. In the traditional economy, information flows w e r e p h y s i c a l . Cash,
i n v o i c e s a n d face-to-face m e e t i n g s w e r e t h e dominating ways of doing business.
Today, however, more or less all information is transferred digitally and information
becomes reduced to bits stored in computers, racing at the speed of light. In addition,
Blomgren & Kuikka (1998) conclude that modern information technologies will become
critical strategic tools in the future. Information technology will result in new drivers and
possibilities when it comes to doing business in the new economy.
I believe that the characteristics discussed are not new phenomena, which are not highlighted
before in business debates. Some of them have been discussed for several years, also in
traditional industries. However, in the context of the new economy, they seem to become
even more important and the reasons for changed market conditions, which set the rules for
companies today. Therefore, the next question is what consequences the changes will have
for companies competing in this new environment.
From Downes & Mui (1998), we find that one important implication of the changes is
the occurrence of ‘killer applications’. Killer applications are new products and services
that dramatically change the power balance between the actors of the market. For instance,
Blomgren & Kuikka (1998) mean that one of the major differences to the traditional
industry is low barriers to entry. Therefore, it is very important, in an early stage, to

64
identify and react to changes in the market, such as new technologies within services and
products.
Because of technological development and globalization, new competitors are born every
where and in a very short time. The new conditions make new demands on managers, to
be extremely future-oriented and innovative. Low barriers to entry give organizations
high margins very fast, but can also dramatically change the profit to loss. In comparison,
Shapiro & Varian (1999) state that the industrial economy is populated with oligopolies, where a
few large firms dominate the market and where market shares will fall only gradually. In
contrast, the new economy is populated by temporary monopolies, which increase the
importance of speed and future orientation. Blomgren & Kuikka (1998) and Tapscott (1996)
mean that successful companies within this economy must change constantly to be able to
stay ahead. New products and services are born and product life cycles are counted in days or
weeks rather than years.
From literature, we find that timing and speed have become a business competitive
strategy. Time has been a competitive advantage comparable to technological products and services.
Time to market, time to volume, time to cash flows will decide who will set the standard
and the structure and get access to attractive and strategic market shares.(Blomgren &
Kuikka, 1998, Tapscott, 1996). Furthermore, Shapiro & Varian (1999) mean that the old
industrial economy was driven by economies of scale while the new economy is
driven by economies of networks. Since new ideas are born continuously, former
competitors may become potential partners. Today, companies need partners and alliances in order to
get access to technology and market shares.
Networks become crucial for reducing risk and time for development, lowering the costs and
increasing flexibility. Constant innovation is similar to constant consumption of new ideas,
which lead to that organizations are living on the edge of constant chaos. The speed and the
time may decide who will be eaten and who will not.
Shapiro & Varian (1999) conclude that the critical success factor lies in the computer
network, if we can share the same software and the same files. It becomes very
dangerous to fall below the critical mass. Shapiro & Varian call this the network effect,

65
meaning that companies connected to the bigger network will be stronger while
companies that are not connected will be weaker. There appears a win-win game for all
parties involved. The network economies and network effect make co-operation more important than
ever. The success lies in finding the right partners instead of fighting with each other.
Consequently, they mean that the competitive strategy for the new economy is to combine
different solutions into integrated networks in order to achieve the critical mass of users.
It follows from this discussion that a set of new conditions seems to have arisen, which
may affect the business environment and the market conditions for companies. One
consequence of the described changes in the business environment is that strategic
alliances between firms seem to become more important due to increased importance of
networks, speed and timing. Hence, we believe, in the context of these new conditions there
may be new reasons for why companies conduct M&As in the new economy and how the process is
managed in comparison to traditional industries.
From a theoretical point of view, M&A research can be divided into two basic approaches.
The first approach of research sees the outcomes of M&As as results of individuals’
actions and behavior in the company. This approach focuses on the transaction as an
internal process where proper planning and integration are stressed. Failures are often
explained by managers’ inability and lack of knowledge of handling internal issues in the
process. Thus, the internal approach is based on the assumptions that companies'
conduct changes in response to internal demands. From this point of view, M&As are
conducted in order to increase the internal efficiency. (Jemison & Sitkin, 1986)
In addition to this internal approach, other researchers adopt an environmental perspective of

what drives M&As. The main assumption of this approach is that organizational transformations
often take place in response to environmental demands. Buono & Bowditch (1989) argued
that, although companies tend to behave and act in response to internal demands, most
major organizational changes occur in accordance to the organizations’ interplay with its
environment. Companies that are acting in a stable and predictable environment are
more likely to keep old routines and structures.

66
Buono & Bowditch (1989) propose that when companies’ external environments meet
fundamental changes, companies tend to respond by changing their structures.
Uncertainties and ambiguities tend to emerge when companies try to understand and respond
to new conditions in their environment. Additionally, Meyer & Rowan (1977) argue that
companies are open systems that interplay with their environments. They also mean that
external forces will influence companies to change their structures. Hence, according to the
characteristics of the new economy, companies seem to be affected by a set of new
environmental factors, such as increased momentum in technology changes and increased
importance of global networks. With the environmental approach in mind, it is reasonable
to suggest that changed conditions may influence the way managers are carrying out M&As.
5.2 THEORETICAL APPROACH OF THE THESIS

In figure 1 below, the study presents a schematic illustration of essential concepts of our
study and how they are related. The figure makes no demand to be a causal model but should
rather be seen as a conceptual scheme. The model serves as a tool for the collection of data
and theoretical and empirical analyses. As shown in the model, the study divide the
internal M&A process into three different phases. The idea phase, which includes the
initial idea to merge and the motives behind the decision-making phase, where the idea to merge is
evaluated and decision is taken. The integration phase, including how managers
look upon and plan for integration issues
Furthermore, as the study proposed in the problem discussion, it is not enough to look upon
M &As a s a n i n t e r n a l p r o c e s s . Instead, in o r d e r t o u n d e r s t a n d the transaction one
must take into account environmental factors that may influence and restrain the
process. Hence, we suggest that institutionalization of behavior, environmental pressures and
67
environmental dependency are factors that affect the whole M&A process through the
idea, decision-making and integration phase. In the next chapter, we will deepen the
discussion about our theoretical approach. We will start by presenting a broad overview of the
M&A research field and then separately describe each part of the model proposed.
Institutionalization of IDEA PHASE

Behavior
Factors
Influencing and
Environmental DECISION MAKING
Restraining the
Pressures PHASE
M & A Process
INTEGRATION
Environmental PHASE
Dependency
M & A PROCESS
Figure Theoretical Approach of the Thesis

Overview of the M&A Research Field
From M&A literature, it is possible to distinguish several different schools or fields of
research; the strategic, organizational, financial and economic school. Each school of thought
addresses its own perspective of M&As, with different methodologies and different
objectives. Consequently, the different approaches have divergent theoretical understanding
of what accounts for the M&As success and failure. (Larsson, 1989, Haspeslagh &
Jemison, 1991, Gaughan, 1991, Bouno & Bowditch, 1989) In order to broadening our
understanding of what really drives M&As, we will here briefly examine the different schools.
The strategic perspective seems to be well explored by researchers, where the focus is on
M&As as a strategy to growth in firms. Barney (1997) and Porter (1980) are examining
different business strategies and strategic relatedness of M&As. They discuss different
diversification and combination possibilities depending on the strategic position of the specific
firm. In addition, Ansoff’s et al (1971) have conducted studies where acquisition
strategies are evaluated through performance measurements and how firms plan and

68
manage M&As. Hence, Haspeslagh & Jemison (1991) distinguish between two
subgroups of strategy researches, the acquisition performance group and the acquisition
planning group. The first group shares the financial economists’ interest in performance and focuses
on identifying the success factors for different M&As combinations. The second is more focused
on developing strategic analysis concepts to improve the performance.
A second school of thought in the M&A research are the economic and financial
perspectives, which are focused on the explicit economic outcomes of M&As. The
economic school highlights production efficiency through economies of scale
and s c o p e . The financial school includes accounting motives, stockholder value and
gains from tax advantages are explored. Researchers have generally relied on the stock
market value to obtain the best estimate of future M&A performance. (Ravenscraft & Scherer
1987, Rydén 1971, Steiner, 1975)
In the organizational perspective, researchers focus on the human side of the M&A
process, how M&As affect the individuals in the firm. For instance, Risberg (1999)
addresses the problem of how various employees interpret objectives, corporate identity
and other meanings associated with the post- acquisition process. Additionally, also
Buono & Bowditch (1989), investigate the human side and the interrelationship between M&As and
the employees. The organizational approach of M&As is also highlighted in the perspective
of corporate cultures (Kleppesto, 1993).
From this brief overview of literature, we see that M&A activities have fascinated
researchers and practitioners for decades. Traditionally, these seem to have been a clear
distinction between the different approaches, each focusing on different aspects. We think this
is important to realize since the explanations of why M&As are undertaken and how the
processes are managed are driven by the different schools.
The Emergence of a Process Perspective
As discussed, there are different perspectives on M&A activities and research has been
more single-voiced than multi-voiced. However, many strategic and organizational
researchers combine several approaches in order to decrease the gap between the different

69
perspectives (Haspeslagh & Jemison, 1991, Bouno & Bowditch, 1989). The reason for this is
that the intended benefits of M&As are often not realized, which have led both strategic and
organizational literature to start emphasizing the connection between hard and soft issues. For instance,
one of the most famous approaches is Haspeslagh and Jemison’s (1991), process
perspective, which is different from the traditional view of how M&As are conducted.
The traditional perspective of M&As seems to be based on a neo-classic view of how

decisions are taken. The neo-classicists suppose that managers behave rationally and make
their decisions on economic efficiency . The rational perspective stems from general
strategic research, such as Porter (1980), Ansoff, (1965). The rational approach is built
upon a deterministic view, where the world is seen as rational and where reality is concrete. In
accordance to the conventional view, Porter and Ansoff suggest a rational model for
decision- making in strategy planning. In their models, objectives are clear and facts are
gathered and evaluated in an orderly way with explicit purposes. A certain cause would lead to a
certain effect since all people will respond in a shared rational way.
In accordance to the neo-classical view, the conventional view sees M&As as a result of a
sequential process of rational planning. The transaction is evaluated by quantitative measures
and the outcome is determined when the transaction is assured. The M&A justification are
articulated in terms of strategic goals and how well the transaction will serve these goals. This view
presumes that it is possible to understand and predict the value of the deal already in the
planning phase. (Haspeslagh & Jemison, 1991)
The process perspective differs from the conventional view since it considers the M&A
transaction as a coherent process where all sequences affect each other and together
determine the outcome. In comparison to general strategic theory, we think that the process
view is similar to the voluntarism perspective, where the world is seen as subjective and
should be experienced. Mintzberg (1979), who supports this view, means that
formulations and realizations of strategies are not distinct. Instead, strategies and plans are
emerging from a process of continuous learning.
The process view suggests that strategic decisions are not comprehensive rational
choices, but outcomes of processes governed by one or several influences.

70
Furthermore, M&As could not be seen as independent on-off deals. Instead, they should be
viewed as means, which will help the company to create value in the end. All the actions
and activities through the whole process will determine the outcome. Haspeslagh & Jemison
(1991) argue that it is not enough to look upon fragments of the process. One must
consider the whole process to be able to understand the different parts. The process perspective emphasizes
that the acquisition process itself is a factor, in addition to strategic and organizational fit, that
affects the outcome.
We have chosen to partly build our theoretical approach upon Haspeslagh & Jemison’s
(1991) process view. In accordance to our purpose, we are adopting a broad perspective and
we find the process view suitable since it considers the whole M&A process itself as a factor
determining the outcome. The view will be a supporting tool for understanding how
companies are managing their M&A processes in the new economy. For instance, if the
case companies are acting in accordance to the process view or the conventional view
The Process Perspective

A common way to describe the M&A as a process is to divide it into different phases. In
contrast to the conventional view, the process view sees the phases as highly integrated.
Haspeslagh & Jemison’s (1991) propose four phases; idea, acquisition justification, acquisition
integration and results, see
Figure 2 – THE PROCESS VIEW OF MERGERS & ACQUISITION

71
IDEA ACQUISITION ACQUISITION RESULTS

INTEGRATION
JUSTIFICATION
Decision Making Process Problems Integration Process Problems
Source: Haspeslagh & Jemison (1991), p. 12.
According to Haspeslagh & Jemison (1991), in the idea phase, potential M&As are suggested
and suitable partners are evaluated. In this phase, strategic and organizational fit is
emphasized even if they only determine the value potential. They mean that most acquisitions
are a combination between a formal planning process and opportunism. For instance, if the
company has formally identified a “growth gap” or if the acquisition is triggered by an
opportunity Furthermore, in the acquisition justification, the transaction is evaluated and
the final decision is made. In this stage companies should not only evaluate the potential
outcome, but also plan for how value is to be created. For instance, plan for how
integration issues can be carried out. Important to consider is how people from the two
organizations can co-operate in order to create value from the transaction. The
integration stage is about transfer of strategic capabilities where people from the two
organizations learn to work together.
During the different phases in the process, a set of problems appears that need to be carried
out before the desired results finally can be achieved. Haspeslagh & Jemison, (1991) argue
that the phases are interactive and that they must be considered together. In the next
section, when we are explaining the specific phases in our theoretical approach, we will
extend the discussion about important issues and problems.
72
Buono & Bowditch (1989) also propose a process perspective, where they identify
different stages in the M&A process. In contrast to Haspeslagh & Jemison (1991), they
describe the M&A transaction as not only an internal process. They discuss how ambiguities
and uncertainties in the environment will affect the actions in the different phases.
Buono & Bowditch (1989) state that, although companies conduct changes in response to
internal demands, most major organizational changes take place in response to environmental
demands. When the environment of the companies is relatively stable and predictable, the
company is more or likely to keep old routines and structures. On the other hand, when
companies face environmental changes they tend to respond by transforming their structures.
Furthermore, Bouno & Bowditch (1989) argue that ambiguities tend to emerge when the
organization tries to understand, make sense of and respond to conditions in their
external environment. Ambiguities include changes in technology, market, socio-political
and economic variables. Bouno & Bowditch mean that all these uncertainties create a number
of ambiguities for managers in terms of deciding on appropriate strategic responses. For
instance, how the firm should position itself with respect to its products, services and other
industry players.
According to Buono & Bowditch (1989), M&A decisions are influenced by the different
ambiguities and uncertainties created by changes in the environmental conditions. Hence, the
challenge of M&A activities is to reduce or avoid environmental uncertainty and
ambiguities. The larger degree of uncertainty, the greater the tendency to conduct
M&As. As the level of environmental uncertainties increase, M&A discussions tend to
begin. In many cases, fears arise that unless the firm grows or get access to additional
resources, large companies will destroy it, it will be less competitive, or it might even fail.
In other cases, M&As are seen as a way of developing new opportunities. Since strategic
discussions like M&As are usually conducted at top-management level of the company, most of
this uncertainty and ambiguity is focused on the management level.
As we see it, Buono & Bowditch (1989) mean that the different ambiguities and
uncertainties play a great impact on the M&A process. In contrast, Haspeslagh &

73
Jemison (1991) emphasize internal aspects of the process and do not include environmental
influences. In their internal perspective, the focus is on how to create value through the M&A
process.
As e a r l i e r m e n t i o n e d , w e h a v e a d o p t e d H a s p e s l a g h & J e m i s o n ’ s ( 1991)
perspective to be able to understand how our case companies are planning for value creation.
For instance, what drives the idea, how decisions are taken and how the companies are
planning for integration? However, in accordance to our research question, we find it
reasonable to suggest that new market conditions may be one of the main aspects that differ
for companies in the new economy, compared to traditional industries. Therefore, w e
believe that Bouno & Bowditch (1989) highlights important aspects since they consider influences
from the external environment on M&A decisions. This is also the reason for the
perspectives included in our theoretical model, where we combine the process view with
an environmental approach.

74
CHAPTER 6
THE MAIN MOTIVES OF MERGERS
AND ACQUISITION
Motives
The findings from the theoretical material and the empirical investigation will be analyzed both
horizontally and vertically according to the following: -

75
There are two types of motives involved in merger and acquisition and these are Explicit and
Implicit motives.
Explicit Motives
Synergy: Synergy means that the merged firm will have a greater value than the
sum of its parts as a result of enhanced revenues and the cost base.
Economies of Scale: Economic of scale refer to the reduction in unit cost achieved
by producing a large volume of a product. Horizontal mergers aim at achieving
economies of scale. This phenomenon continues while the firm grows to its
optimal size, after which a firm experiences diseconomies of scale.
Economies of Vertical Integration: Economies of vertical integration are
achieved in vertical mergers. It makes coordination of closely related operating
activities easier.
Entry to New Markets and Industries: A firm that wants to enter a new market
but lacks the know-how can do so through the purchase of an existing player in
that product or geographical market. This makes the two firms worth more
together than separately.
Tax Advantages: Past losses of an acquired subsidiary can be used to minimize
present profits of the parent company and thus lower tax bills. Thus, firms have a
reason to buy firms that have accumulated tax losses.
Diversification: One of the reasons for conglomerate mergers is diversification of

risk. There are two types of risks associated with businesses- systematic and

76
unsystematic risk. Systematic variability cannot be removed by diversification and

hence mergers are not able to eliminate this risk. Though, unsystematic risk can be
spread through mergers.
Managerial Motives: The management team of the acquiring firm tends to benefit
from the merger activity. The four most important managerial motives for merger
are empire building, status, power and remuneration.
Implicit Motives
Hubris: It is like a maturity test for the owners and the company boards of directors
when they see the opportunity to form a new business cycle.
Excess of Money: When a company has excess of money, the question of what to
do with it eventually comes up and this leads towards merger and acquisition.
Steps Involved in an Acquisition Valuation
Procedures for Analyzing Valuation of the Firm
An acquisition valuation programme can be segregated into five distinct steps like:
Step 1: Establish a motive for the acquisition.
Step 2: Choose a target.
77
Step 3: Value the target with the acquisition motive built in.
Step 4: Choose the accounting method for the merger/acquisition - purchase or pooling.
Step 5: Decide on the mode of payment - cash or stock.
Evaluations
Implicit Motives
 Financing Mergers
The triangle in the figure provides a view of acquisition financing mechanism. As the options
for financing the acquisition would increase, the layers in the triangle would also increase. But
the basic question that arises or the consideration that comes is whether the transaction should
be made in cash or stock as it has different effect on the various stakeholders of both the
organizations the acquiring firm as well as the target firm. The influence of method of payment
on post-merger financial performance is ambiguous.
Post merger performance maybe affected by the means of payment in the takeover. There are
mainly two ways, in which mergers can be financed,
 Cash
 Stock

78
Using cash for payment helps the acquirer's shareholders to retain the same level of control
over the company. Another obvious reason of financing mergers through cash is the simplicity
and preciseness that gives a greater chance of success. Another advantage of using cash to the
target's shareholders is that it is more certain in its value. Also, the recipients can spread their
investments by purchasing a wide-ranging portfolio. There is also a disadvantage to target
shareholders. They may be liable to pay capital gains tax. This is payable when a gain is
realized.

79
CHAPTER 7
DATA ANALYSIS AND
INTERPRETATION

80
1. OWNERSHIP PATTERNS OF THE MERGED AND MERGING FIRMS
Merging firms Merged Firms

Ownership No. No.
Domestic 20 28
Foreign 11 20
Subsidiaries
OWNERSHIP PATTERNS OF THE MERGED AND

MERGING FIRMS
30
25 Merging firms
Merged Firms
20
15
10
5
0
Domestic Foreign Subsidiaries
INTERPRETATION:
The above diagram suggests the ownership pattern followed by the merging and the
merged companies in the recent past. Form the above diagram we can conclude that, in
the case of both merged and merging companies most of the time ownership is retained
by the domestic companies.

81
2. CLASSIFICATION OF THE MERGING AND MERGED FIRMS BASED ON THE
SIZE OF THE BUSINESS (10 million – 1000 million)
Merging Merged
Size No. No.
Large (> 1000 Million) 28 1
Medium (10-1000 18 27
Million)
Small (< 10 Million) 1 0
50 1
45
40 18
35
30 0
25
20
28 27
15
10
5 1
0
Merging Merged
Large (> 1000 Million) Medium (10-1000 Million)

Small (< 10 Million)
INTERPRETATION:
The above diagram shows a shift in the trend. The most of the merged companies (28)
falls under medium sized companies. But in the case of merging companies the larger
companies with the minimum of one billion investments is going for merger. Hence we
can conclude that the larger companies (> one billion) are more interested to go for
merger strategy to expand themselves.

82
3. TYPE OF MERGERS RUNNING IN THE INDUSTRY
Type No.
Horizontal 38
Conglomerate 9
Other 3
Type of Mergers Running In The Industry
40
35
30
25
20
15
10
5
0
Horizontal Conglomerate Other
INTERPRETATION:
The survey suggested that, about 90 percent of the companies are looking for horizontal type of
mergers. Hence we can conclude by saying that the horizontal type of merger is most preferred
type of merger for the domestic companies. It is followed by the conglomerate type of merger.

83
4. TYPE OF RELATIONSHIP BETWEEN THE FIRMS INVOLVED IN THE
MERGERS IN INDIA
Related Unrelated
Ownership No. No.
Domestic 25 7
Foreign Subsidiary 13 2
Domestic-Foreign 0 6
35
30
25
20 Unrelated
15 Related
10
0
Domestic Foreign Subsidiary Domestic-Foreign
INTERPRETATION:
The above diagrams states that the domestic – domestic relation is seen in the mostly
recent time. We can notice that the relation between the domestic and foreign subsidiary
is nil in the related case, means the relation ship between the same industry is not seen
through out the survey we conducted. But in unrelated case the mergers among the
foreign and a domestic company can be noticed.

84
5. RELATION SHIP PATTERNS OF THE ACQUISITIONS ENTITIES IN INDIA
Category Ownership No.
I Domestic- Domestic 15
II Foreign- Foreign 20
III Foreign- Domestic 6
IV Domestic- Foreign 8
V Foreign- Domestic Foreign 1
Ownership Pattern of Acquisitions

20
15
8
6
INTERPRETATION:
Our survey suggest that relation pattern in the case of acquisition is slightly different
from the previous case i.e., merger. In acquisition the foreign-foreign relation ship is
higher than any other case; it means most of the foreign companies use the acquisition
strategy rather than a particular domestic firm. Hence we can conclude that most of the
acquisition cases happen between two different companies of different countries.

85
6. CLASSIFICATION OF THE ALLIANCES IN THE M&A DEALS ON THE BASIS OF
THE MOTIVES INVOLVED (WHAT MOTIVATES THE FIRMS?)
Motive No
Marketing 21
Marketing & Manufacturing 4
Expansion of Business 18
R&D and Technology 4
Not Specified 3
THE M&A DEALS ON THE BASIS OF THE

MOTIVES INVOLVED
25
20
15
10
5
0
ng rin
g
es
s
lo
gy ed
keti tu in o ecifi
ar ac Bu
s hn p
M n uf f Tec otS
a o d N
M n an
& sio D
ng an R&
keti Exp
ar
M
INTERPRETATION:
Our survey suggests that for most of the companies marketing turned to be favored reason to go
for merger and acquisition. It is followed by the expansion of business. Hence we can conclude
that marketing and Expansion of business are the two most preferred reason for the alliance

86
7. DISTRIBUTION OF SALE PROCEEDS BETWEEN THE ALLIANCES
Category Type No.

I Domestic –Domestic 5
II Domestic- Foreign 33
III Domestic Foreign 1
IV Domestic
Foreign-Domestic 6
Ownership of Firms Involved in Alliances
33
6 7 6
5 4 5
2 3
1 1
Domestic -Domestic Domestic- Foreign Domestic Foreign-Domestic Foreign-Domestic
INTERPRETATION:
Many of the company’s are going for domestic foreign sales foreign - domestic sales are
next to these sales with a share of 6%, domestic –domestic sales occupies next to this
merges companies. Like wise the sales are distributing among the merges alliance
companies.

87
8. Parameters taken into account while evaluating the motives behind the firms
Gross profit margin 0
Net profit margin 5
Return on capital employed 0

Return on net worth 3
R&d intensity 9
Advertisement intensity 0
Marketing intensity 18
Cost intensity 3
Export intensity 7
Import intensity 0
Capacity utilization 5
18
16
12 9
7
8 5 5
3 3
4 0 0 0 0
0
INTERPRETATION:
The companies going for the merger and acquisition mainly looks for certain parameters;
some of them are listed above. Among the listed parameter marketing intensity termed to
be highly preferred one which is followed by the R & D. This means most of the
companies look at the marketing and R & D skills of the other company with which it is
planning or planned to go for alliance.

88
9. Distribution of performance of the mergers during the two phases i.e. before and after
merges.
Parameters Pre merger firms vs. post merger firms

Above average Below average Above average Below average
Gross profit 08 42 40 10
margin
Net profit 06 44 41 09
margin
Return on 04 46 43 07
capital employed
Return on net 05 45 41 09
worth
R & D intensity 08 42 43 07
Marketing 09 41 44 06
intensity
Cost intensity 05 45 47 03
Export intensity 03 47 48 02
Import intensity 14 36 42 08
Capacity 12 38 44 06
utilization
INTERPRETATION:
The various parameters considered while going for mergers are ROI, ROE, Marketing intensity
capacity utilization; cost intensity, import intensity, R&D intensity, and net profit margin.

89
10. Comparison of the firms involved in the merges based on select parameters
Parameters Pre merger firms vs. post merger firms

Increased Decreased Difference
(present) (Previous)
Gross profit 50 24 26
margin
Net profit 26 12 14
margin
Return on 32 18 14
capital employed
Return on net 28 22 06
worth
R & D intensity 40 10 30
Marketing 38 12 26
intensity
Cost intensity 40 10 30
Export intensity 42 08 34
Import intensity 16 34 (18)
Capacity 42 08 34
utilization
INTERPRETATION:
The various parameters considered while going for mergers is marketing intensity is always
better prospectus for a companies after mergers, export intensity gives more benefits to the
company, R&D intensity helps the company for better innovations and inventions, Profits are
always more for a post merger for than a pre merger form.

90
CHAPTER 8
FINDINGS AND SUGGESTIONS
FINDINGS:
As per the analysis the findings are found as suggestive. A further probe may be required to
determine exact cause for mergers and acquisition and to take corrective measures for the
pharmaceutical industry as a whole. The analysis was done with the purpose to highlight the

91
findings to a particular vertical of the industry, thus probe was limited to the fulfillment of
objective.
Domestic merged and merging companies are more in number than in foreign merged
and merging companies.
It is observed that large companies, which have more than 1000 millions investments, are
more in merging and merge companies.
Large companies prefer to go for horizontal merges; next to this some other also prefers
to go for Conglomerate merges. Few companies are going for other forms of merges than
the above two types.
Domestic relation prevails in many of the companies. It shows that out of the total
companies 25 companies are belonged to domestic, 13 belonged to foreign subsidiary and
no company belongs to domestic foreign.
Foreign-foreign ownership is the largest ownership, which consists of 20 companies.
Next to this domestic-domestic relation, this consists of 15 companies.
Many of the company’s are going for domestic foreign sales foreign - domestic sales are
next to these sales with share 6%, domestic –domestic sales occupies next to this merges
companies. Like wise the sales are distributing among the merges companies.
The various parameters considered while going for mergers is ROI, ROE, Marketing
intensity capacity utilization, cost intensity, import intensity, R&D intensity, and net
profit margin.
Mergers can fail for many reasons including a lack of management foresight, the inability
to overcome practical challenges and loss of revenue momentum from a neglect of day-
to-day operations.
SUGGESTIONS:
Growth is always essential for the existence of a business concern. A concern is bound to die if it
does not try to expand its activities. The expansion of a concern may be in the form of
enlargement of its activities or acquisition of ownership and control of other concerns. Internal
expansion results gradual increase in the activities of the concern. External expansion refers to

92
“business combination” where two or more concerns combine and expand their business
activities. This report is made before keeping each and every aspect in mind. The research is
done on behalf of various segments (employee, consumer and shareholders). As per employee
information analysis employee satisfaction, organization culture, salary package, technological
development and hierarchy level. The companies need to develop self sustainability in the areas
of marketing, R&D; exporting the products etc. other wise they need to go for mergers which
may not be that much useful for them.
The Pharmaceutical Industry is growing a rapid phase; to meet up the market

expectations companies should have excellence in all departments. To achieve the
excellence, companies can use Merger and Acquisition as a major weapon or strategy.
The merger and acquisition can be an economical scale strategy for those companies who
are looking to expand themselves (gain Market share, acquire technologies, Managerial
effectiveness) within and even cross border relation.
The companies undergoing merger and acquisition can create a synergy in such a way
that the value obtained of the combined companies must be greater than the sum of the
two individually.
The R&D should be the main objective or motive to be considered while going for
Merger & Acquisition.
Overall it is suggested that mergers takes place in a healthy environment it is really a
benefit for both the merge company and as well merging company too. So it is suggested
that in many of the cases merges gives a favorable results to the group of companies that
are merge ring.

93
CHAPTER 9
CONCLUSION
CONCLUSION
The study found that coincided with the global trends, the pharmaceutical industry experienced
greater consolidation through mergers, acquisitions, alliances as well as sale of assets. Even
through the mergers are dominated by the domestic firms, the foreign firms are actively
participating in acquisition as well as alliances which became possible due to the dilution of

94
various policy regulations. Most of the firms used it as a market expansion strategy rather than as
a technology enhancer and it is evident from the performance analysis carried out, which shows
that there is a significant difference in the marketing expenditure of merging firms compared to
the non-merging counterparts during the post merger period.
With industry challenges climbing, pharmaceutical companies are finding it difficult to sustain
desired or expected revenue growth rates. Although mergers and acquisitions (M&A) offer
several avenues for achieving growth, results are often short-lived. To develop capabilities that
fuel growth over the long term, pharmaceutical firms should exploit M&A transactions as a
potential way to dramatically improve research and development (R&D) productivity. Many
pharmaceutical companies have seen mergers as a way to stay abreast of this building tsunami of
market pressures. However, many mergers have reflected short-term strategies focused on filling
gaps in product portfolios or pipelines, or increasing in scale as a means to increase market share.
Although these strategies are effective in creating temporary benefits, they do not effectively
address more complex, long-term opportunities that can feed organizational success into the
future.
Even through the capacity expansion is one of the major motives of these strategies, the analysis
reaches an opposite trend albeit it is increasing during the post merger period. Majority of the
firms are using merger as a means to expand their product profile and thus to remain risk free. In
short, the merging firms which is less than 10 percent of all firms in this industry overall
performance is far better than the others and their own pre-merger period performance. I
conclude by saying that if this industry is able to transfer a part of their improved performance
due to consolidation to the consumers in the form of a price reduction and a better quality of
drugs, it would be a welcome sign and on the other hand if it lead to increased market power and
consequent price rise, then it would deserves special attention.

95
BIBLIOGRAPHY
WEB SITES
www.mergers acquisition.com
www.expresspharmaonline.com
www.thehindubusinessline.com

96
www.thepharmanetwork.com
www.kppub.com/indian_pharma_industry.htm
www.expresshealthcaremgmt.com
www.Wikipedia.com
www.moneycontoral.com
BOOKS
Title of Book: Mergers + Acquisitions
Author : Dana Vachon
Edition : Hard cover (2007)
Title of Book: Mergers and Acquisitions
Author : Fred Weston
Title of Book: Successful Mergers
Author : Marion Devine
NEWS PAPERS
Express Health Care Management (online)

Business Today
JOURNAL
Mergers and Acquisitions Journal

(www.acg.org/News/pablications/Mergersandacquisitionsjournal/tabid/381/default.aspx)
ARTICLES
Economist.com
(http://www.economist.com/research/articalsbysubject/display.cfm?id=348978)

97
ANNEXURE
QUESTIONNAIRE
Name of the Respondent: ___________________________________________

98
Designation: __________________________________________________________
Experience: ________________________________________________________________
1. Ownership patterns of the merged and merging firms

 Domestic
 Foreign Subsidiaries
2. Classification of the merging and merged firms based on the size of the business (10
million – 1000 million)
 Small
 Large
 Medium
3. Type of mergers running in the industry
 Horizontal
 Conglomerate
 Other................................
4. Type of relationship between the firms involved in the mergers in india
 Domestic
 Foreign Subsidiary
 Domestic – Foreign Subsidiary
5. Ownership patterns of the Acquisition entities in India
 Domestic – Domestic
 Foreign – Foreign
 Domestic – Foreign
 Foreign – Domestic
 Foreign – Domestic – Foreign
 Others (specify)_________________________________

99
6. Classification of the alliances in the M&A deal on the basis of the motives involved
(what motivates the firms?)
 Marketing
 Marketing & Manufacturing
 Expansion of Business
 R&D and Technology
 Not Specified
7. Distribution of sale proceeds between the alliances

 Domestic – Foreign
 Foreign – Domestic
 Domestic – Domestic
 Foreign-Foreign
8. Parameters taken into account while evaluating the motives behind the firms
 Gross profit margin
 Net profit margin
 Return on capital employed
 Return on net worth
 R&d intensity
 Advertisement intensity
 Marketing intensity
 Cost intensity
 Export intensity
 Import intensity
 Capacity utilization
9. Distribution of performance of the mergers during the two phases
Parameters Pre merger firms vs post merger firms

100
Above average Below average Above average Below average
Gross profit
margin
Net profit
margin
Return on
capital
employed
Return on net
worth
R & d intensity
Marketing
intensity
Cost intensity
Export
intensity
Import
intensity
Capacity
utilization
10. Comparison of the firms involved in the alliances based on select parameters
Parameters Pre merger firms vs post merger firms

Increased Decreased Difference
Gross profit
margin
Net profit

101
margin
Return on
capital
employed
Return on net
worth
R & d intensity
Marketing
intensity
Cost intensity
Export
intensity
Import
intensity
Capacity
utilization
Thesis Response Sheet 1
Name: K. Ravi Babu
ID NO: HYD/FIN/FW04019
Thesis Guide: Mr. V. Vamsi Krishna
Topic: “What Motivates Pharmaceutical Companies to Go For Merges and Acquisitions”
Date of Consultation with the Guide: 09-02-2009
Out come of the Discussion:

102
The conversation was on the topic and to decide the content of the report and to plan a process to
continue the thesis.
Progress of the Thesis:
Prepared an introduction of the Thesis
Name: K. Ravi Babu

103
The conversation was to discuss the few Mergers and Acquisitions and managed to use those as
examples in the Thesis.
Collected Literature on Secondary research of the Thesis
Name: K. Ravi Babu

104
The conversation was to discuss the Structured Questionnaire planned a process to continue the
thesis.
Collected Literature on Primary and Secondary research of the Thesis
Name: K. Ravi Babu

105
The conversation was too discussed and analyzed the data gathered from the Filed of experts and
Structured Questionnaire filtered the relevant information needed for the Thesis.
Prepared Report up to Data Analysis and Interpretation
Name: K. Ravi Babu

106
The conversation was too discussed and analyzed the data gather from various secondary sources
like Magazines, News papers and Articles.
Preparing Final Part of Thesis like Recommendations and Suggestions
Name: K. Ravi Babu

107
The conversation was to discussed on few case studies and Worked on the Consultation part of
the Thesis
Preparing Final Report of the Thesis

What Motivtes Phrma Companies To Go For M&amp Q

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Dear k. Ravi Babu,

This is to inform that the thesis topic "-WHAT MOTIVATES PHARMACEUTICAL

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4.4 Associates of Group of companies

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TABLES AND GRAPHS

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STATEMENT OF THE PROBLEM:

OBJECTIVES OF THE STUDY:

1. To find the motives behind the Mergers and Acquisition concentrating on

In business or economics a merger is a combination of two companies into one larger

Need for the study:

Research Methodology and Data Base

Mr. V. Venugopal Reddy

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number of years have accumulated significant libraries of research organizations

The size of the research is about 50 questioners.

SCOPE OF THE THESIS WORK

JUSTIFICATION FOR CHOOSING A PARTICULAR RESEARCH

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2.1 Defining M&A

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2.2 Types of Mergers

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2.2 Types of acquisition

2.3 Distinction between Mergers and Acquisitions

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2.4 INDIAN MERGERS AND ACQUISITIONS – TOP TEN DEALS

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Here are the top 10 acquisitions made by Indian companies worldwide:

Country Deal value ($

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel

Suzlon Energy Hansen Group Belgium 565 Energy

Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical

Tata Steel NatSteel Singapore 293 Steel

Videocon Thomson SA France 290 Electronics

VSNL Teleglobe Canada 239 Telecom

double the amount involved in US companies’ acquisition of Indian counterparts.

Graphical representation of Indian out bound deals since 2000.

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stands (Source: http://ibef.org)

Mergers and Acquisitions

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The sectors attracting investments by Corporate India include metals, pharmaceuticals,

2.5 Different Types of Valuation Matters

3. Discounted Cash Flow (DCF)

Synergy: The Premium for Potential Success

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Doing the Deal

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The Target's Response

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