Android Project Report
LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT Report on Capstone Project
“Test of market efficiency with special reference to mergers in pharmaceutical industry of India” Submitted to Lovely Professional University
In partial fulfilment of the Requirements for the award of Degree of Master of Business Administration Submitted by: Arif Lateef Gilkar. (10800545) Nitish Sen. (10800321) Shamshar Singh.(10800743) Priyanka Thakur.(10800442)
DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY JALANDHAR NEW DELHI GT ROAD PHAGWARA PUNJAB 1|Page
We hereby take an opportunity to express our profound gratitude of all those who have helped and encouraged us towards the successful completion of the Capstone project report. It has been a great experience to work under the supervision of Mr. Gurpreet Grewal and was a great opportunity for us to learn something. We are highly thankful for his support and kind attitude which helped us a lot and made our project a success. Above all our family members have always been our biggest supporters. In spite of our serious efforts to complete this project, if we have committed any error it should be looked upon with sympathy.
Arif Lateef Gilkar Nitish Sen Shamshar Singh Priyanka Thakur
We Arif Lateef Gilkar, Nitish Sen, Shamshar Singh, Priyanka Thakur, do hereby declare that project report titled “Test of market efficiency with special reference to merger in pharmaceutical industry of India” submitted to Lovely Professional University Punjab for the partial fulfillment of the requirement for the degree of MBA is one of our original work under the continuous guidance of Mr. Gurpreet Grewal We have not submitted this training report to any University for the award of any other degree.
Arif Lateef Gilkar Nitish Sen Shamshar Singh Priyanka Thakur
This is to certify that the project report titled “Test of market efficiency with special reference to merger in pharmaceutical industry of India” carried out by Mr. Aarif Lateef Gilkar has been accomplished under my guidance & supervision as a duly registered MBA student of the Lovely Professional University, Phagwara. This project is being submitted by him in the partial fulfilment of the requirements for the award of the Master of Business Administration from Lovely Professional University.
This dissertation represents his original work and is worthy of consideration for the award of the degree of Master of Business Administration.
___________________________________ (Name & Signature of the Faculty Advisor) Date:
This is to certify that the project report titled “Test of market efficiency with special reference to merger in pharmaceutical industry of India” carried out by Mr.Nitish Sen has been accomplished under my guidance & supervision as a duly registered MBA student of the Lovely Professional University, Phagwara. This project is being submitted by him in the partial fulfilment of the requirements for the award of the Master of Business Administration from Lovely Professional University.
His dissertation represents his original work and is worthy of consideration for the award of the degree of Master of Business Administration.
___________________________________ (Name & Signature of the Faculty Advisor) Date:
CERTIFICATE This is to certify that the project report titled “Test of market efficiency with special reference to merger in pharmaceutical industry of India” carried out by Mr. Shamshar Singh has been accomplished under my guidance & supervision as a duly registered MBA student of the Lovely Professional University, Phagwara. This project is being submitted by him in the partial fulfilment of the requirements for the award of the Master of Business Administration from Lovely Professional University.
His dissertation represents his original work and is worthy of consideration for the award of the degree of Master of Business Administration.
___________________________________ (Name & Signature of the Faculty Advisor) Date:
CERTIFICATE This is to certify that the project report titled “Test of market efficiency with special reference to merger in pharmaceutical industry of India” carried out by Miss. Priyanka Thakur has been accomplished under my guidance & supervision as a duly registered MBA student of the Lovely Professional University, Phagwara. This project is being submitted by her in the partial fulfilment of the requirements for the award of the Master of Business Administration from Lovely Professional University.
His dissertation represents his original work and is worthy of consideration for the award of the degree of Master of Business Administration.
___________________________________ (Name & Signature of the Faculty Advisor) Date:
Table of contents Contents Executive Summary CHAPTER-1
Page No. 11-12 13
Introduction 1.1 Indian Pharmaceutical Industry
1.2 Indian Market
1.3 Industry structure
1.4 Growth Scenario
1.6 Product development
1.7 Small and medium enterprises
1.9 Government support
1.01 Market Efficiency
1.02 The Effect of Efficiency
1.03 The Challenge to Efficiency
1.04 The Efficient market hypothesis (EMH)
Degrees of Efficiency
23 1.01 Mergers and Acquisitions 23 1.002 Distinction between mergers and acquisitions 1.003 Different Types of M&A
1.004 Merger and Acquisition Strategy CHAPTER-2
Review of Literature Cont.. CHAPTER-3 3.0 Scope of the study
32 33 34
3.1 Objectives of study 3.2 Limitations
34 CHAPTER- 4
4.0 Research Methodology
4.1 Purpose of the study
4.2 Objectives of general research
4.3 Objectives of this research 4.4 Hypothesis
4.5 Research design
4.6 Sampling Plan:
4.7 Methods of data collection
4.8 Statistical tools used
CHAPTER-5 MERGERS Cont… 5.0 Acquisition of Beta pharmaceutical by Dr. Reddy’s Laboratories
5.1 Sun Pharmaceutical and Taro Pharmaceutical
5.3 Companies vs Shareholder
49 CHAPTER-6 DATA ANALYSIS AND INTERPETATION 6.1 Dr. Reddy & Beta pharmaceutical
6.01 Sun pharmaceutical & Taro pharmaceutical
6.001 Dr. Reddy’s laboratories Ltd.
6.002 Sun Pharmaceuticals Ltd.
78 CHAPTER 8 BIBLIOGRAPHY
8.2 Annual Reports:-
10 | P a g e
Executive Summary This empirical research indicates that merger announcements have a major impact on market efficiency of pharmaceutical industry in India. Such efficiency is particularly important for country’s economic performance which tends to be highly exposed to external companies. The rise of the competition, the financial liberalization allowing capital flows and the rapid technological changes are the basis of the globalization process extensively favoring the influence, presence and participation of foreign owned firms in national economies. This also triggers a lot of corporate restructuring activities of domestic firms. The process has caused a significant reshuffling and redeployment of firm’s assets and thereby reshaping of many industrial sectors. The present form of industrial ownership is witnessing strong mergers and acquisitions (M&A) activities around the globe. The phenomenon has tended to facilitate a reconfiguration of firm’s organizational structure and its core competencies. Most of the M&A deals are motivated, by the desire to obtain financial synergies, to gain market power, to obtain access to distribution channel or to gain entry into new geographical locality, thereby admitting that technological reasons do not motivate all M&A. However in the current globalised scenario there are certain high-tech industries where innovation is a key to competitive edge. Such firms will consider the impact of M&A on technological performance even when the deal is not innovation driven and choose the most appropriate innovation and financial strategy. The purpose of this study is to test market efficiency with respect to merger announcements using standard Past data by conducting event study methodology. Specifically, this study analyzes the effects of mergers announcements on stock price’s and market efficiency. Using sixty days and eighty five days data before and after the merger. The positive and negative efficient market hypotheses have been used which tests an overall efficiency and measures the earnings as positive abnormal return on the basis of merger announcements. Specifically, this work focuses on market efficiency in pharmaceutical industry with respect to mergers. Evidence here supports positively that market efficiency along with a positive signal exhibited by the sample of acquiring firms during the event period. Evidence of earning excess returns after the merger announcement was also observed. This event study will test the idea of whether or not it is possible for a shareholder to earn above normal return with the announcement of a merger. This will therefore be a test of the Market Efficiency theory, seeing how quickly the stock price of a firm reacts to the particular announcement. The effect of Six company that enter into mergers agreement on the firms’ risk adjusted stock price will be examined to test if the announcement includes the positive or negative of the hypothesis with respect to timing and stock price change. The study will include data of 30 and 40 days before and after merger announcements, and will use the standard risk adjusted event study methodology. By reviewing the merger sample company’s stock around the announcement date, it will be possible to tell if there is some kind of relationship between the 11 | P a g e
two. If the Market exhibits the movement similar to the company, then the theory of an Efficient Market would hold true and an investor would not be able to receive an above normal return. But, if the firm exceeds the Market for a certain period of time relative to the announcement date, then the possibility of gaining an above normal return may occur, thus possibly challenging the Efficiency theory.
12 | P a g e
13 | P a g e
1.1 Indian Pharmaceutical Industry The Indian Pharmaceutical Industry today is in the front rank of India’s science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. India's pharmaceutical sector is currently undergoing unprecedented change. Much of this is due to the country's introduction, on January 1, 2005, of a system of product patents; before that, only patents for processes were permitted to be issued, a fact that has been instrumental in the domestic industry's huge success as a worldwide exporter of high quality generic drugs. The new patent regime has also led to the return of the pharmaceutical multinationals, many of which had left India during the 1970s. Now they are back, and looking at India not only for its traditional strengths in contract manufacturing but also as a highly attractive location for research and development (R&D), particularly in the conduct of clinical trials and other services. The global pharmaceuticals market grew rapidly in the 1990s and in the early 2000s, spurred primarily by market demand in North America and Europe. However, with impeding patent expiries, declining R&D productivity, increasing regulatory and pricing pressures, growth in these markets have been slowing down. As a result, pharmaceutical companies are looking for new avenues of driving growth and ways to improve operational efficiencies. In this context, emerging markets represent a potential growth driver for the industry its contribution to the growth of the global pharmaceutical market increased from eight per cent in 2003 to 40 per cent in 2010. Consequently, global pharmaceutical MNCs have adopted prudent strategies to further expand their footprint in emerging markets such as Brazil, Russia, India and China. India is among the most significant emerging markets for the global pharmaceutical industry, given that it will feature among the world’s top 10 sales markets by 2020. Currently, it is regarded as one of the fastest-growing pharmaceutical industries globally, primarily driven by a large population, evolving patient demographics, increasing health care expenditure, growing urbanization, rising life expectancy, and active private-sector participation.
14 | P a g e
Contribution of emerging markets to overall sales of key pharmaceutical MNCs (current and future estimates)
Domestic companies are transforming their business model to play a larger role in global pharmaceutical market. The Indian pharmaceutical industry has been able to claim a share in the global market by leveraging its strengths and enhancing its regulatory and technical maturity. Formulations manufactured in India constitute 20 per cent of the global generics market by value, and the overall share of Indian manufactured formulations is as high as 46 per cent in the generics segment in the emerging markets. However, with the onset of the patent regime, the traditional reverse engineering capabilities of Indian pharmaceutical companies are no longer helpful, as they would not be able to replicate the patented product and launch it in the domestic market. Hence, going forward, India would be required to leverage its strengths in supply of low cost medicines across the world and invest in newer areas to drive growth. Opportunities exist ranging from the low value added segment. Thus, domestic companies can look forward to pursue all these opportunities and build capabilities to conduct drug discovery and in house development. Indian pharmaceutical market by 2020 (US $ billion)
After years of anemic growth in the Indian pharmaceutical market until the 1990s mainly due to a feeble intellectual property environment pharmaceutical MNCs have recorded steroid led growth in the domestic market. They have increased investments in the domestic market over the past few years and are now comfortably placed to capture a substantial share of the domestic market. Evidently, pharmaceutical MNCs are projected to capture a 35 per cent market share of 15 | P a g e
the market by 2017, compared with 28 per cent in 2009. Over the years, pharmaceutical MNCs have adopted India focused strategies to tap the growing potential of the country’s pharmaceutical market. The advent of the product patent regime in 2005 instilled confidence in the country’s IP regime. With renewed confidence, large pharmaceutical MNCs are now looking to launch their patented drugs in India and such product launches are expected to increase further in future. Companies in Indian pharmaceutical industry can broadly be classified into two categories – Indian origin companies (domestic companies) and foreign companies (MNCs). Some of the major players include GlaxoSmithKline, Cipla, Dr. Reddy’s Laboratories, Ranbaxy, Pfizer etc. India is fast becoming a global hub for all pharmaceutical manufacturing and research, and Indian generics today constitute nearly a fifth of global supplies. India tops the world in exporting generic medicines worth US $ 11 billion. Generics are expected to continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the market till 2015, as per a McKinsey report. Multinational drug companies are showing a healthy growth in the Indian market setting a new trend. In terms of sale, out of 25 top medicine brands in 2011, 13 were global drug majors such as Pfizer, GSK and Novartis Over the past 50 years, the Indian pharmaceutical industry has undergone a massive makeover. They covered the journey from being followers to become strategic partners of MNEs particularly in their drug discovery research and development efforts. The Indian pharmaceutical industry ranked 3rd in the world in terms of production volume (10 percent of global share) and 13th in domestic consumption volume is one of the leading drug industries of developing countries. Over the last 30 years, India’s pharmaceutical industry has evolved from almost being nonexistent to a world leader in the production of high quality generic drugs. It has been valued at $5.3 billion in 2005 accounting for approximately one percent of global pharmaceutical industry. In 1995 when India became member of WTO, its pharmaceutical exports were valued at less than $600 million which has grown to $3.7 billion by 2005 and accounts for 61 percent of Industry turnover (Greene, 2007). The latest data specifies that the amount of exports has increased to $9.1billion. The export of pharmaceutical industry has grown at a CAGR of 14% in last decade (EXIM Bank Report, 2007). Currently India produces 20-22 (in volume) percent of world’s generic drug. The number of purely Indian pharma companies is fairly low. Indian pharma industry is mainly operated as well as controlled by dominant foreign companies having subsidiaries in India due to availability of cheap labour in India at lowest cost. In 2002, over 20,000 registered drug manufacturers in India sold $9 billion worth of formulations and bulk drugs. 85% of these formulations were sold in India while over 60% of the bulk drugs were exported, mostly to the United States and Russia. Most of the players in the market are small-to-medium enterprises; 250 of the largest companies control 70% of the Indian market. Thanks to the 1970 Patent Act, 16 | P a g e
multinationals represent only 35% of the market, down from 70% thirty years ago.Most pharma companies operating in India, even the multinationals, employ Indians almost exclusively from the lowest ranks to high level management. Mirroring the social structure, firms are very hierarchical. Homegrown pharmaceuticals, like many other businesses in India, are often a mix of public and private enterprise. Although many of these companies are publicly owned, leadership passes from father to son and the founding family holds a majority share.
1.2 Indian Market The Indian pharmaceutical market is small, both by Western standards and in terms of per capita consumption. Although India is the world’s leading producer of generic drugs, its annual per capita consumption of pharmaceuticals is among the lowest in the world at approximately $4.50 per person, as compared with $820 in the United States and $13 in China in 2006. The value of India’s pharmaceutical industry nearly doubled from $3.2 billion in 2000 to more than $6.2 billion in 2005, or by an average of 12 percent annually. According to the Associated Chambers of Commerce and Industry of India, the Indian pharmaceutical market is expected to grow at an average annual rate of 13.6 percent during 2006-2010 to reach $9.5 billion in sales by 2010.51 This growth is expected to be driven by access to low cost, high volume generic drugs, mergers and acquisitions, industry consolidation, and India’s growing importance as a pharmaceutical contract manufacturing and services location. Approximately 80 percent of domestic industry production consists of formulations, with the remainder consisting of bulk drugs.
1.3 Industry structure Mergers, acquisitions, and other alliances: The last 3 years have seen a significant rise in the number of consolidations, mergers & acquisitions, and other types of alliances and tie-ins in the Indian pharmaceutical industry. Most of the acquisitions involve Indian companies searching for ways to penetrate overseas markets and widen their global footprint, diversify and enhance their product portfolios, offer their customers a near shore-offshore option, improve their custom manufacturing, packing, and R&D capabilities, acquire existing brands, and gain access to the highly regulated markets of Western Europe and the United States. Indian companies without significant R&D capabilities for drug discovery are also purchasing Western drug discovery companies. In 2005-06, 18 Indian companies spent approximately $1.6 billion to acquire generic drug manufacturing firms in Europe, North America, and Mexico.29 These companies included Ranbaxy, Dr. Reddy’s Labs, Nicholas Piramal, Sun Pharmaceutical, and Jubilant Organosys. Although eleven of these transactions were for medium and small sized companies valued between $5 million and $30 million, several have been significant acquisitions valued in excess of $500 million. To date, Dr. Reddy’s purchase of Beta pharmaceutical Arzneimittel of Germany for $572 million is the industry’s largest overseas acquisition. Other significant deals include Ranbaxy’s purchase of Terapia (Romania) and RPG Aventis (France) and Matrix’s acquisition of API of Belgium. With these acquisition; Dr. Reddy’s became Germany’s fourth largest generic 17 | P a g e
drug company and Ranbaxy became Romania’s third largest generic drug company and one of Belgium’s top 10 generic providers.31 India’s pharmaceutical industry should witness a significant decline in the number of smaller companies that either leave the market or are acquired by larger Indian or foreign companies. Since 2000, a number of smaller Indian pharmaceutical companies have been acquired by larger companies including Wockhardt’s acquisition of Merind and Tata Pharma; Ranbaxy’s purchase of Crosland; Nicholas Piramal’s acquisition of Roche, Boehringer, and Sumitra Pharma, and Glaxo-Wellcome’s merger with Ciba-Sandoz. Matrix, one of India’s and the world’s leading producers of APIs, was acquired by Mylan (US) in January 2007 for $546 million. Mylan, one of the largest generic drug producers in the United States, acquired Matrix to expand its manufacturing capabilities, gain a foothold in key markets, and gain access to Matrix’s technical and scientific expertise. Since 2005, Europe has become a counterweight to the U.S. market and its growing pricing pressures. In exploring Western Europe for acquisitions, Indian pharmaceutical companies found a wider range of companies available at more reasonable valuations.
1.4 Growth Scenario India's pharmaceutical market grew at 15.7 per cent during December 2011. Globally, India ranks third in terms of manufacturing pharmaceutical products by volume. According to McKinsey, the Pharmaceutical Market is ranked 14th in the world. By 2015 it is expected to reach top 10 in the world beating Brazil, Mexico, South Korea and Turkey. More importantly, the incremental market growth of US$ 14billion over the next decade is likely to be the third largest among all markets. The US and China are expected to add US$ 200bn and US$ 23bn respectively. McKinsey & Company’s report, “India Pharma 2020: Propelling access and acceptance, realizing true potential,” predicted that the Indian pharmaceuticals market will grow to US$55 billion in 2020; and if aggressive growth strategies are implemented, it has further potential to reach US$70 billion by 2020. While, Market Research firm Cygnus’ report forecasts that the Indian bulk drug industry will expand at an annual growth rate of 21 percent to reach $16.91 billion by 2014. The report also noted that India ranks third in terms of volume among the top 15 drug manufacturing countries. Further, McKinsey reports Healthcare grew from 4 per cent of average household income in 1995 to 7 per cent in 2005 and is expected to grow to 13 per cent by 2025.
18 | P a g e
1.5 Patents As it expands its core business, the industry is being forced to adapt its business model to recent changes in the operating environment. The first and most significant change was the January 1, 2005 enactment of an amendment to India’s patent law that reinstated product patents for the first time since 1972. The legislation took effect on the deadline set by the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which mandated patent protection on both products and processes for a period of 20 years. Under this new law, India will be forced to recognize not only new patents but also any patents filed after January 1, 1995. Indian companies achieved their status in the domestic market by breaking these product patents, and it is estimated that within the next few years, they will lose $650 million of the local generics market to patent holders. In the domestic market, this new patent legislation has resulted in fairly clear segmentation. The multinationals narrowed their focus onto high end patients who make up only 12% of the market, taking advantage of their newly bestowed patent protection. Meanwhile, Indian firms have chosen to take their existing product portfolios and target semi-urban and rural populations.
1.6 Product development Indian companies are also starting to adapt their product development processes to the new environment. For years, firms have made their ways into the global market by researching generic competitors to patented drugs and following up with litigation to challenge the patent. This approach remains untouched by the new patent regime and looks to increase in the future. However, those that can afford it have set their sights on an even higher goal, new molecule discovery. Although the initial investment is huge, companies are lured by the promise of hefty profit margins and this legitimate competitor in the global industry. Local firms have slowly been investing more money into their R&D programs or have formed alliances to tap into these opportunities.
1.7 Small and medium enterprises As promising as the future is for a whole, the outlook for small and medium enterprises (SME) is not as bright. The excise structure changed so that companies now have to pay a 16% tax on the maximum retail price (MRP) of their products, as opposed to on the ex-factory price. Consequently, larger companies are cutting back on outsourcing and what business is left is shifting to companies with facilities in the four tax-free states Himachal Pradesh, Jammu & Kashmir, Uttaranchal and Jharkhand. Consequently a large number of pharmaceutical manufacturers shifted their plant to these states, as it became almost impossible to continue operating in non tax free zones. But in a matter of a couple of years the excise duty was revised on two occasions, first it was reduced to 8% and then to 4%. As a result the benefits of shifting to a tax free zone were negated. This resulted in, factories in the tax free zones, to start up third 19 | P a g e
party manufacturing. Under this these factories produced goods under the brand names of other parties on job work basis.
1.8 Challenges Even after the increased investment, market leaders such as Ranbaxy and Dr. Reddy’s Laboratories spent only 5-10% of their revenues on R&D, lagging behind Western pharmaceuticals like Pfizer, whose research budget last year was greater than the combined revenues of the entire Indian pharmaceutical industry. This disparity is too great to be explained by cost differentials, and it comes when advances in genomics have made research equipment more expensive than ever. The drug discovery process is further hindered by a dearth of qualified molecular biologists. Due to the disconnect between curriculum and industry, Parma’s in India also lack the academic collaboration that is crucial to drug development in the West and so far.
1.9 Government support The Indian government has been very supportive. It established the Department of Biotechnology in 1986 under the Ministry of Science and Technology. Since then, there have been a number of dispensations offered by both the central government and various states to encourage the growth of the industry. India’s science minister launched a program that provides tax incentives and grants for biotech start-ups and firms seeking to expand and establishes the Biotechnology Parks Society of India to support ten biotech parks by 2010. Previously limited to rodents, animal testing was expanded to include large animals as part of the minister’s initiative. States have started to vie with one another for biotech business, and they are offering such goodies as exemption from VAT and other fees, financial assistance with patents and subsidies on everything ranging from investment to land to utilities.
20 | P a g e
1.01 Market Efficiency When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or beat, the market. However, market efficiency championed in the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else.
1.02 The Effect of Efficiency The nature of information does not have to be limited to financial news and research alone; indeed, information about political, economic and social events, combined with how investors perceive such information, whether true or rumored, will be reflected in the stock price. According to EMH, as prices respond only to information available in the market, and, because all market participants are privy to the same information, no one will have the ability to outprofit anyone else. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful. This "random walk" of prices, commonly spoken about in the EMH school of thought, results in the failure of any investment strategy that aims to beat the market consistently. In fact, the EMH suggests that given the transaction costs involved in portfolio management, it would be more profitable for an investor to put his or her money into an index fund.
1.03 The Challenge to Efficiency In the real world of investment, however, there are obvious arguments against the EMH. There are investors who have beaten the market, whose investment strategy focuses on undervalued stocks, made millions and set an example for numerous followers. There are portfolio managers who have better track records than others, and there are investment houses with more renowned research analysis than others. Counter arguments to the EMH state that consistent patterns are present. Here are some examples of some of the predictable anomalies thrown in the face of the Studies in behavioral finance, which look into the effects of investor psychology on stock prices, also reveal that there are some predictable patterns in the stock market. Investors tend to buy undervalued stocks and sell overvalued stocks and, in a market of many participants, the result can be anything but efficient. Paul Krugman, MIT economics professor, suggests that because of the mass mentality of the trendy, short-term shareholder, investors pull in and out of the latest and hottest stocks. This results in stock prices being distorted and the market being inefficient. So prices no longer reflect all available information in the market. Prices are instead being manipulated by profit seekers.
21 | P a g e
1.04 The Efficient market hypothesis (EMH) The EMH does not dismiss the possibility of anomalies in the market that result in the generation of superior profits. In fact, market efficiency does not require prices to be equal to fair value all of the time. Prices may be over- or undervalued only in random occurrences, so they eventually revert back to their mean values. As such, because the deviations from a stock's fair price are in themselves random, investment strategies that result in beating the market cannot be consistent phenomena. Furthermore, the hypothesis argues that an investor who outperforms the market does so not out of skill but out of luck. EMH followers say this is due to the laws of probability: at any given time in a market with a large number of investors, some will outperform while other will remain average. In order for a market to become efficient, investors must perceive that a market is inefficient and possible to beat. Ironically, investment strategies intended to take advantage of inefficiencies are actually the fuel that keeps a market efficient. A market has to be large and liquid. Information has to be widely available in terms of accessibility and cost and released to investors at more or less the same time. Transaction costs have to be cheaper than the expected profits of an investment strategy. Investors must also have enough funds to take advantage of inefficiency until, according to the EMH, it disappears again. Most importantly, an investor has to believe that she or he can outperform the market.
1.05 Degrees of Efficiency Accepting the EMH in its purest form may be difficult; however, there are three identified classifications of the EMH, which are aimed at reflecting the degree to which it can be applied to markets. 1. Strong efficiency - This is the strongest version, which states that all information in a market, whether public or private, is accounted for in a stock price. Not even insider information could give an investor an advantage. 2. Semi-strong efficiency - This form of EMH implies that all public information is calculated into a stock's current share price. Neither fundamental nor technical analysis can be used to achieve superior gains. 3. Weak efficiency - This type of EMH claims that all past prices of a stock are reflected in today's stock price. Therefore, technical analysis cannot be used to predict and beat a market
22 | P a g e
1.01 Mergers and Acquisitions Mergers and acquisitions is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.
1.002 Distinction between mergers and acquisitions The terms merger and acquisition mean slightly different things. The legal concept of a merger with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer is different from the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an "acquisition". From a legal point of view, in an acquisition, the target company still exists as an independent legal entity, which is controlled by the acquirer. In the pure sense of the term, a merger happens when two firms 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". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place. 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 allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. 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"
1.003 Different Types of M&A Types of M&A by functional roles in market The M&A process itself is a multifaceted which depends upon the type of merging companies. ∑
A horizontal merger is usually between two companies in the same business sector. The example of horizontal merger would be if a health cares system buys another health care
23 | P a g e
system. This means that synergy can obtained through many forms including such as; increased market share, cost savings and exploring new market opportunities. A vertical merger represents the buying of supplier of a business. In the same example as above if a health care system buys the ambulance services from their service suppliers is an example of vertical buying. The vertical buying is aimed at reducing overhead cost of operations and economy of scale. Conglomerate M&A is the third form of M&A process which deals the merger between two irrelevant companies. The example of conglomerate M&A with relevance to above scenario would be if health care system buys a restaurant chain. The objective may be diversification of capital investment.
Arm's length mergers An arm's length merger is a merger: 1. Approved by disinterested directors and 2. Approved by disinterested stockholders: The two elements are complementary and not substitutes. The first element is important because the directors have the capability to act as effective and active bargaining agents, which disaggregated stockholders do not. But, because bargaining agents are not always effective or faithful, the second element is critical, because it gives the minority stockholders the opportunity to reject their agents work. Therefore, when a merger with a controlling stockholder was: 1) Negotiated and approved by a special committee of independent directors and 2) Conditioned on an affirmative vote of a majority of the minority stockholders, the business judgment standard of review should presumptively apply, and any plaintiff ought to have to plead particularized facts that, if true, support an inference that, despite the facially fair process, the merger was tainted because of fiduciary wrongdoing.
Strategic Mergers A Strategic merger usually refers to long term strategic holding of target (Acquired) firm. This type of M&A process aims at creating synergies in the long run by increased market share, broad customer base, and corporate strength of business. A strategic acquirer may also be willing to pay a premium offer to target firm in the outlook of the synergy value created after M&A process
24 | P a g e
1.004 Merger and Acquisition Strategy Before any strategy is formulated, a company needs have a clear-cut policy regarding merger and acquisition. This policy must be complimentary to its vision and mission. Once a policy decision to expand business through merger and acquisition has been taken, the first step is to establish a Merger and Acquisition Cell. The roll of the cell would be to identify the potential companies, which would depend on macro level issues discussed above and the broad guidelines laid down by the company for such a move i.e. to diversify the business or expand the existing business or for upgrading the technology. This cell should be assisted by business analyst, representative of financial institution/investment bankers, technical experts, valuators and lawyers specializing in this field. For faster decision making, which is vital in such cases, the cell must have direct axis to the business leader/decision making authority. Sophisticated software that can handle financial analysis, projections, valuation, and so on is available in the market and help of these can be taken. Once the targeted company has been identified, option of finalizing deal through negotiation must be considered. However, if it is not feasible due to any reason and takeover is vital for the organization, a hostile takeover should be considered. For hostile takeover, the stock of targeted company should be bought quietly through third party. The whole process must be managed confidentially. The sheer number of companies acquiring parts of other companies has shown that the Indian pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major pharmaceutical packing organization in Canada. Torrent has got the ownership of Heumann Pharma, a general drug making company and, formerly, a subsidiary of Pfizer. Matrix has acquired Docpharma, a major pharmaceutical company of Belgium. Sun Pharmaceutical Industries is set to make acquisitions in pharmaceutical companies in the US and has set aside $450 million to execute these plans. In Bengaluru, Strides Arcolab has aimed at acquiring 70 percent in a pharmaceutical facility in Italy that is worth $10 million. The sheer number of companies acquiring parts of other companies has shown that the Indian pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major pharmaceutical packing organization in Canada. Torrent has got the ownership of Heumann Pharma, a general drug making company and, formerly, a subsidiary of Pfizer. Matrix has acquired Docpharma, a major pharmaceutical company of Belgium. Sun Pharmaceutical Industries is set to make acquisitions in pharmaceutical companies in the US and has set aside $450 million to execute these plans. In Bengaluru, Strides Arcolab has aimed at acquiring 70 percent in a pharmaceutical facility in Italy that is worth $10 million.
25 | P a g e
Review of Literature
26 | P a g e
2.0 Rani.N,Yadav.S,Jain.P (2011) In the article Impact of Mergers and Acquisitions on Shareholder’s Wealth in Short-Run: An Empirical Study of Indian Pharmaceutical Industry implies that Indian pharmaceutical industry has carved out a unique place on the global map, not only as a manufacturer of generic drugs but also of new formulations, with growing emphasis on research and development and new drug discovery. The present paper examines the short-run abnormal returns to India based mergers and acquisitions focusing on the pharmaceutical industry during 2001-2007 by using event study methodology. Short-term effects are of interests for immediate trading opportunities they create. We find that acquisitions of foreign companies significantly create short-term wealth on the announcement day to the shareholders of acquiring companies. Cumulative abnormal return (CAR) for Indian companies’ acquisitions activities aimed at foreign-based targets is positive over event window. It seems market perceives the deals of acquisitions of foreign targets by Indian pharmaceutical companies as efficiency enhancing.
2.1 Louis.H, Sun.A (2010) In this study Investor Inattention and the Market Reaction to Merger Announcements the author studies suggest that investors have limited attention. Tests of the inattention hypothesis have been performed in the context of relatively small corporate events, particularly earnings announcements. Presumably, large corporate events would always attract sufficient investor attention. However, we find evidence indicating that inattention affects investors’ information processing even in the context of one of the largest and most important corporate events – merger announcements. More specifically, consistent with the notion that investors are less attentive to Friday announcements, we find that the market reaction to Friday stock swap announcements is muted, as evidenced by lower acquirers’ merger announcement abnormal trading volumes and less pronounced acquirers’ merger announcement abnormal stock returns.
2.2 Anand.M, Jagandeep.S (2008) The study Impact of Merger Announcements on Shareholders' Wealth: Evidence from Indian Private Sector Banks analyses five mergers in the Indian banking sector to capture the returns to shareholders as a result of the merger announcements using the event study methodology (Brown & Warner, 1980, 1985; and McKinley, 1997). These are merger of Times Bank with the HDFC Bank, Bank of Madura with the ICICI Bank, ICICI with the ICICI Bank, Global Trust Bank with the Oriental Bank of Commerce, and Bank of Punjab with the Centurion Bank. The Fama and Miller (1972) market model and Cox and Portes (1998) two-factor model form the theoretical framework of this study. The aim is to understand the shareholder wealth effects of bank mergers. Using the single-factor model the study finds that the average cumulative abnormal return (CAR) of the bidder banks is positive and substantial. These results are 27 | P a g e
statistically significant also. Thus, the bidder banks got significant positive abnormal returns. The two-factor model results reveal that the merger announcement in the Indian private sector banks generated a positive and statistical significant CAR of 5.24%, 7.83% and 8.59% in a oneday, two-day, and three-day run-up window respectively to the shareholders of the bidder banks. The single-factor model finds that the combined CAR for all target banks is positive, significant and substantial. The combined CAR has been propped up due to very high CAR registered by Bank of Madura. The bidder banks created a wealth of Rs 4,117.98 million in a one day window (single-factor model) as a result of the merger announcements. In case of target banks, the shareholders of the Global Trust Bank and Bank of Punjab appear to be the losers as they lost Rs 382.55 million in a one day run up window (single-factor model) and Rs 128.74 million in a oneday window (single-factor model) respectively. Oriental Bank of Commerce and Global Trust Bank combined lost 14.78% in value on weighted average basis in a 11 days period (-5, 5) window. This merger was first major move to bail out sick bank. The merger announcements in the Indian banking industry have positive and significant shareholder wealth effect both for bidder banks and target banks. The market value weighted CAR of the combined bank portfolio as a result of merger announcement is 4.29% in a three-day period (-1, 1) window and 9.71% in 11-days period (-5, 5) event window.
2.3 Saranga.H, Phani.B (2008) Operational efficiencies as per the article Determinants of operational efficiencies in the Indian pharmaceutical industry of a firm play a crucial role in determining the survival and growth of a firm, especially when the industry is going through a dynamic structural transformation owing to external changes. In this paper, we explore the effect of managerial and strategic parameters on the degree of operational efficiency achieved by a firm in the Indian pharmaceutical industry using data envelopment analysis (DEA). During the period 1992–2002, the relaxation of import restrictions and foreign direct investment, along with a major change in the regulatory norms, resulted in increased competition from firms with superior resources in this industry. We use non-parametric DEA models and parametric methods such as regression analysis to determine the factors that have contributed to the internal operational efficiencies of these firms. The findings indicate that domestic firms, most of which are controlled by family-based governance structures, enjoy higher efficiencies than affiliates of multinational pharmaceutical majors. After controlling for firm size and initial efficiency levels, we find that firms with higher levels of innovation through higher R&D investments and older establishments are associated with higher efficiencies, when compared with their less R&D intensive and younger counterparts, respectively
2.4 Anand.S, Dadwal.S, Singh.P (2006) As per the article Mergers and acquisitions in Indian pharmaceutical industry, merger is the combination of two or more companies into a single corporation. The result of this action is the 28 | P a g e
formation of one, new, corporate structure. This new corporate structure retains its original identity. An acquisition is a little different from a merger in that it involves many problems being dissolved, and an entirely new company being formed. The overall goal is to ensure future stability and growth in the market. Reasons for mergers include reduced competition and/or product diversification, opportunity to expand by establishing their presence in a host country, to adopt technology from the other business rather than spending the time and money to develop it, Economies of scale and scope, to reduce its foreign exchange operating exposure. One major problem that may be incurred is cultural differences between the two businesses. This may lead to tension, conflict, and stresses between the organizations, namely its employees, lessening the chances of a smooth merger.
2.5 Danzon.P, Epstein.A, Nicholson.S (2003) The paper Mergers and Acquisitions in the Pharmaceutical and Biotech Industries, examines the determinants of M&A in the pharmaceutical biotechnology industry and the effects of mergers using propensity scores to control for endogeneity. Among large firms, we find that mergers are a response to excess capacity due to anticipated patent expirations and gaps in a company's product pipeline. For small firms, mergers are primarily an exit strategy for firms in financial trouble, as indicated by low Tobin's q, few marketed products, and low cash-sales ratios. Conversely, small firms with a relatively high Tobin's q, a large number of marketed products, and high cash/sales ratios are less likely to engage in any M&A activity. We find that it is important to control for a firm's prior propensity to merge. Firms with relatively high propensity scores experienced slower growth of sales, employees and R&D regardless of whether they actually merged, which is consistent with mergers being a response to distress. Controlling for a firm's merger propensity, large firms that merged experienced similar changes in enterprise value, sales, employees, and R&D relative to similar firms that did not merge. Merged firms had slower growth in operating profit growth in the third year following a merger. Thus mergers may be a response to trouble, but they are not an effective solution for large firms. Neither mergers nor propensity scores have any effect on subsequent growth in enterprise value. This confirms that market valuations on average yield unbiased predictions of the effects of mergers. Small firms that merged experienced slower R&D growth relative to similar firms that did not merge, suggesting that post-merger integration may divert cash from R&D.
2.6 Muslumov.A (2002) This paper Merger Announcement and Market Efficiency: Do Market Predict Synergetic Gains from Mergers Properly, examines whether market evaluates merger announcements in a reasonable way based on their effect on fundamental value using a sample of 37 mergers from U.S. industries completed within 1992-1997. For this purpose, the post-merger performance measures were regressed by abnormal returns at the announcement period. The research findings provide partial support to market efficiency hypothesis. Full sample analysis shows that bidder 29 | P a g e
abnormal stock return at the merger announcement is a good predictor of the post-merger cash flow changes, whereas subsample analyses yield varying results that cast doubt to market efficiency. The variation of the findings across subsamples suggests that the market sticks to its dynamic clichés in the evaluating merger’s future success in the environment of asymmetric information and these clichés sometimes incorporate misleading information content.
2.7 Griffin.P, Grundfest.J, Perino.M (2000) This study Stock Price Response to News of Securities Fraud Litigation: Market Efficiency and the Slow Diffusion of Costly Information, distinguishes between announcements that precipitate federal class action securities fraud litigation, such as earnings surprises and restatements, and the later announcement that an issuer has been named as a defendant in such a lawsuit. The study documents a statistically significant negative short-term price response to the litigation announcement as well as a negative response that persists for several weeks subsequent to the litigation announcement. The response over shorter and longer horizons is more pronounced for smaller firms and for firms with less analyst coverage. Also, passage of the Private Securities Litigation Reform Act of 1995 reduced the cost of obtaining information about the initiation of these lawsuits and is correlated with a more rapid price response, particularly among smaller issuers and those with less analyst coverage. Although these findings are hardly dispositive of the debate, they present a case study of a price pattern that is far more consistent with a costlyinformation explanation of stock market price formation than with any behavioral model of which we are aware. These findings also suggest that careful examination of market microstructure and information cost considerations can usefully explain patterns that might otherwise seem inconsistent with the efficient market hypothesis.
2.8 Jensen.M (1978) As per the article Some Anomalous Evidence Regarding Market Efficiency, the efficient market hypothesis has been widely tested and, with few exceptions, found consistent with the data in a wide variety of markets: the New York and American Stock Exchanges, the Australian, English, and German stock markets, various commodity futures markets, the Overthe-Counter markets, the corporate and government bond markets, the option market, and the market for seats on the New York Stock Exchange. Yet, in a manner remarkably similar to that described by Thomas Kuhn in his book, The Structure of Scientific Revolutions, we seem to be entering a stage where widely scattered and as yet in cohesive evidence is arising which seems to be inconsistent with the theory. As better data become available (e.g., daily stock price data) and as our econometric sophistication increases, we are beginning to find inconsistencies that our cruder data and techniques missed in the past. It is evidence which we will not be able to ignore. The purpose of this special issue of the Journal of Financial Economics is to bring 30 | P a g e
together a number of these scattered pieces of anomalous evidence regarding Market Efficiency. As Ball (1978) points out in his survey article: taken individually many scattered pieces of evidence on the reaction of stock prices to earnings announcements which are inconsistent with the theory don't amount to much. Yet viewed as a whole, these pieces of evidence begin to stack up in a manner which make a much stronger case for the necessity to carefully review both our acceptance of the efficient market theory and our methodological procedures.
2.9 Fama.E, Fisher.L, Jensen.M, Roll.R (1969), The article The Adjustment of Stock Prices To New Information, represents there is an impressive body of empirical evidence which indicates that successive price changes in individual common stocks are very nearly independent. 2 Recent papers by Mandelbrot and Samuelson show rigorously that independence of successive price changes is consistent with an "efficient" market, i.e., a market that adjusts rapidly to new information. It is important to note, however, that in the empirical work to date the usual procedure has been to infer market efficiency from the observed independence of successive price changes. There has been very little actual testing of the speed of adjustment of prices to specific kinds of new information. The prime concern of this paper is to examine the process by which common stock prices adjust to the information (if any) that is implicit in a stock split.
31 | P a g e
SCOPE, OBJECTIVES AND LIMITATION OF STUDY OF STUDY
32 | P a g e
3.0 Scope of the study To be competitive and successful in modern corporate world, it is essential to be updated with current trends in the market. Whether to expand your business or to relocate your production unit to some other place for cost effectiveness, you require finance and effective organizational strategies. It is not always possible to expand your business by using companies finance but it should also aligned with organizational strategies of expansion and diversification. A delay of a few days can cost you in millions. To make your enterprise successful and to run your business strategically, a secured Merger and Acquisition is an option worth trying for. Market can take an adverse turn at any moment. We can’t be certain about our future market trends and obligations. In an hour of need, we look for various options to expand our business. India is among the most significant emerging markets for the global pharmaceutical industry, given that it will feature among the world’s top 10 sales markets by 2020. Currently, it is regarded as one of the fastest growing pharmaceutical industries globally, primarily driven by a large population, evolving patient demographics, increasing health care expenditure, growing urbanization, rising life expectancy, and active private-sector participation. 1. This research will help to evaluate and analyze the factors that will contribute to the expansion and diversification of Pharmaceutical industry in India. 2. This research will help in determining the market efficiency of Pharmaceutical industry with respect to mergers and acquisitions. 3. This research will further help in determining the effect of mergers and acquisitions on the companies that are going to get merged or acquired by other companies. 4. This research further determines the share of Indian pharmaceutical industry in the global market by leveraging its strengths and enhancing its regulatory and technical maturity.
33 | P a g e
3.1 Objectives of study 1. To study the impact of merger announcement over market efficiency. 2. To study the growth potential for the company after the merger.
3.2 Limitations This research was limited because of the fact that the major source of data was from the annual reports of the companies, which were subject to accounting policies and practices followed by the company. The major limitations are 1. Due to strict confidentiality policy of the company the financial department disclosed screened information. 2. Accuracy of the data provided cannot be guaranteed which does not clear idea with regard to the actual functioning. 3. The study was limited by shortage of time also. 4. The results are drawn from the companies past performance which may have no relevance in the future. 5. The scope of the study is limited to because only few companies were included in the research.
34 | P a g e
35 | P a g e
4.0 Research Methodology Research may mean the first small step in an endeavor to understand better the change occurring and at times forced upon us as individuals or as society. Every project work is based on certain methodology, which is a way to systematically solve the problem or attain its objectives. It is a very important guideline and lead to completion of any project work through observation, data collection and data analysis. “Research Methodology comprises of defining & redefining problems, collecting, organizing &evaluating data, making deductions &researching to conclusions.” Accordingly, the methodology used in the project is as follows: 1. Defining the objectives of the study 2. Collecting Data of Different Companies. 3. Comparing Data 4. Analysis of Collected Data 5. Conclusion, findings and suggestions. Research as a process involves defining problems, hypothesis, formulation and organization and evaluating data, deriving deductions, interferences and conclusion after careful testing.
4.1 Purpose of the study The main purpose of the study is to find out the market efficiency with special reference to merger in pharmaceutical industry.
4.2 Objectives of general research 1. It extends, verifies or corrects knowledge. 2. It enables us to have a better understanding of our world. 3. It aids in purposive planning. 4. Research initiates, formulates, deflects and clarifies theory.
36 | P a g e
4.3 Objectives of this research 1. To study the impact of merger announcement over market efficiency. 2. To study the growth potential for the company after the merger.
4.4 Hypothesis Null Hypothesis: 1. The Return of the stock price of the companies announcing a merger is not significantly affected by this type of information on the announcement date. 2. The Return of the stock price of the companies announcing a merger is not significantly affected by this type of information after the announcement date.
Alternative Hypothesis: 1.
The Return of the stock price of the companies announcing a merger is significantly affected in a positive way by this type of information on the announcement date.
2. The Risk Adjusted Return of the stock price of the sample of firms announcing a merger is significantly affect in a positive way around the announcement date, as defined by the event period.
4.5 Research design A research design is a framework or blueprint for conducting the research project. It specifies the details of the procedures necessary for obtaining the information needed to structure and/or solve research problem. On the basis of fundamental objectives of the research we can classify research design into two general types: Exploratory research Conclusive research Exploratory research is one type of research design, which has its primary objective the provision of insights into, and comprehension of, the problem situation confronting the researcher.
37 | P a g e
Conclusive research is designed to assist the decision maker in determining evaluating and selecting the best course of action to take in a given situation. Conclusive research can be further divided into two types:1. Descriptive 2. Experimental
Descriptive study as the name implies is designed to describe something. The term descriptive research refers to the type of research question, design, and data analysis that will be applied to a given topic. It can involve collections of quantitative information that can be tabulated along a continuum in numerical form. Descriptive research involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data collection. Exploratory research is often conducted because a problem has not been clearly defined as yet, or its real scope is as yet unclear. It allows the researcher to familiarize him/herself with the problem or concept to be studied, and perhaps generate hypotheses (definition of hypothesis) to be tested. It is the initial research, before more conclusive research is undertaken. Exploratory research helps determine the best research design, data collection method and selection of subjects, and sometimes it even concludes that the problem does not exist. In this project we have used Exploratory as well as Descriptive Research to understand the behavior of different types of mergers which in turn provided me an opportunity to know about the market efficiency
and thus made it easier for me to formulate the above
mentioned hypothesis so that my project could reach to a logical conclusion. As mentioned above the Exploratory research was carried so as to come up with the real problem which was to reveal the pattern by how the mergers improves the market efficiency and what are the characteristics that companies observe in the industry before going for merger.
38 | P a g e
4.6 Sampling Plan: Sample Unit: Companies past data. Sample Technique: Probability and Non Probability Sampling, Convenience Sampling I have used convenience sampling technique. Convenience sampling is used in exploratory research where the researcher is interested in getting an inexpensive approximation of the truth. As the name implies, the sample is selected because they are convenient. Sample Size: 6 companies
4.7 Methods of data collection Data is of primarily of two kinds. 1. Primary data 2. Secondary data.
Primary data consists of original information for the specific purpose at hand. It is first hand information for the direct users or respondents. The tools used to collect the data may vary depending upon the nature of the problem. The primary data was collected through Questionnaire, Interviews Secondary data may be defined as data that has been collected earlier for some purpose other than the purpose of the present study. Any data that is available prior to the commencement of the research project is secondary data and it is called historic data Uses of secondary data 1. It acts as a reference for the present study. 2. The secondary data can be a useful benchmark, which the findings of the study can be tested. 3. At times it may be the only source of data.
39 | P a g e
Sources of secondary data 1. Published Sources 2. Unpublished sources Data collection methods can be classified as follows 1. Observation 2. Interviewing 3. Experimentation 4. Simulation 5. Projective techniques 6. Questionnaire In this project secondary data from published sources was collected.
4.8 Statistical tools used The main statistical tools used for the collection and analyses of data in this project are: As stated, the Standard Risk Adjusted Event Study methodology will be used. The information will be retrieved from the historical data for the company and the market. The announcement date of the merger will be used as Day zero. R = (Current day close price - Previous day close price) / Previous day close price Rm = (Current day market close price - Previous day market close price) / Previous day market close price. A regression analysis was performed comparing the actual daily return of each company to the Market daily return. The return on the firm is the dependent variable and the market return is the independent variable. The regression will cover the pre-event period (-30 to +30 Day and -44 to +44Day)
40 | P a g e
41 | P a g e
5.0 Acquisition of Beta pharmaceutical by Dr. Reddy’s Laboratories
Introduction On 7 Mar 2006, Dr. Reddy's Laboratories Limited (DRL), a leading Indian pharmaceutical company, acquired the fourth-largest generic pharmaceutical company in Germany, Beta pharmaceutical Arzneimittel GmbH (Beta pharmaceutical) from the 3i Group PLC (3i) for US$570 million (€480 million). The sale deal also included the 'beta institute for socio medical research GmbH' (beta Institute), a non-profit research institute founded and funded by Beta pharmaceutical to conduct research on issues related to social aspects of medicine and health management. The acquisition was hailed as the biggest overseas acquisition made by an Indian pharmaceutical company. The synergies from the acquisition were expected to benefit both DRL and Beta pharmaceutical. Stated above is the vision with which DRL went for the acquisition of Beta pharmaceutical. ∑
Understand and appreciate the role of mergers and acquisitions as a growth strategy.
Understand and discuss the rationale behind the acquisition of Beta pharmaceutical by Dr. Reddy's Laboratories.
Understand the impact of business and regulatory environment (domestic and international) on mergers and acquisitions.
Announcement The Hyderabad based company Dr. Reddy’s signed a definitive agreement with 3i, the private equity house that controls Beta pharmaceutical, on Thursday, 16th February 2006, to acquire 100 per cent equity of the German drug major. Dr Reddy's said the transaction, subject to customary closing conditions, was expected to close in the first week of March 2006.Valuation at the time of acquisition Beta pharmaceutical was highly profitable, with estimated EBITDA margin of 2426%. With assumptions and available industry data, we have done a quick NPV valuation of Beta pharmaceutical and arrived at a value of €550-560 million (or Rs 380-400 per share) assuming WACC of 12% and a sustainable growth rate of 5%. The payback period is likely to be 6-7 years. Analysts expected the Beta pharmaceutical acquisition to add $ 200 million to Dr Reddy's top line immediately and the company's shares jumped 9.38 percent to hit its 52-week high price on the Bombay Stock Exchange
42 | P a g e
Synergies from the Acquisition Not only is Dr. Reddy's non-existent in Germany, but the market has deep-rooted sales and distribution networks that makes inorganic expansion there tough and expensive for an outsider. Saion Mukherjee, Research Analyst, Brics Securities,in July 2006 The synergies from the acquisition were expected to benefit both DRL and betapharm. Through this acquisition DRL could get immediate access to the German generic market, the second-largest generic market in the world after the US. Germany also accounted for 66 percent of the generic market in Europe. The acquisition was expected to help DRL gain a strategic presence in the European market as the generic drug market in Europe was expected to show strong growth due to rising public healthcare costs. It was also expected to help DRL realize its ambition of becoming a US$1 billion mid-size global pharmaceutical company by 2008. Beta pharmaceutical was expected to benefit from the acquisition as it would be able to add more products to its portfolio and grow at a much faster rate in Germany. Besides, the acquisition would help it to utilize DRL's global product development and marketing infrastructure to expand its presence in the European market in the long run. Dr. Wolfgang Niedermaier (Niedermaier), CEO of Beta pharmaceutical, commented, "Dr. Reddy's impressive pipeline of generic and innovative products and its high quality standards combined with competitive manufacturing costs will help further develop our position in the German market and offer an entry platform for the European market. Its extensive and well-recognized corporate social responsibility activities perfectly fit with our successful corporate philosophy and business model. We see Dr. Reddy's as our partner of choice to build a successful joint future and continue betapharm's growth and success story." Though DRL was not the highest bidder, it clinched the deal largely due to the perceived synergies between the two companies. DRL's strong commitment to corporate social responsibility (CSR) initiatives too helped swing the deal in its favor as Beta pharmaceutical identified with such initiatives through the activities conducted by beta Institut. However, some analysts were of the opinion that DRL had paid too much to 3i for the acquisition as the value of the acquisition was estimated to be more than three times the annual sales of Beta pharmaceutical. Their argument was strengthened by the fact that another Indian pharmaceutical major, Ranbaxy Laboratories Limited7 (Ranbaxy), which had also aggressively competed for the acquisition and was a pre-sale favorite to bag the Beta pharmaceutical deal, pulled out at the last minute quoting the high price. DRL, however, justified the premium price saying that the advantages from the acquisition were manifold. A few also expressed their doubts as to whether DRL could leverage any benefits in the short term as Beta pharmaceutical was reportedly emerging from a lean period. A few months after the acquisition, there were already early signs of trouble, as the Economic Optimisation of Pharmaceutical Care Act (AVWG) took effect in Germany on May 1, 2006. Though the act was expected to increase the scope for the use of generic drugs, it also put some 43 | P a g e
price caps in place, which affected the margins of Beta pharmaceutical. Analysts opined that the payback to DRL from this acquisition would take a few years longer than previously expected. It was reported that DRL, which had plans for more acquisitions in Europe after the Beta pharmaceutical acquisition, had shelved its plans of any further acquisitions in Europe
Financing of the deal DRL had its war chest ready with a $200 million cash and remaining debt arranged from domestic FIs. DRL funded the acquisition through a combination of internal accruals and borrowings. Closure of the deal Dr. Reddy's Laboratories, announced the completion of 100 per cent acquisition of Beta pharmaceutical Group, Germany's fourth largest generic pharmaceutical firm, with a total enterprise value of 480 million Euros on Mar 07, 2006 Subsequent performance Dr Reddy's share price shot up by 9.3% to close at Rs 1,281 on February 16, 2006, when it announced the $560 million Beta pharmaceutical deal. Shares were trading higher at Rs 1,600 in early May. With the German government reducing prices of drugs in the range of 10-20%, the pricing environment became a little negative for the company in the first quarter, and the returns were on the lower side in Sep 2006. Of late DRL’s subsidiary, Beta pharmaceutical, has returned to its usual sales levels at $51 million, and lower selling, general & administrative (SGA) expenses led to better-than-expected operating margin adjusted for one-off opportunities. Beta pharmaceutical has achieved a 600 bps improvement in its active pharmaceutical ingredients (API) margins, which the management attributed to a better product mix, citing Amlodipine Besylate as one of the key products being sold.
44 | P a g e
5.1 Sun Pharmaceutical and Taro Pharmaceutical Sun Pharmaceutical Industries Ltd. Sun Pharmaceutical Industries Limited is an Indian global pharmaceutical company headquartered in Mumbai, Maharashtra that manufactures and sells pharmaceutical formulations and active pharmaceutical ingredients (APIs) primarily in India and the United States. The company offers formulations in various therapeutic areas, such as cardiology, psychiatry, neurology, gastroenterology and diabetology. It also provides APIs such as warfarin, carbamazepine, etodolac, and clorazepate, as well as anticancers, steroids, peptides, sex hormones, and controlled substances. Established in 1983, listed since 1994 and headquartered in India, Sun Pharmaceutical Industries Ltd. is an international, integrated, specialty pharmaceutical company. It manufactures and markets a large basket of pharmaceutical formulations as branded generics as well as generics in India, the United States and several other markets across the world. In India, the company is a leader in niche therapy areas of psychiatry, neurology, cardiology, gastroenterology, orthopedics and ophthalmology. Sun Pharmaceutical has strong skills in product development, process chemistry, and manufacturing of complex API, as well as dosage forms. Sun Pharma was established by Mr. Dilip Shanghvi in 1983 in Kolkata with 5 products to treat psychiatry ailments. Cardiology products were introduced in 1987 followed by gastroenterology products in 1989. Today it is the largest chronic prescription company in India and a market leader in psychiatry, neurology, cardiology, orthopedics, ophthalmology, gastroenterology and nephrology. Some of the top brands of the company include pantocid, susten, aztor, gemer, repace, glucored, strocit, clopilet and cardivas. Over 57% of Sun Pharma sales are from markets outside India, primarily in the US. Manufacturing is across 23 locations, including the US, Canada, Brazil, Mexico and Israel. In the US, the company markets over 200 generics, with another 150 awaiting approval from the USFDA. Sun Pharma was listed on the stock exchange in 1994 in an issue oversubscribed 55 times. The founding family continues to hold a majority stake in the company. Today Sun Pharma is the third largest and the most profitable pharmaceutical company in India as well as the largest pharmaceutical company by market capitalization on the Indian exchanges. The Indian pharmaceutical industry has become the third largest producer in the world and is poised to grow into an industry of $ 20 billion in 2015 from the current turnover of $ 12 billion Taro Pharmaceutical Industries Ltd. Taro Pharmaceutical Industries Ltd. (Taro), incorporated in 1959, is a multinational, sciencebased pharmaceutical company. The Company develops, manufactures and markets prescription and over-the-counter (OTC) pharmaceutical products, primarily in the United States, Canada and Israel. It also develops and manufactures active pharmaceutical ingredients (APIs), primarily for use in its finished dosage form products. Its primary areas of focus include pediatric creams and ointments, liquids, capsules and tablets, mainly in the dermatological and topical, cardiovascular, neuropsychiatric and anti-inflammatory therapeutic categories. It operates principally through three entities: Taro Pharmaceutical Industries Ltd. (Taro Israel), and two of its subsidiaries (including indirect), Taro Canada and Taro U.S.A. Taro Pharmaceutical Industries Ltd. is a 45 | P a g e
multinational, science-based pharmaceutical company, dedicated to meeting the needs of its customers through the discovery, development, manufacturing and marketing of the highest quality healthcare products.
Merger Sun Pharmaceutical and Taro Pharmaceutical Industries Ltd. announced that they have entered into a merger agreement together with certain affiliates of Sun Pharmaceutical. The merger agreement provides that all shareholders of Taro other than Sun Pharmaceutical and its affiliates will receive a cash payment of $ 39.50 per share upon the closing of the merger. Sun Pharmaceutical and its affiliates collectively own approximately 66.0% of the outstanding Taro ordinary shares and 100% of Taro’s founder’s shares, representing approximately 77.5% of the outstanding voting power in Taro. Upon completion of the merger, Taro will become a privately held company, will be wholly owned by affiliates of Sun Pharmaceutical, and its ordinary shares will no longer be traded on the New York Stock Exchange. The closing of the merger is subject to certain terms and conditions customary for transactions of this type, including the affirmative vote at the shareholder meeting to be convened to approve the merger 1) At least 75% of the voting power of the Taro ordinary shares voting at the Shareholder Meeting, 2) At least 75% of the voting power of the Taro founders shares voting at the Shareholder Meeting and 3) At least 75% of the total voting power of Taro (ordinary shares and founders shares together) Voting at the Shareholder Meeting, including at least a majority of the voting power voted that is not held by Sun Pharmaceutical or its affiliates unless the total voting power of Taro held by holders other than interested shareholders and voting against the merger does not exceed 2% of the total voting power of Taro. In connection with the proposed transaction, Taro intends to mail a proxy statement to its shareholders and to file relevant materials with the United States Securities and Exchange Commission. The merger agreement was approved by Taro’s Board of Directors based upon the recommendations and approvals of the Special Committee of Taro’s Board of Directors the “Special Committee” and the Audit Committee of Taro’s Board of Directors. The Special Committee was advised by its independent financial advisor Citigroup Global Markets Inc. and its independent legal counsel Goldfarb Seligman & Co. as its Israeli legal counsel and Willkie Farr & Gallagher LLP as its United States legal counsel. Safe Harbor Statement Certain statements in the press release are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements that do not describe historical facts and statements that refer or relate to events or circumstances that Sun Pharmaceutical or Taro estimates, believes, or expects to happen or similar language. The forward-looking statements in the press release are based on the current expectations of Sun Pharmaceutical and Taro and are made only as of the date of this 46 | P a g e
announcement and involve certain risks and uncertainties that could cause actual results to differ materially from future results that may be expressed or implied by such forward looking statements. Various factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, but are not limited to, risks associated with uncertainty as to whether the transaction will be completed, the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement, potential litigation associated with the transaction, the failure to obtain shareholder approval and the failure of either party to meet the closing conditions set forth in the merger agreement. Unless required by law, neither Sun Pharmaceutical nor Taro undertake any obligations to update, change or revise any forward-looking statement, whether as a result of new information, additional or subsequent developments or otherwise.
Successful acquisition On 13 August 2012, Sun Pharmaceutical Industries Ltd had completed the acquisition of a controlling stake in Taro Pharmaceutical Industries Ltd ending a three-year battle for control of the Israeli drug maker. Sun Pharmaceutical's units have increased their economic interest in Taro to 48.7% and their voting rights to 65.8%. The victory for Sun Pharmaceutical comes after a legal battle in Israel and in U.S. following Taro's termination in 2008 of a merger agreement signed between the two companies in 2007.In connection with the closing of the Option Agreement, Sun and the members of the current Board of Directors of Taro, including members of the Levitt and Moros families, have settled all outstanding litigation among themselves. Sun Pharmaceutical intend to build on Taro's market presence in U.S., Israel and Canada and its expertise in dermatology and pediatrics, along with specialty and generic pharmaceuticals, and over-the-counter products. Sun Pharmaceutical Chairman Dilip Shanghvi has been appointed to serve as chairman of the Taro board. Israeli Supreme Court ruled in favour of Sun Pharmaceutical by unanimously dismissing the appeal by Taro of the previous ruling by the Tel-Aviv District Court holding that the Israeli special tender offer (STO) rules do not apply to the Tender Offer by Sun Pharmaceutical’s subsidiary, Alkaloida Chemical Company Exclusive Group Ltd. to purchase all outstanding Ordinary Shares of Taro for $7.75 net per ordinary share in cash. At that time, Sun Pharmaceutical had a 36% equity stake in Taro with 24% voting rights. Sun Pharmaceutical had signed a $454 Mn merger agreement with Taro in 2007 including equity purchase of approximately $230 Mn at $7.75 per share in cash. However, in May 2008, Taro unilaterally terminated the agreement claiming lower valuations. In 2008, Sun Pharmaceutical launched an open offer to acquire additional stake in Taro, which was challenged by the latter. Both companies then filed suits in Israeli and the US courts. In a separate statement, Taro said its current board members were resigning and that appointees of Sun Pharmaceutical would become directors
47 | P a g e
5.3 Companies vs Shareholder The strategic investments of the firm should aim to create value for the owners of the firms, especially the shareholders. Nevertheless, most of the acquisitions in last decades seem to generate poor performance concerning the acquiring firms, and even when the results appear to be positive, they are lower for bidders' shareholder than targets' one and the value which is generated in the process retain for the very short period of time. Different studies therefore prove that the acquisition strategies would benefit the targets' shareholders by creating them value .But this doesn’t hold true in every scenario. There is hence a misunderstanding of the stake of the acquisition game from both sides. Such a discrepancy can only lead to bad acquisition strategy and planning. This gives a clash between the management of the company and the shareholders of the company. No planned integration cost The peculiarities of external horizontal growth are based on the combination of two entities, and especially of tangible, financial and above all human resources. The bidding company and the target, whatever are their activities, are composed of men and women living within the firm’s community. The rules, the behaviors, the customs, it means the culture is specific to each entity. The cultures of both entities may be mixed, and their combination may result in efficient synergies, but they can also be incompatible and lead to failure. There is also lot of reorganization & restructuring in the company during the days when M&A process is going on .The process of M&A by which company is bought or sold can prove difficult, slow and expensive
48 | P a g e
DATA ANALYSIS AND INTERPETATION
49 | P a g e
6.1 Dr. Reddy & Beta pharmaceutical (Table-1) Date
Index Price 9,390.14
Dr Reddy's Return
Close Price 963
10-Jan06 12-Jan06 13-Jan06 16-Jan06 17-Jan06 18-Jan06 19-Jan06 20-Jan06 23-Jan06 24-Jan06 25-Jan06 27-Jan06 30-Jan06 31-Jan06 1-Feb-06
10-Feb06 13-Feb06 14-Feb06
50 | P a g e
15-Feb06 17-Feb06 20-Feb06 21-Feb06 22-Feb06 23-Feb06 24-Feb06 27-Feb06 28-Feb06 1-Mar-06
10-Mar06 13-Mar06 14-Mar06 16-Mar06 17-Mar06 20-Mar06 21-Mar06 22-Mar06 23-Mar06 24-Mar06 27-Mar06 28-Mar06 29-Mar06 30-Mar06 31-Mar06
51 | P a g e
Regression Statistics Multiple R 0.244089 R Square 0.059579 Adjusted R Square 0.024749 Standard Error 0.021574 Observatio ns 29 ANOVA df
Significan ce F
SS 0.00079 6 0.01256 6 0.01336 2
Standar d Error
X Variable 1 0.519759
MS 0.00079 6 0.00046 5
F 1.71055 5
Lower 95.0% 0.0028 3 0.2956 5
Upper 95.0% 0.01415 4 1.33516 8
It is being presents by the above mentioned tables 1 that the CER (cumulative excess returns) of Dr. Reddy and Beta Pharma accumulated for the period (-30 to +30), i.e., from 30 days before the merger to 30 days after the merger. From the table it is clear that the entire time window is displaying marginal changes in CERs for Dr. Reddy. In relative terms, the CER is increasing marginally during the 30 days prior to the announcement of merger. After the date of merger announcement through the next 30 days it experienced a positive excess returns reflecting that the shareholders expected benefits from the merger. However, if CER is re-evaluated after omitting this positive announcement day excess return, CER for the period of next 30 days after merger announcement it declined it declines with a minimal rate as the information of merger is diffused in the market.
52 | P a g e
6.2 Dr. Reddy
Dr. Reddy experienced high positive returns during 30 days through 5 days prior to merger announcement deal. It was followed by the high positive return again after the merger announcement for next 5 days and after that the share prices resumed an upward trend. Hence, on the whole Dr. Reddy’s shareholders experienced almost positive returns during the entire time window of -30 to +30. This further supports our hypothesis, it is analyzed that:∑ ∑
Dr. Reddy experienced negative returns during the period -10 to -15 days except on the date of announcement of the deal. Dr. Reddy experienced high positive returns during the period 15 to 20 days and again during +52 to +54 days.
These trends started around 30 days before the announcement of the deal compatible with Beta pharmaceutical and lasted for further 30 days. However, an opposite trend is observed immediately after few days of announcement. In case of Dr. Reddy, after the trend of negative returns for few days it experienced positive returns for the next upcoming days. On the other hand, in case of Beta Pharma, after the trend of positive returns it experienced negative returns for the next 5 days. The subsequent opposite trend can be due to ‘overshooting’ of market expectations. The information about the proposed merger deal was taken as positive information for the shareholders of Dr. Reddy and it also act as positive information for the shareholders of Beta Pharma. Hence, the market responded to the information positively
53 | P a g e
6.3 Beta Pharmaceuticals (Table-2) Date
Close Price 82.95
Beta Pharma Return
10-Mar06 13-Mar06 14-Mar-
54 | P a g e
06 16-Mar06 17-Mar06 20-Mar06 21-Mar06 22-Mar06 23-Mar06 24-Mar06 27-Mar06 28-Mar06 29-Mar06 30-Mar06 31-Mar06 3-Apr-06
10-Apr06 12-Apr06 13-Apr06 17-Apr06 18-Apr06 19-Apr06 20-Apr06 21-Apr06 24-Apr06
55 | P a g e
Regression Statistics Multiple 0.514033 R 336 0.264230 R Square 271 Adjusted 0.261227 R Square 129 Standard 0.025646 Error 195 Observat ions 247 ANOVA Df Regressi on
SS 0.057869 883 0.161143 188 0.219013 07
0.000810 062 0.583385 108
0.001639 142 0.062194 498
0.494199 003 9.380011 458
0.621608 445 4.64559 E-18
Intercept Market return
MS 0.057869 883 0.000657 727
F 87.98461 495
Significa nce F 4.64559 E-18
Lower 95% 0.002418 546 0.460880 986
Upper 95% 0.004038 671 0.705889 23
Lower 95.0% 0.00241 855 0.46088 099
Upper 95.0% 0.004038 671 0.705889 23
The CER of Beta Pharma declined during the 30 days prior to the merger announcement with almost all the figures in negative terms and some of them are in positive, and rose with significant figures till next 30 days after the merger. On the announcement date, Beta Pharma experienced 3.44% positive returns. This high positive return supports the fact that the shareholders were satisfied by the swap ratio declared by Beta Pharma. Further, the positive change in CER does not last for a long period of time which could have benefited shareholders. If CER is considered after excluding the announcement day’s return, it is found that CER for the period (-30 to -1) increased overall and then there is additional increase during the 30 days after the merger. Thus, on ignoring 0 day CER, it is found that CER stays at positive for Beta Pharma shareholders during 30 days after the announcement of merger deal. Overall, it can be concluded that the period under review supports positive return to the target shareholders.
56 | P a g e
6.4 Beta Pharmaceuticals
Above graph shows a mixed trend during the 60 days (from -30 to +30) around the announcement of merger. During 30 days through few days prior to the announcement of offer the CER declined during the time period it accounted for about 6%. The trend of negative returns changed to positive after the announcement it yielded positive return of 17% immediately after the decline. Moreover, there was a positive shift in CER of 11%.However, CER fallen to near about 15%. This is consistent with our hypothesis. When Dr. Reddy’s and Beta Pharma merger was announced, Beta Pharma shareholders presumably expected that the proposed merger would lead to good returns given the lower risky business of Beta Pharma. This was due to the fact that pre merger Beta Pharma was 0.583385108. The shareholders of Beta Pharma were able to increase their returns with a significant amount which reviles that the merger by the two companies has benefited both the participants of the merger.
6.5 Reddy and Beta pharmaceutical. Excess returns to the Dr. Reddy and Beta pharmaceutical combined have been found to be positive. There is average cumulative gain to the combined firm in terms of market capitalization as well as book value. The means of both the indicators have been found to be of marginal value. Thus, positive returns have arisen because of the diversification and sentiments of the firms. Dr. Reddy and Beta pharmaceutical merger deal, apparently, was driven by any synergy gains. The merger is in keeping with the free cash flow hypothesis or the Managerialism hypothesis or both. 57 | P a g e
Since the study concentrates on stock price performance rather than free cash flow, the evidence provided by the study is adequate to accept hypothesis. Effectively, the Dr. Reddy and Beta pharmaceutical merger deal generated positive excess returns for the combined firm. The results are consistent with the Managerialism hypothesis that postulates positive excess returns for the combined firm due to empire building strategy or risk reduction. This is evident from several facts. Beta Pharma shareholders were able to obtain most of the gains. Dr. Reddy’s ambitious plans for diversification were dependent in large measure on Beta Pharma strong cash flows and it also needed to increase the size of its balance. The merger benefited both. Despite Dr Reddy professed objective of attaining leadership in the industry peer group, not only in terms of assets base, revenues, production volumes and market share, but also in terms of maximization of total shareholder returns the negative combined returns clearly indicate that the deal was undertaken by Dr. Reddy managers to maximize the utility of Beta Pharma business at the expense of Dr. Reddy’s shareholders returns can be studied both for the short term as well as the long term and the performances compared. Stock price movements are one of the tools to study the performance of mergers
58 | P a g e
6.01 Sun pharmaceutical & Taro pharmaceutical Sun pharmaceutical (Table-1) Date
Sun pharmaceutical Return
0.002367501 0.001642192 0.015691977
0.004278395 0.000957715 0.005076882 0.014161038 0.002346016
0.005488453 0.021219805 0.011387792
59 | P a g e
0.005294062 0.008781387 0.005850833
60 | P a g e
61 | P a g e
Regression Statistics Multiple R 0.632882 R Square 0.40054 Adjusted R Square 0.385169 Standard Error 0.013264 Observation s 41 ANOVA df
Intercept 0.001636 X Variable 1 0.569718
MS 0.00458 5 0.00017 6
F 26.0585 7
t Stat 0.78089 5 5.10475 9
P-value 0.43957 9 8.99E06
Significan ce F 8.99E-06
Lower 95% -0.0026 0.343975
Upper 95% 0.00587 4 0.79546 1
Lower 95.0% -0.0026 0.34397 5
Upper 95.0% 0.00587 4 0.79546 1
As reveled by the table CER (cumulative excess returns) of Sun pharmaceutical and Taro accumulated for the period (-42 to +42), i.e., from 42 days before the merger to 42 days after the merger. From the table it is clear that the table shows all the CERs for Sun pharmaceutical with the average of 1.68%. In relative terms, the CER declined during the 30 days prior to the merger from the date of merger through the next 42 days. On the date of announcement of merger Sun pharmaceutical experienced positive excess returns reflecting that the shareholders expected benefits from the merger.Further more it is evident from the table that prior to merger i.e; before 42 days sun pharmaceutical experienced CER in negative terms but as the merger announcement came it slowly stated shifting upwards.
62 | P a g e
6.02 Sun Pharmaceuticals
Above graph displays a clear positive slop in the return and CER after the merger announcement between the 85 days (from -42 to +42). 4 days prior to the announcement of offer the CER declined more than that of the others in the trend. The trend of negative returns continued for the next few days but on the day of merger it yielded positive return. Further, there was a sudden drop in the share prices of Sun Pharmaceuticals during the next 10 days after the announcement of offer. However, the trend gained rise during 55 day of the announcement of merger. This helps us to find out that information about merger affect the market value of shares and their return which further helps us to make decisions about our hypothesis. At the time of Sun pharmaceuticals and Taro merger announcement, Taro’s shareholders expected that the proposed merger would lead to will lead to good returns. Hence, the news about merger would have been positive impact on the shareholders of Sun Pharmaceuticals.
63 | P a g e
6.03 Taro Pharmaceuticals (Table-2) Date
64 | P a g e
4-Jun— 2007 5-Jun— 2007 6-Jun— 2007 7-Jun— 2007 08-Jun-07
65 | P a g e
66 | P a g e
Regression Statistics Multiple R 0.172023 R Square 0.029592 Adjusted R Square 0.005923 Standard Error 0.027299 Observatio ns 43 ANOVA df Regression
SS 0.00093 2 0.03055 5 0.03148 7
Coefficient Standar s d Error
MS 0.00093 2 0.00074 5
F 1.25026 9
X Variable 1 0.030804
Lower 95.0% 0.0049 1 0.0248 3
Upper 95.0% 0.01208 2
Taro’s CER was increasing during the 42 days prior to the merger by 4.7% and rose till 30 days after the merger. On the announcement date, Taro experienced positive returns. Due to this high positive return it is justified that Taro’s shareholders gain intensively from this merger and was a win-win position for both companies. Further more if CER is considered after excluding the announcement day’s return, it is found that CER for the period (-42 to -1) was impressive but at the time of announcement and after that it increased further more. Thus, after the merger day it is found that CER stays at positive for Taro shareholders during 42 days prior to and 42 days after the announcement of merger deal.
67 | P a g e
6.04 Taro Pharmaceuticals
Above table shows Taro experienced high positive returns during 42 days and few days prior to merger announcement deal. It was followed by the high positive returns during the next 42 days and after that the share prices further moved upward trend has been notices after the announcement. Hence, it is evident that Taros share holders have earned good returns from the with increased CER .This again supported our hypothesis ∑ Taro experienced positive increase in the value of their shares on the date of announcement of the deal. ∑ Taro experienced high positive returns during the period of +42 days. The upward state of CER and return trends started around one day after the announcement of the deal compatible However, an opposite trend is observed before the announcement. In case of Sun Pharmaceuticals, after the trend of negative returns for 5 days it experienced positive returns for the next 5 days. On the other hand, in case of Taro, after the trend of positive returns it experienced small negative returns for the next one day. The information about the proposed merger deal was taken as positive information for the shareholders of Taro and somehow negative for the shareholders of Sun pharmaceutical. Hence, the market responded to the information likewise.
6.05 Sun Pharmaceuticals and Taro Pharmaceuticals Excess returns for both companies Sun pharmaceutical and Taro have been found to be favorable to the Taro more than Sun pharmaceutical. There is average cumulative profit to the Sun pharmaceutical in terms of market capitalization as well as book value. In the initial stage of merger Sun pharmaceutical was also able to benefit itself from the merger but it lost the tract because of focusing more on the diversification more in foreign markets but, it flourished the market for Taro. Sun pharmaceutical and Taro merger deal, apparently, was not driven by any 68 | P a g e
good synergy gains. But ultimately it helped both the companies to gain sufficiently and improve their existence in other markets. Effectively, the Sun pharmaceutical and Taro merger deal generated positive excess returns for the combined firm. The results are consistent with the hypothesis that positive excess returns for the combined firm due to empire building strategy or risk reduction. This is evident from several facts. Taro shareholders were able to obtain most of the gains even when there was no competition for the acquisition of Sun pharmaceutical. Sun pharmaceutical’s ambitious plans for diversification were dependent in large measure on Taro’s strong cash flows and its existence in overseas market. Stock price movements are one of the tools to study the performance of mergers. Other tools also can be used to calculate the synergy generated by such deals.
69 | P a g e
6.001 Dr. Reddy’s laboratories Ltd The merger between Dr. Reddy’s laboratories Ltd and Beta Pharma Inc. took place in year 2006.Hence below analysis has been done 2 year prior to the merger i.e. during 2003-04 and 2004-05 and two year after the merger i.e. 2006-07 and 2007-2008 respectively. Dr. Reddy’s 2004-05 laboratories Ltd
Gross operating 13.63 Margin (%)
Operating Profit Margin (%)
Net Profit Margin (%)
Return On Capital Employed (%)
Return On Net Worth (%)
On carefully observing the above table it can be seen that the operating margin was at straight 4 year decline before the merger took place the year in which merger there was an immediate rise in operating margin which declined next year and after that there has been a gradual increment in operating margin ( it is a positive sign to the company’s performance). Gross operating margin was on gradual upward move till the merger. In the year merger took place gross operating margin was at its 5 years highest 38.66% after the merger there was a huge decline of nearly 26% in gross operating margin but after that there was a stagnant increase in the years till now ( The response is positive for the company). The net profit margin was very strong in the year 2006-07(29.01%) when the merger took place it was on a steep rise after that there was a big decline to 13.57% in the next year and net profit margin stagnated after that ( It shows the negative impact of merger over the company). 70 | P a g e
Return on capital employed had a similar moment to that of net profit margin of the company as it was very good in the year the company merged (2006-07) but after a decline in the next year it stagnated (This shows the negative impact of merger). Return on net worth was rising steeply till the year of merger (2006-2007) and was 10 years highest in 2006-07 but in the year 2007-2008 it fell almost 17%, but after that till now there has been a gradual rise in return on net worth (This is a positive sign for the company). The company’s debt- equity has decrease from $410 to $1000 equity to$120 to $1000 equity (This is a positive sign for the company). The earnings per share was 10 year high in the year 2006-07(70.09) when the merger happened. The year after the merger there was a huge decline and EPS fell to 28.26 but after that there has been a continuous gradual increase in EPS every year. This is a positive sign for the company. Overall it can be seen that the merger between Dr. Reddy”s laboratories and Beta Pharma was a successful move for Dr. Reddy as the company is facing negative impact on net profit margin and return on capital employed only but the impact of merger over all other factors analyzed was positive . It has been seen that it was difficult for Dr. Reddy to control its operations in both the companies the year next to the merger because the company was not in a good position in year 2007-08 but after that the company is on a rise. It’s also seen that the company was in a very strong position in the year when the merger took place (2006-07). So the growth potential of Dr.Reddy laboratories is good after the merger.
71 | P a g e
6.002 Sun Pharmaceutical Industries Ltd The merger between Sun Pharmaceutical Industries Ltd. and Taro pharmaceutical Industries took place in year 2007.Hence below analysis has been done 2 year prior to the merger i.e. during 2005-05 and 2006-07 and two year after the merger i.e. 2008-09 and 2009-2010 respectively. Sun 2005-06 Pharmaceutical Industries Ltd.
Gross operating 27.81 Margin (%)
Net Profit Margin (%)
Return On Capital Employed (%)
Return On Net Worth (%)
Operating Profit Margin (%)
On carefully looking at the above figures it can be seen that the operating margins of the company was on negative side before the merger took place and after the merger took place there was a relevant improvement in the operating profit margin which reached to its five year high in 2009-10(13.63%)( This is a positive sign for the company). Gross operating margin was very high at 27.81% in 2005-06 but in year of merger and the year next to the merger the gross operating margin had gone close to nil which is not good for the company.(This is negative for the company).
72 | P a g e
The net profit margin has gradually increased from the year 2005-06 till now and was not affected by the merger this is positive sign for the company). The return on capital employed has increased after the merger took place as the year in which merger took place and the year next to the merger there was almost equal return on capital employed (This is a positive sign for the company). The return on net worth for the company is on a decline path there might be an effect of merger over it (this is a negative sign for the company). The company’s debt-equity ratio was quiet high at 1190$ debt to 1000$ equity in the year 20052006 but the company has decreased it 10 times till the year 2009-10 to 100$ debt to 1000$ equity (which is a good sign for the company). Earnings per share has raised from 24.83 in year 2005-06 to 61.09 in 2008-09 which is showing that merger was successful there have been decline in EPS in the year 2009-2010. But still (it is a good for the company). It is easily visible that the merger between Sun Pharmaceutical Industries Ltd. and Taro pharmaceutical Industries in the year 2007 was a successful for Sun Pharmaceutical Industries as the company is facing negative impact on Gross operating margin and return on net worth only but the impact of merger over all other factors analyzed was positive . So the growth potential of Sun Pharmaceutical Industries Ltd laboratories is good after the merger because the company is performing well after the merger.
73 | P a g e
FINDINGS, CONCLUSION, SUGGESTIONS
74 | P a g e
7.1 Findings In order to examine the performance of a firm prior to a merger and after the merger, therefore, it is necessary to identify which of the merging firms are taken into consideration and analyze their past performance. To do so, we rely on past and present performance. The findings that we have found out of this research are as following ∑ ∑
∑ ∑ ∑ ∑ ∑
The merger between Dr. Reddy and Beta Pharmaceuticals helped both the companies to improve their prices and returns of the stock moreover it helped Dr. Reddy to diversify its business in other markets and increase their market share. Dr. Reddy experienced negative returns during the period -10 to -15 days except on the date of announcement, after the announcement of the deal it increased significantly from this we came to know that announcement deals play an important part in determining the market efficiency. It has been found that the cumulative excess returns of Dr. Reddy and Beta Pharma accumulated for the period (-30 to +30), i.e., from 30 days before the merger to 30 days after the merger is increasing marginally during the 30 days prior to the announcement of merger. After the date of merger announcement through the next 30 days it experienced a positive excess returns, reflecting that the merger announcement information plays a positive role in determining the market efficiency. Excess returns to the Dr. Reddy and Beta pharmaceutical combined have been found to be positive. There is average cumulative gain to the combined firm in terms of market capitalization as well as book value. The means of both the indicators have been found to be of marginal value. Thus, positive returns have arisen because of the diversification and sentiments of the firms. Dr. Reddy managers to maximize the utility of Beta Pharma business at the expense of Dr. Reddy’s. It has been found that on the date of announcement of merger Sun pharmaceutical experienced positive excess returns reflecting that the shareholders expected benefits from the merger. Taro experienced positive increase in the value of their shares on the date of announcement of the deal. Taro’s CER was increasing during the 4-2 day prior to the merger by 4.7% and rose till 30 days after the merger. On the announcement date, Taro experienced positive returns. Due to this high positive return it is justified that Taro’s shareholders gain intensively from this merger. Excess returns for both companies Sun pharmaceutical and Taro have been found to be favorable to the Taro more than Sun pharmaceutical. There is average cumulative loss to the sun pharmaceutical in terms of market capitalization as well as book value
A traditional economic motive for mergers, of course, can be to increase market share and market power to gain competitive advantage. This has not been a major issue in the case of the pharmaceutical mergers in India and elsewhere mergers are subject to scrutiny prior to their implementation by the antitrust authorities. 75 | P a g e
7.2 Conclusion This study looked to see how quickly the Market reacts to information, exploring the idea of an investor’s ability to earn an above normal return against the Market. In essence, it possible to outperform the Market when the information about industry is appropriate, with the new information being introduced, like a merger, it would be expected that the Actual Average Return, within the event period, and the Expected Average Returns within the event period would differ. If a significant difference is shown, then the hypothesis that states the information announcement did increase or decrease the stock should be supported. A paired sample was conducted and found that the announcement of the merger may be insignificant in determining its effect on the stock price. A reaction in the Market can be seen in the days leading up to the announcement and shortly after, but the merger announcement play an efficient role in determining the market efficiency. In this research it has been found that merger announcements play an important role in stock prices of the companies announcing the merger and it is evident from this research that stock prices of the companies moved positively when the information about the merger was announces in the market, this helps us to accept the Alternative hypothesis. The research on mergers between pharmaceutical entities is more encouraging in nature. There is evidence of a positive relation between a firm’s announcing merger and leads to successful outcomes. Indian Pharmaceutical manufacturers are demanding more liberalization, arguing that competition, and not price control, will improve availability and affordability of essential drugs The Indian pharmaceutical industry is on a major growth trajectory and is expected to reach US$ 74 billion by 2020. In order to realize the full potential of the market and tap growing global opportunities, companies operating here will have to collaborate in a mutually beneficial manner. As we move into the next decade, mergers will drive future growth. MNCs will not be averse to acquisitions but high valuations will make M&A’s expensive in India. Alternatives such as alliances and partnerships will actually prove to be more flexible and value enhancing in the long term. MNCs can benefit from the local market knowledge of Indian companies, the strength of their sales force and significant cost advantage across drug development and the manufacturing process. Global pharmaceutical companies have the capability of bringing in newer products, technology, capital and quality leadership. They can help their Indian counterparts in their desire to ascend the innovation curve. However, mergers face significant challenges of quality, valuation, management control, corporate governance as well as cultural issues. Success will depend on thorough due diligence of quality aspects, appropriate valuation and synergy derived from the association. Given the price sensitive nature of the Indian consumer as well as cost pressures from developed economies, pharmaceutical companies will have to focus on improving operational efficiencies. Creating an agile and responsive supply chain that is operationally efficient and minimizing the incidents of supply chain fraud will be of significant importance. At the same time, companies entering cross border transactions should proactively monitor their policies and maintain robust documentation. This will assist companies in optimizing their business operations. Health insurance is a significant driver for the growth of the overall healthcare market by improving access to state-of-the-art medicines and therapies. Medical technology can also help improve access to quality healthcare delivered in a cost effective way. Medical technology will also help drive the trend towards personalized medicine. The medical technology sector needs to reduce its import reliance as well as create innovative products and solutions keeping in mind the realities of the Indian market. Government and industry must work 76 | P a g e
together to reduce the barriers to innovation and create a vibrant innovation ecosystem to deliver patient-centric solutions. In meeting the challenges of growth, pharmaceutical companies will have to ensure that it is sustainable. Pharmaceutical MNCs as well as large Indian companies are taking an interest in sustainability by implementing initiatives and reporting on their success in the areas of energy and water consumption, emissions and waste treatment and handling, access to medicine by using differential pricing and voluntary licensing. The pharmaceutical industry in India is poised for a period of robust growth driven by mergers. Success in the market will be dependent not only on pharmaceutical companies but also on other stakeholders like healthcare providers, health insurance companies, medical technology companies, government, patient groups as well as society at large acting in concert. How well they do will determine the future of the Indian pharmaceutical industry.
77 | P a g e
7.3 Suggestions The suggestions that have been entitled below are for the companies that have entered into merger agreement, by opting these suggestions these companies might get benefited in one or other way and can remain ahead in the market to its competitors. ∑
Pharmaceutical companies that have entered into merger agreement with other companies should establish their production plants where they can achieve Cost effective manufacturing to gain competitive advantage over its competitors.
Pharmaceutical companies should improve their supply chain in order to be grow with the emerging markets and should concentrate more on embedding the culture of one’s organization with the merged organization.
Pharmaceutical companies should improve their global competitiveness by making their presence in foreign markets and should diversify their business in related aspects by Creation and entry to new markets.
Pharmaceutical companies that have entered into merger agreement should increase their product portfolio by adding the products of merged company in their product line.
Pharmaceutical companies that have entered into merger agreement should acquire assets of merged firms, in order to boost their outsourcing capabilities and new products.
Pharmaceutical companies that have entered into merger agreement should consolidate their market shares. Pharmaceutical companies that have entered into merger agreement should adopt the technology of merged firm and should try to maximize its returns from the adopted technology, further more it will help the company to reduce its expenditure on innovating the same technology.
Pharmaceutical companies that have entered into merger agreement should extensive experimental on the manufacturing new drugs.
78 | P a g e
79 | P a g e
8.1 Books:NAME OF THE BOOK
NAME OF THE AUTHOR
1. Financial Management
2. Financial Engineering
John F. Marshall
3. Fundamentals of financial management (Authored by vyuptakesh sharan, chapter 16. Page no:230)
8.2 Annual Reports:1. Annual reports of Dr. Reddy Laboratories. 2. Annual reports of Beta Pharmaceuticals. 3. Annual reports of Sun Pharmaceuticals. 4. Annual reports of Taro Pharmaceutical Industries Ltd
8.3 Journals:1. “Note for Guidance on Parametric Release,” CPMP/QWP/3015/99 (EMEA, 7 Westferry Circus, Canary Wharf, London E14 4HB, UK, 2001). 2. H.L. Avallone, Pharm. Eng. 10(4), 38–41 (1990). 3.
C. DeSain and C.V. Sutton, Pharm. Technol. 19(10), 131–136 (1995).
4. J. Agalloco, J. Parenter. Sci. Tech. 47(May/June 1993). 5. D.C. Montgomery, Design and Analysis of Experiments (John Wiley & Sons Inc., 6. Hoboken, New Jersey, USA, 1997) pp 315–322. 7. B.T. Loftus in I.R. Berry et al., Eds., Pharmaceutical Process Validation, 2nd Edition Marcel Dekker Inc., New York, New York, USA, 1993) pp 1–8. 8.
G.W. Melliger, Pharm. Ind. 42(Nr.11a), 1199–1202 (1980).
80 | P a g e
9. E.M. Fry, Pharm. Ind. 46(6), 601–605 (1984). 10. Andrade, G. and Stafford, E. (2004) “Investigating the Economic Role of Mergers.” Journal of Corporate Finance 10: 1-36. 11. E.M. Fry, Drug Cosm. Ind. 133(7), 46–51 (1985). 12. J.R. Sharp, Pharm. J. 236(1), 43–45 (1986). 13. B.T. Loftus, Pharm. Ind. 42(Nr. 11a), 1202–1205 (1980). 14. Beena, P.L. (2008) “Trends and Perspectives on Corporate Mergers in Contemporary India.” Economic and Political Weekly 43(39): 48-56.
8.4 Websites:1. http://www.bse.com 2. http://www.moneycontrol.com 3. http://www.investopedia.com 4. http://www. nse.com 5. http://www.allbusiness.com 6. http://www.uri.pdu 7. http://Businessballs.com 8. http://sebi.org
81 | P a g e