INDUSTRY DETERMINATIONS OF

“MERGER VERSUS ALLIANCE”

DECISION

SUBMITTED TO: SUBMITTED BY:

MS: RITU SRIVASTAVA SAMEER POONIA

ROHAN SETHI
ROOPAM
ROHIT KHURANA
SACHIN SHARMA
SANJOY SHAW
 SAAHIL JAIN

Table of Contents

ABSTRACTS 5

INTRODUCTION / LITERATURE REVIEW 6

EVOLUTION OF ALLIANCES 8

EXECUTIVE SUMMARY 13

OBJECTIVE OF THE STUDY 14

RESEARCH METHODOLOGY 15

ANALYSIS AND FINDINGS 18

PRODUCT DIVERSIFICATION 21
THROUGH CONSOLIDATION

SOME BIG ALLIANCES 24

LIMITATIONS 26

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 OBJECTIVES & PROJECT DESIGN

This chapter is concerned with the project methodology, which is the foundation stone of a Project,
Project Objectives, and Data Collection.

Statement of the Problem:

The present study explores various aspects of, the statement is:-

“Merger and Acquisition’’ /Alliances.”

Project Objectives:

The main objectives of the research work are:-

1.) To study and acquire in depth knowledge in the field ,with analysis of
a).“Impact of industry determinants on M&A/Alliances.

b). Successful strategy designing on the basis on these variables.

2.) To analyze the latest trends and development in the corporate environment in the field of

“Merger & Acquisition, Alliances’’

DATA COLLECTION:

The design chosen for the study was review of articles in renowned reoffered Journals, Newspapers,

Magazines, References Books and Websites.

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Collection of Secondary data: - To provide a base to the current study variety of secondary data
sources has been tapped to develop a conceptual framework.

The sources of secondary data were sort mainly from Pacific Institute of Management Library, Pacific
Institute of Technology Library, Pacific Business School Library and Pacific Institute of Management and
Technology Library.

Help of various engines on internet, mainly google.com and yahoo.com for reference articles on the

subject. Various academicians and practitioners in this field for guidance have also been
consulted.

Limitations of the Study:-

1.) The time constraint was a hurdle, as such Primary data Collection could not be done.
2.) The topic was contemporary and had limited data available. But an attempt to present the best has
been done.

ABSTRACT:
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Merger and Acquisition has become a routine feature than an exception in the present day business
scenario. In a merger companies join up with each other sharing their resources to reach a common goal.
Shareholders of both the entities continue as join owners of the merged entity. In an acquisition , as the
denotes, one firm out rightly purchases the assets or shares or both of another company whose
shareholders lose their claim on the acquired outfit once the deal is over. As businesses expanding with
diversification becoming the order of day, merger and acquisition are being adopted as strategic tools for
growth. Restricting to core area makes no business sense any longer, as one can see the way both the
houses of reliance are forging ahead with entry into virtually every field. Tatas are rewriting their
corporate history with acquisition galore. No different is the case with the other major industrial houses.
All the augurs well for our country which is poised to become an economic force to reckon with, very
soon.

Winning the race to future and the rest world requires a strong sense of purpose and speed. Yet, few
companies, if any, have what it takes to run the race on their own. The idea of racing as a team is
somehow uplifting to the human spirit. The logic of bringing many heads together to achieve what was
previously considered difficult or impossible on an individual basis is somehow compelling.

The trends towards globalization of all national and regional economies has increased the intensity of
mergers, in a bid to create more focused, competitive, viable, larger players, in each industry. The recent
liberalization has made mergers more necessary and acceptable. The globalization may entail
redundancies and closures of inefficient units as a consequence of technological upgradation and
modernization. As it open the flood gates of competition between unequal partners. The working units
below average efficiency are more favorable to mergers and takeover.

Also a number of firms around the world have been using strategic alliances to become more competitive
globally. The reasons attributed to such alliances vary from economies of scale, increased revenue, cross
selling, synergy, tax write-offs, and diversification and resource transfers among others. After the
liberalization of INDIA economy in 1991, INDIAN companies have used these strategic alliances to
expand into other markets and prepare for increased competition at home. But after joining the World
Trade Organization in 1995, India had to change its patent laws by 1 January 2005 to meet its
commitments under the WTO's agreement on Trade Related Intellectual Property Rights (TRIPS). In the
post-2005 scenario, the pharmaceutical industry has undergone a significant change due to the TRIPS
agreement.

Though a number of reasons are attributed to these strategic alliances in literature, there is no particular
pattern that can be observed in these alliances. This study aims at analyzing the indian Pharmaceutical
Industry and the strategic alliances in the recent past and what drives these alliances. A value chain
framework has been proposed that analyses the critical capabilities needed along the value chain in the
Pharmaceutical Industry, the existing capabilities of the firms and how these alliances are supposed to
bridge the capability gap. Overall we try to extract various available secondary data to grab valuable and
noticeable determinants that led to successful merger, acquisition or an alliance between firms.

Literature Review

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According to the theory of financial turbulences, Grot (1969) developed the merger wave model
where waves occur when an increase in the general financial activity results in an imbalance in
the marketplace of products. Investments who keep a higher positive outlook for future demand
from others, give higher price to the bought out companies. Mergers are the result of the efforts
for the consolidation of these capital gains.

When the leading company proceeds to merging movements, then its competitors will follow
in the fear that they will stay behind. Thus the actions for the development of the wave are been
born. Gort’s model is been developed around the influence of the merger waves during the
periods of strong financial development and increase of the stock markets in USA, Great Britain
and the European Union. An initial merger wave can itself create a financial unbalance. Financial
turbulences cause or offer the conditions for larger scale mergers. In some cases, the companies
attempt to make mergers when changes are ahead (Davies and Lyons, 1996).

Types and classification of Buyouts & Mergers:

A buyout does not always lead to a merger of the bought out company. In practice, the
implementation of a merger can take other forms; it can be direct or gradual, total or selective
resulting in total or partial merging of units, stores, services, resale or closure of others. The
operational merger procedure, total or partial does not necessarily coincide with the typical- legal
procedure of its implementation. Thus, the various resulting consequences, especially the ones
concerning employment and labor relations can appear before, during or even after the typical
implementation of a merger, something that is very important for the regulation and protection of
the corresponding labor rights.

Usually, the combination of buyout with merger depends on:

• The strategy and targets of the companies performing the buyout

• The business activity and certain basic features of the bought out (corresponding activity,

Complimentarily of operations, compatibility of culture, administrative and labor practices and

The existing cooperation schemes between the two companies).

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• The general social and economic conjuncture in the country and internationally. Corporate
merger is when two or more companies are terminated in the purpose of forming a combination
of companies that will create as a rule, a larger and more powerful financial unit

Problems companies face following Buyouts& Mergers

The problems for a smooth implementation of Buyouts & Mergers are not only institutional,
financial or operational. Factors such as, man, culture, company philosophy and potential
internal weaknesses that are part of each company’s micro-world, can be determinant in the final
outcome of the Buyout & Merger.

The involved parts do not only deal with the financial aspect of the Buyout & Merger, but
also with the social cost of each Buyout & Merger that is usually interpreted in issues concerning
the management of excessive personnel resulting in the loss of work places . The research in
Greek companies, tried to locate the most important problems after the Buyout & Merger.

EVOLUTION OF ALLIANCES:

Mittra (2007) explains how pharmaceutical R&D can be described as a complex, ‘distributed
innovation system’ by giving a brief explanation of history of the pharmaceutical industry in

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general. He found out that in the past companies used the shot-gun approach and patiently
accumulated in-house research, production and marketing capabilities independent of the
knowledge from external innovators. But around the 1980’s developments in biotechnology and
genomics broadened the industry’s understanding of the structure and activity of the chemical
compounds; which led to the development of focused screening and systems research . During
the 1990’s, the emergence of new life science-based revolutionary potential of a new biomedical
paradigm, prompted many technologies for discovery research, coupled with 12 companies to re-
configure internal R&D processes and exploit creative strategic relationships with external
innovators .A study conducted shows that the number of alliances within the pharmaceutical
industry varies depending on the category of drugs .

IN DEVELOPED COUNTRIES:

Inter-firm partnerships in the developed firms started during the 1970’s but did not really take off
until the beginning of 1980’s. During the 1970’s and the 1980’s, utilizing the explosion of
knowledge in biotechnology provided by government funding (in the US), the focus of drug
research of many large multinationals changed from random screening to rational drug discovery
Dedicated biotechnology firms (DBF’s) originated in the US first and then in Europe (Sinker,
2005). Therefore, during the early 1980’s the European government redirected public research
funds into academic biotechnology research in order to reap the benefits of the DBF’s in Europe.
During this time Europe was lagging behind the US in entering collaborations with DBF’s and
universities so as to produce in-house capability in new technologies (Sinker, 2005). Some
companies like Bayer pharmaceuticals had built a small in-house biotechnology research team

IN DEVELOPING COUNTRIES:

The Indian and the Chinese Pharmaceutical Industries are both very fragmented (Grace, 2004).
During the 1970’s and the 1980’s the law of patents was applicable only to processes in
developing countries. Hence the pharmaceutical industry flourished by mass producing cheap
products through imitation and the on-patent products was copied without restrictions (Gangly,
2006). During the 1990’s few firms started collaborating with the biotech segment. India and
China were amongst the late entrants in this area. Biotech based products in India formed only
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4% of the entire industry market. India during this time differed in strategic alliance formation
such that from the total money spent on biotech research (US $33 million), the industry’s
contribution was only about $4-5 million The other reason could be that many drugs are in
different phases of their life cycles waiting to be developed. Due to incapability of biotech firms
to develop them fully on their own, licensing or joint ventures like research collaborations
support these small biotech firms in achieving this goal .Post 2005 scenario, three new business
models i.e. contract research, contract manufacturing and co-marketing alliances are seen within
the Indian pharmaceutical industry. This has 16 shifted the focus of pharmaceutical firms from
process improvisation to drug discovery in order to compete with the global market. An example
of such business model is the collaboration of Dr. Reddy’s Laboratories (Hyderabad) with IICT
(Hyderabad) (FICCI, 2005). Also the R&D spending in India of ‘elite’ pharmaceutical firms in
2005 was raised to $10 million/year or more to generate NCE’s and the clinical research
spending was about $100 million/year. Now, the large advanced Indian pharmaceutical firms are
forming strategic alliances with the biotechnology laboratories and/or research
institution/universities to produce novel drugs and NCE’s (Ganguli, 2006) while some other
small firms are simply trying to explore the new markets in order to survive the post-patent
period (Grace, 2004). FDI has increased in these countries due to the low cost of land and labour
(Grace, 2004) and the number of US FDA approved patents have also increased in these
developing industries .Agarwal et al.(2007) point out that the Indian companies have now
entered into product specific marketing arrangements and alliances with Indian as well as foreign
pharmaceutical firms. They also found out that many Indian firms are entering into generic
markets through agreements with the US and European firms either by assisting the innovator
companies by supplying the manufacturing expertise needed for complex patent protected
molecules or by assisting the global generic companies for off-patent molecules. Therefore, it
can be concluded that collaborations are helping the pharmaceutical firms to build a portfolio of
variety 17 of drugs and shape best practices while assisting them in leveraging core
competencies (Pharma Focus, 2007).Thus, it can be said that for pharmaceutical firms, creating
an appropriate business portfolio based on a strategic mix of generic products with a planned
generic pipeline by taking advantage of drugs going off-patent, NCE’s, investing in research for
new drug molecules, designing drug delivery systems/functional formulations, cost-effective
non-patent-infringing processes, etc., has been the main thrust in the last decade (Ganguli, 2006).

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TYPES OF ALLIANCES

Different researchers have different views about the alliance types.Cools and Roos (2005) list the
following four different types of alliances within the life-science industry:

a) Expertise alliances which include collaboration between non-competitors to share expertise

and capabilities,

b) New Business alliances in which non-competitors enter partnership to gain access to new
markets,

c) Cooperative alliances in which competitors cooperate to take advantage of economies of scale,

and

d) M&A like alliances in which competitors may desire total integration but are prevented from
pursuing it.

RELATIONSHIP ORGANIZATIONAL LEARNING

Innovation and alliances are argued to be positively related such that alliances help firms develop
and absorb technology outside the firm .This type of internalization of external research tends to
be very prevalent in the biopharmaceutical industry when new technologies are introduced
(Higgins, 2004). Rothaermel points out that incumbent firms are engaged in exploration
alliances with the biotechnology industry in order to facilitate their technological core
transformation through discovery of radical innovations.

BETWEEN ALLIANCES, INNOVATION

According to scholars organizational learning is an important determinant of alliances’ success

through organizational learning strategic alliances can be handled and managed better as the
firms in an alliance learn about each other. Alliances enhance the strategies and operations of
partner firms through learning thereby creating value by enhancing overall partner skills view
alliances as tool to gain access to the technology and knowledge of the partners. According to
alliance learning is a co-operative way of learning through which firms try to enhance their
capabilities.

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However, the dynamics of learning and partner interactions continuously change over the course
of time. Initial motivating conditions for exploring partnerships generate adaptive learning
capacities in firms, and these lead to greater responsive abilities to meet new conditions
encountered at each phase as the relationship progresses; firms themselves learn more and more
and eventually become big firms. Thus, it can be concluded that through alliances, firms acquire
both knowledge and innovation.

FACTORS DRIVING ALLIANCE TREND

Within the life-science industry, many reasons contribute to the alliance behavior of firms. One
of the most important reasons for alliance formation is to gain access to new markets and
distribution channels The second reason is the high costs involved in drug development process
which is difficult for small firms to bear alone. Thus, alliances are formed between organizations
with the hope of learning and acquiring new technologies from the partner firm, leveraging on
economies of scale and scope, and enhancing new product development capabilities

OTHER FACTORS INFLUENCING ALLIANCES

A lot of management and scientific challenges are faced in an alliance formation. Linder et al.
(2003) suggest that pharmaceutical and biotech firms lack the scientific common ground needed
for alliance formation due to the differences in their approaches toward drug development
wherein the prior takes a more chemistry-based approach while the latter takes a more technical
approach. Linder et al. (2003) further point out that firms also suffer due to lack of alliance
strategies. Differences in the scientific orientation, size and business models of companies create
core structural defects through the bio-pharmaceutical alliance.

GOVERNMENT REGULATIONS AND PATENT EFFECTS:

Among the key industrial policies influencing the innovative process and alliances in
pharmaceutical industry are the public support of biomedical research, patents, FDA regulatory
policy, and government reimbursement controls. Mitral (2007) supports this view by pointing out
that through funding the research projects of small innovative firms, government has started
influencing alliance in a positive way. Alliance formation is the patent system which is the public
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policy instrument designed to balance the tradeoffs inherent between the dynamic and generic
forms of competition. According to Agarwal et al. (2007), patentability is defined as a
pharmaceutical patent which will have to be a new entity involving one or more inventive steps,
and new use of an existing product (incremental innovation) will not be patentable (Agarwal et
al. 2007).

BENEFITS OF ALLIANCES/ALLIANCE OUTCOMES:Alliances allow firms to maintain

multiple flexible research relationships to quickly adapt and incorporate new technologies
without having to expend the time or resources to develop those capacities internally or acquire
those competencies through acquisition (Higgins, 2004). They also combat problems associated
with inter-firm cooperation.

DRAWBACK OF ALLIANCES:

One of the drawbacks of alliance formation, according to Jones and Hill (1988), is that when one
firm enters into too many alliances at a time, it becomes difficult to manage the alliance
portfolio. They further point out that the difficulty arises from the high transaction costs which
surpass the firm’s gains resulting in a negative net effect for high levels of alliance activity. The
second drawback of alliance formation is the problem associated with knowledge spill over
which can occur due to differences in alliance partners regarding goals and opinions. This
problem can be negated through well-maintained relations and indirect ties. The third drawback
is the power imbalances which can result from organizational learning and due to difference in
size of firms.

EXECUTIVE SUMMARY

Globally, pharmaceutical industry grew at a compounded annual growth rate (CAGR) of 9.1 per
Cent in the last 23 years to US$491bn—powered by a string of innovative blockbusters. It is an
Industry characterized by huge investments in drug discovery and development. In the recent
past, falling research productivity triggered off a series of mega mergers. Multinationals fixated
upon mergers and acquisitions as a way of fattening their research pipelines. This at best

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represents a short term solution. Multinationals are trying to raise research productivity by
pursuing contract research opportunities and striking alliances with biotech companies and
academe. With a slew of blockbuster drugs losing patent protection in the next few years and
government’s pressing for pharmaceutical price cuts, multinationals today find themselves under
more immense pressure to find new drugs and slash costs. Worldwide focus on cost cutting is
driven by outsourcing of production and research to low cost havens such as India and China.
India, with the highest number of FDA approved plants outside USA, is providing the high
quality drugs at low costs in tune with the requirements of the global players. The global trend of
substituting prescription drugs with generic drugs for cutting health care expenditure betters
prospects of Indian companies focused on outsourcing opportunities in generic markets. Indeed,
Indian pharmaceutical industry is staring at a new world full of opportunities and threats. The
size of Indian pharmaceutical market increased from INR Rs4 billion in 1970 to Rs290 billion in
2003—a CAGR of 13.5 per cent. Key therapeutic segments include anti-infective, cardio
vascular and central nervous system drugs. In 2003, total production of bulk drugs stood at INR
Rs60 billion and formulations at Rs230bn. Indian exports totaled INR Rs140 billion while
imports amounted Rs40 billion. The profiles of the major 100 pharmaceutical companies in India
give an insight into the strategies adopted by the Indian players besides helping in outsourcing
strategies. The companies covered include formulations, bulk drugs as well as the ones involved
in contract manufacturing and contract.

OBJECTIVES OF THE STUDY

1. The first objective of our study is to measure the success rate of “ M&A,and strategic
Alliances, it means we wanted to observe the impact of M&A and alliances on to the
various variables like Employee compensation , R&D expenses ,revenue etc.

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 2. The second objective is to take or focus on only Pharmaceuticals industries, and take two
important variables Commitment and Flexibility to measure our first objectives.

3. Our most important objective is to observe & analyze the past few years data of the
companies and interpret the results and check our three HYPOTHESIS based on
Secondary data.

4. The another objective of our study is to prepare some important findings or we can say
some kind of important Recommendations and on the basis of our samples ,we try to
make some Generalized statements.

RESEARCH METHODOLGY

To determine the situations in which a industry decides to go for merger & acquisition or alliance
we undertaken a research based on secondary data. The sample size taken here is 32 which
comprises of 12 firms that had undergone merger, 11 firms that had undergone acquisitions and 9
forms that had undergone alliances with other firms. All the firms belong to the pharmaceutical
industry.
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The variables taken for the research are –

1. Requirement For Flexibility

2. Requirement For Commitment

The choice that a firm makes between M&A and alliance involves balancing
requirements for commitment with requirements for flexibility. This balancing of
commitment and flexibility is subject to the further constraints of the industry structure
and institutional forces. The choice of M&As versus alliances involves a cost-benefit
analysis of the relative trade-offs of commitment and flexibility. Commitment brings
great benefits to firms but it does so at a cost, in terms of both the investment itself and
the potential for loss of foregone opportunities due to inflexibility. The same comparison
can be made regarding flexibility, in that more flexible arrangements allow firms to take
advantage of changed circumstances, but at the cost of less capability to intensively
exploit an opportunity.

To carry on with the research we took three hypotheses. They are-

1. M&As will be more likely than alliances in capital-intensive industries.

2. Alliances will be more likely than M&As in industries characterized by a high

level of specialized human asset intensiveness.

3. M&As will be more likely than alliances in industries characterized by high

levels of tacit knowledge.

M&As will be more likely than alliances in capital-intensive industries.

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Capital intensity refers to the amount of physical capital used to produce a unit of output. Firms
in capital-intensive industries will have higher fixed costs and require greater economies of scale
and scope to succeed. Inter-firm collaborations in these industries will require unified control
over the combined firm, especially in larger transactions with expectations for economies of
scale and scope. This will increase the desirability of M&As relative to alliances.

Alliances will be more likely than M&As in industries characterized by a high level of
specialized human asset intensiveness.

Not all value-creating investments are amenable to control through ownership Investments in
specialized human assets are an example, since it is difficult to control critical employees as one
would control fixed assets, intellectual properties, or patents. Employees are free to leave a firm,
and firms must secure their cooperation if their specialized human assets are to be put to work.
This makes specialized human assets a different situation from traditional settings of labor
intensiveness and traditional human resources, which suggests that firms in industries high in
specialized human assets will be more likely to use alliances than M&As. This intuition is true
for specialized human assets, even if there is substantial causal ambiguity of the core resources
of potential partners. Causal ambiguity exists when the precise reasons for success or failure
cannot be determined and it is impossible to produce an unambiguous list of the factors of
production. When there is causal ambiguity, firms may prefer ownership through mergers over
alliances in order to have more control of the combined resources. However, firms cannot own or
control specialized human assets as they can control fixed assets. Value from cooperation based
on specialized human assets requires more investment in people, more retention of trained
people, and more cooperation between firms over new resources. Inter-firm collaborations
through alliances based on specialized human assets will be more flexible and less susceptible to
exploitation than linkage controlled through hierarchy, as in M&As. Meanwhile, it has long been
recognized that M&As tend to create cultural clashes when they are implemented which,
coupled with the difficulties of exploiting specialized human assets through hierarchical
controls, might increase the turnover of valuable employees from the acquired firms.

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M&As will be more likely than alliances in industries characterized by high levels of tacit
knowledge.

Tacit knowledge is knowledge that is difficult to articulate and communicate and that often
requires face-to-face contact for effective transfer Tacit Knowledge is also associated with ideas
of causal ambiguity. The presence of extensive tacit knowledge in an inter-firm association
suggests a higher cost of transferring knowledge and a higher cost of contracting. This will raise
the cost of alliances, which depend on contracts, relative to M&As. This may make M&As
preferable to alliances. As already suggested, this implies that the assets involved in
collaboration are sufficiently large relative to those held by each partner to justify ownership
investments.

To test the above hypothesizes we took the following matrices-

1. Capital history of the firms.

2. Employee compensation

3. R&D expenses

4. Market Share

5. Sales revenue

The data were taken and compared on the basis of pre M&A/Alliance and post M&A/Alliance
basis.

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 ANALYSIS AND FINDINGS

MARKET SHARE:

We have taken 50 companies data (before M&A and strategic alliances) to observe the impact of
the share prices, it means we wanted to observe “Is there any positive relationship between the
MARKET SHARE PRICE of the company and M&A, STRATEGIC ALLAINCES “??

KEY FINDINGS:

1.The most important point which we observed that there is a Positive Correrelation present
between the Share Price of the company and Strategic Alliances, this shows that as any
company ( Pharmaceutical companies) make some alliances then the share price increases(90%),
the reasons may be followings:

 The first important reason is that if any companies make strategic alliances with
some well known company which having the special resources present in terms of
Capital or in terms of technology then definitely companies will have increment in
terms of innovation & it helps in R&D also.

According to our sample size we don’t find any direct positive correlation between
the M&A and MARKET share prices of the company. Again the reasons may be as
follows:

The main reason may be that M&A requires lot of CAPITAL investment to acquire
any drug company, so thus people create some doubt among their mind sets.

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MEASURING THE IMPACT OF M&A ON EMPLOYEE
COMPENSATION:-

Employee Compensation is the most important variable for our study propose because we really
wanted to know or we can say that we wanted to measure the impact of M&A and strategic
alliances impact.

We find that there is HIGHLY POSITIVE RELATION exist between the M&A and Employee
Compensation.

We observe that in most of the cases there is highly increment in employee’s salary and wages,
from our sample size more than 80% companies’ shows positive relationship between these two.

For example ABL technology, leading company of drugs, there is 48% increment in employee’s
salaries after the takeover.

The same thing also happens in case of STRATEGIC ALLAINCES it means we can say that
“There is positive relationship between the ALLAINCES and employees salary and this
relationship is less linear as compared to the M&A.

Now employee training is also part of the employee compensation, we interpret from the data
and conclude that “In case of M&A, there is highly increment in employees training (most of the
time it got doubled), may be the most important reason is that When company go for M&A then
two different cultures mix with each other so it requires special training for the employees in
terms of technological training or HR training etc.

R&D EXPENSES:-

This is again very important variable for our study purpose because in this industry most of the
M&A and STRATEGIC ALLAINCES take place only because of R&D purpose because this
requires most of the capital and especially high level of technical personas and high level of tacit
knowledge also.

There is a complete high level of positive correlation exists between the Merger and R&D
expenses, it means in most of the cases the R&D expenses became doubled or tripled.

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For example take the example of ANKUR DRUG CORP., there was a merger took place
between ankur and some other company in 2006 and look at the all variables:

(Merger year) (After Merger)

Variables Mar 2007 Mar 2008
Compensation 2.5 5.71
Sales 178 390
PAT 13 38.14
Total Assets 156 510
R&D expenses 15.23 35.22

Relationship between SALES and M&A:

It is not compulsory that if any company go for M&A or STRATEGIC ALLAINCES then it is
sure that sales will increase it may be or may not be,

From our study we observed that in most of the cases there is no clear pattern for sales revenue
means there is no hard n fast rule is that M&A or ALLIANCES means higher sales or large
increment in sales revenue, there is no clear cut relationships exist between the SALES
REVENUE and M&A OR ALLAINCEES.

Now there may be many reasons for that because at initially there is not linear relationship exist
between M&A and sales revenue but after some time period, we can say that after 2 or 3 years
when company is able to handle and utilize the all assets of targeted company then company is
able to innovate new formulas and drugs and then sales increases in linear manner.

PRODUCT DIVERSIFICATION THROUGH CONSOLIDATION :

Firms may opt for mergers in order to reduce the risk and uncertainty. If a firm is more
diversified, then there is greater possibility of obtaining stable return. Any losses in one
particular market can be offset by profit in some other market. Mergers enable firms to diversify

20
their production by adding new product to more therapeutic categories and thereby not only
reduce risks, but also expand their market size. The synergy effect of merger will enable the
firms to either deepen or extent product structure. Here an attempt is made to find out to what
extent mergers and acquisitions helped the merging firms’ to diversify their production. One way
to find out the extent of diversification is by taking account of the sales value of new products
added after mergers to the total sales value. Since the information about this is unavailable,
alternatively we have applied a rule of thumb method to understand the extent of diversification.
We have used Monthly Index of Medical Specialties (MIMS) published by A. E. Morgan
Publications (India) Private Ltd., which is Medical Journal containing information on product
lines, prices and usage of major drugs available for prescription in India. The study compares the
situation of 8 merging companies in 1990 with that of 2005 as the similar information for the rest
of the merging firms are not available in MIMS. MIMS classifies the pharmaceutical products
into major therapeutic categories and each of these categories consists of different sub-
categories. The product profiles of these firms can be traced from this document. A comparison
with 1990 will show as to how many new products were added by merging firms.

The data shows that there was an expansion in the production profile of the merging companies
during the post merger period. If we take the major therapeutic categories as the device for
comparison, then in the case merging companies that makes major percent of all the merging
firms’ expanded their product profile in 2005 as compared to 1990. Cadila Pharmaceuticals were
among the firms, which have reduced its product lines between 1990 and 2005 (see Table 14).
We further observed that Cadila is concentrating on some therapeutic categories more
powerfully. It is interesting to note that Ranbaxy has not expanded its product lines during this
period, but Ranbaxy has concentrated its brands in some product lines widely. This only means
Ranbaxy has been consolidating in the existing product lines.

Table below gives the number of product lines of the merged firms that included in the product
lines of the merging firms in 2005, which were not produced by the merging firms in the year
1990. This analysis is based on the sub-categories (not major therapeutic categories as in the
Table given). The result showed that merging firms continued producing many of the product
lines of the merged firms. For example, Pharmacia had products in six therapeutic sub-categories
in 1990. The merging firm (Pfizer) had no products in these categories at the time of merger. The

21
merging firm started producing two new product lines, which were earlier produced by merged
firm.

Product Diversification of Merging Firms between 1990 and 2005

Firm 1990 2005 Change

number
Aventis 8 12 4

Cadila 14 10 -4
Glaxo 9 15 6
SmithKline

Nicholas 9 12 3
Piramal

Pfizer 7 13 6

Ranbaxy 9 9 0

Sun Pharma 5 8 3

Product lines of merged firms continued by merging firms (1990-2005)

Merging Firm Merged Firm Total Product No: of product
Lines* lines continued

Pfizer Pharmacia 6 2

Nicholas Roche 5 3
Piramal Products

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 Nicholas Piramal 2 2
Piramal Healthcare

Nicholas Boehringer 13 8
Piramal Mannheim

Glaxo Roussel India 12 8

SmithKline Ltd.

Nicholas Rhone 23 14
Piramal Poulance

Pfizer Parke Davis 18 13

Note: * Total product lines of the merged firms before merger

SOME BIG ALLIANCES:

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 1. Strategic alliance made between Ranbaxy and Orchid pharmaceuticals. As per this
alliance, Orchid would manufacture both finished dosage formulations, and active
pharmaceutical ingredients (APIs) for marketing by Ranbaxy. Orchid is niche player in
the global pharma industry with an impressive track record with lot of sterile products.
Cephalosporins are the main products of Orchid (fifth rank in global cephalosporin’s
production).

2. Nicholas Piramel also had a deal with same Merck to discover and develop cancer drugs
which may bring them revenue of about 350 million dollars! Nicholas has also signed
with Eli Lilly for the drugs targeting metabolic disorders, where it could receive 100
million dollars in royalty payments

3. Pfizer – aurobindo Dated – Mar, 09, in licensing and supply agreement.

Pfizer will take on license, an array of generic pills and injectible medicines, as it looks to
off-patent medicines for the growth, said a senior executive on Tuesday, adding that it is
focusing on such off-patent medicines to increase profits. The company estimates that the
deal with Eurobond would boost its revenue by $200 million till 2014.
"Eurobond will manufacture the products and we will be responsible for the marketing,"
said Pfizer senior vice-president Kevin Cooper. "Currently, this is for the US and Europe
market but we are also in talks for other geographies as well." Pfizer’s established
products business unit was launched in 2008

4. Pfizer – claris life sciences May 09

World No 1 pharma company Pfizer on Wednesday announced a marketing tie-up with

Rs 800-crore Ahmadabad-based Claris Life sciences that specializes in injectables.

5. Gsk – dr reddy’s June 15, 2009

GlaxoSmithKline plc (GSK) on June 15, 2009 announced an agreement with Dr. Reddy’s
Laboratories Ltd (Dr. Reddy’s) to develop and market selected products across an
extensive number of emerging markets, excluding India.

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 This is another significant step forward in our strategy to grow and diversify GSK’s
business in emerging markets. This new alliance will combine Dr. Reddy’s portfolio of
quality branded pharmaceuticals together with GSK’s extensive sales and marketing
capabilities. Together we will be able to deliver more medicines of value to more patients
in these countries.”

Under the terms of the agreement, GSK will gain exclusive access to Dr. Reddy’s rich and
diverse portfolio and future pipeline of more than 100 branded pharmaceuticals in fast growing
therapeutic segments such as cardiovascular, diabetes, oncology, and gastroenterology and pain
management.
The products will be manufactured by Dr. Reddy’s, and licensed and supplied by GSK in various
countries in Africa, the Middle East, Asia Pacific and Latin America. In certain markets,
products will be co-marketed by the GSK and Dr. Reddy’s. Under the terms of the agreement,
revenues will be reported by GSK and shared with Dr. Reddy’s as per the agreed terms.

1. HYPOTHESIS: M&A will be more likely than alliances in industries

characterized by high levels of tacit knowledge.

From our data it is very clearly shown that dharma industry requires high level of
tacit knowledge and maybe that’s why most of the companies go for M&A, and in
most of cases that decision is right because we have observed that R&D expenses is
the best variable which we have taken and that shows that whenever companies
require (Pharmacy industry) tacit knowledge they go for M&A because they
needed high budget for R&D expenses, and our data shows that there is clearly
linear relationship exist between the R&D expenses and M&A.

Thus Hypothesis 1 is completely right

2. HYPOTHESIS: M&A will be more likely than alliances in capital-intensive

industries.

As we took CAPITAL (including equity, total assets and some other financial data)
data for measurement of this variable, again we observed from our data that most of

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 the companies which requires tacit knowledge, they again require assets or some
other sources of the targeted company so this hypothesis is also right.

LIMITATIONS:

1. The scope of study is limited because we have taken only 50 sample size because it’s
very difficult for us to take beyond 50 sizes.

2. No primary data is involved, all the data are based on secondary data, and the source of
data collection is only CMIE data base.

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