The Merger of Ranbaxy with Daiichi Sankyo

About Ranbaxy
Ranbaxy was started by Ranbir Singh and Gurbax Singh in 1937 as a distributor for a Japanese company Shionogi. The name Ranbaxy is a combination of the names of its first owners Ranbir and Gurbax. It is India's largest pharmaceutical company. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world. The company has a global footprint in 43 countries, world-class manufacturing facilities in 8 countries and serves customers in over 125 countries. Most of Ranbaxy's products are manufactured by license from foreign pharmaceutical developers.

 On June 10, 2008, Daiichi Sankyo agreed to take a majority(34.8%)stake in Indian generic drug maker Ranbaxy, with a deal valued at about $4.6 billion to create an innovator and generic pharmaceutical powerhouse. The combined entity now ranks among the top 20 pharmaceutical companies, globally. For the year 2011, the company recorded Global Sales of US $ 2.1 Bn. As part of the Hybrid Business Model, Daiichi Sankyo will utilize Ranbaxy's strong manufacturing capabilities and expertise in developing generic medicines . Under the terms of the deal, Ranbaxy became a subsidiary of the Japanese company but would continue to operate as an independent & autonomous Company.

About Daiichi Sankyo

Daiichi Sankyo was established in 2005 through the merger of Sankyo Co., Ltd. and Daiichi Pharmaceutical Co., Ltd which were century-old pharmaceutical companies based in Japan. It is a global pharmaceutical company and the second largest pharmaceutical company in Japan. Its headquarter is based in Tokyo. The company also owns the American biotechnology company Plexxikon, the German biotechnology company U3 and Ranbaxy Laboratories in India. It achieved JPY 970 billion in revenue in 2010 and is currently ranked number 17 in world sales.

Nature of transactions
All cash transaction. Specific nature of the transaction Off Market Transaction. Acquisition funded through debt and existing cash reserves. The deal was financed through a mix of bank debt facilities and existing cash resources of Daiichi Sankyo. Daiichi Sankyo has taken short and long term loans of USD 2.6billion which is almost 50% of the total funding requirement of the deal.

Synergies
In one shot, the deal gives Daiichi access to Ranbaxys strong network, infrastructure and market share. Ranbaxy, on the other hand, will benefit from the Japanese firms research capabilities. Ranbaxys geographically diversified presence across the globe will enable it to provide a wider reach to Daiichi Sankyos product portfolio, including India. Ranbaxy has a small presence in the Japanese market where the generics market holds good opportunities. Ranbaxy incurred lower interest costs, as it be came debt-free company.

 The deal strengthened the financials of Ranbaxy (making it debt free and cash rich)and help it grow aggressively-organic. Ranbaxy by passed a lot of European and U.S. companies that were finding it difficult to enter the Japanese market, where safety and testing requirements a real lot higher. This deal made the amalgamated company to be the 15th largest pharma company in the world.

Deal Summary
Daiichi will buy the 34.8 per cent controlling stake held by Ranbaxys founders the Singh family at Rs 737 a share. It will then make an open offer for up to 20 per cent of Ranbaxy shares that is mandatory under SEBI regulations. Daiichi will also get preferential allotments of shares and share warrants, with a goal of a minimum 50.1 stake. The deal the second-largest foreign acquisition of an Indian company after Vodafone values Ranbaxy at $8.5 billion, with the offer price at a 31.4 per cent premium to its closing price. Ranbaxy shares closed at Rs 560.75 on the BSE .

Anticipated Benefits Of the Acquisition

Daiichi Sankyo Strengthen the position of the company. Acquisition will provide low cost manufacturing. Market access to over 60 countries. Ranbaxy Co Lt Company will be come one of the top 5 in generic business. Access to Daiichis advanced R&D facilities. Access to Japanese drug market Infusion of an additional $1billion into the company. Surplus cash of Rs.3,000 c rores flows in. The market capitalization goes to $8billion & the net worth goes up.

How did Daiichi acquired Ranbaxy

Date of acquisition Particulars No. of shares % of share holding Values in Crores

15Oct,2008

Acquisition of share under open offer persuant@737 per share

Acquired share by preferential allotment of warrant Acquisition of share from promoter@737p er share(first tranche) Second tranche

9,12,77,598

20

6,727

20 Oct,2008

4,16,22,585

9.12

3,068

20 Oct,2008

9,35,13,899

20.49

6,892

07 Nov,2008

6,53,09,121

14.31

4,813

Total

29,17,23,203

63.92

21,500

Shares held Pre & post acquisition

Shares held by Singh Singhs family Daiichi Sankyo Mutual fund Banks Insurance Company FII General Public Pre % 34.82 19 5.56 1.71 14.39 12.42 12.1 Post% 63.92 2.58 0.32 9.19 4.41 19.53 Change% 100 100 63.92 53.59 58.47 36.13 64.49 61.40

Reasons for higher valuation

The deal values Ranbaxy at $8.42billion An enterprise value to sales (EV/sales) of 3.5 x the estimated earnings for 2008. An EV/EBITDA of 23 x the forward earnings for the current year. It was a very attractive multiple. Daiichi Sankyo paid about 4.7 x Ranbaxys sales for the acquisition, as against 2.7 x paid by Mylan for Merck KGaAs generic unit at a price offer $7.6 billion in 2007. The high valuation was due to Ranbaxys strong infrastructure, presence across geographies, a robust product pipeline, including upsides from the

Impact Analysis of the deal on Daiichi

The EPS showed a double fold increase with out much of increase in gross profit which indicated that the reserves & surplus should have been made available accordingly. The balance sheet of Daiichi Sankyo indicated that the current liabilities had increased to 161% when compared to current assets which had decreased by (15.43%). COGS significantly decreased in the year 2008 due to the increase in Purchase of Investments owing to the acquisition.