Mergers and Acquisition

CHAPTER-1
INTRODUCTION TO MERGERS AND ACQUISITIONS

Mergers and Acquisitions are a means of corporate expansion and growth. They are not only
means of corporate growth, but are an alternative to growth by internal or organic capital
investment. From time to time, companies have preferred the external means of growth through
acquisitions to internal growth. The terms merger, acquisition, ta!eovers are all part of
mergers and acquisitions parlance.
"n a merger, the corporations come together to combine and share their resources to achieve
common ob#ectives. The shareholders of the combining firms often remain as #oint owners of
the combined entity. An Acquisition resembles more of an arms length deal, with one firm
purchasing the assets or shares of another, and with the acquired firms shareholders ceasing to
be owners of that firm. "n a merger a new entity may be formed subsuming the merging firms,
whereas in acquisitions the acquired firm becomes the subsidiary of the acquirer.
$%&
The immediate ob#ective of an acquisition is self evidently growth and expansion of the
acquirers assets, sales and mar!et share. 'owever this merely represents an intermediate
ob#ective. A more fundamental ob#ective may be the enhancement of shareholders wealth
through acquisitions aimed at accessing or creating sustainable competitive advantage for the
acquirer. According to the managerial utility theory, acquisitions may be driven by managerial
ego or desire for power, empire building or perquisites that go with the si(e of the firm.
$)&
Why Do Firms Merge?
Gro!h"
*ne of the most common motives for mergers is growth. There are two broad ways a firm can
grow. The first is through internal growth. This can be slow and ineffective if a firm is see!ing
to ta!e advantage of a window of opportunity in which it has a short+term advantage over
competitors. The faster alternative is to merge and acquire the necessary resources to achieve
competitive goals. ,ven though bidding firms will pay a premium to acquire resources through
mergers, this total cost is not necessarily more expensive than internal growth, in which the firm
1
has to incur all of the costs that the normal trial and error process may impose. -hile there are
exceptions, in the vast ma#ority of cases growth through mergers and acquisitions is
significantly faster than through internal means.
Sy#ergy"
Another commonly cited motive for mergers is the pursuit of synergistic benefits. This is the
new financial math that shows that ) . ) / 0. That is, as the equation shows, the combination of
two firms will yield a more valuable entity than the value of the sum of the two firms if they
were to stay independent1
2alue 3A . 45 6 2alue 3A5 . 2alue 345
Although many merger partners cite synergy as the motive for their transaction, synergistic
gains are often hard to reali(e. There are two types of synergy1 that which is derived from cost
economies and that which comes from revenue enhancement. 7ost economies are the easier of
the two to achieve because they often involve eliminating duplicate cost factors such as
redundant personnel and overhead. -hen such synergies are reali(ed, the merged company
generally has lower per+unit costs. Many of the consolidating mergers of the fifth merger wave
are partially based upon the pursuit of such discussed separately in the section that follows this
one.
8evenue enhancing synergy is more difficult to predict and to achieve. An example would be
where each firm believes that it can sell its products and services to the other firms customer
base. Another example would be a situation where one companys capability, such as research
prowess, is combined with another companys capability, such as mar!eting s!ills, to
significantly increase the combined revenues.
Di$ersi%i&'!io#"
*ther motives for mergers and acquisitions include diversification, whereby companies see! to
lower their ris! and exposure to certain volatile industry segments by adding other sectors to
their corporate umbrella. The trac! record of diversifying mergers is generally poor with a few
notable exceptions. A few firms, such as 9eneral ,lectric, seem to be able to grow and enhance
shareholder wealth while diversifying. 'owever, this is the exception rather than the norm.
2
:iversification may be successful, but it seems to need more s!ills and infrastructure than some
firms have.
(ENEFITS OF MERGERS AND ACQUISITIONS
Mergers and acquisitions generally succeed in generating cost efficiency through the
implementation of economies of scale. "t may also lead to tax gains and can even lead to a
revenue enhancement through mar!et share gain.
The principal benefits from mergers and acquisitions can be listed as increased value
generation, increase in cost efficiency and increase in mar!et share. Mergers and acquisitions
often lead to an increased value generation for the company. "t is expected that the shareholder
value of a firm after mergers or acquisitions would be greater than the sum of the shareholder
values of the parent companies.
An increase in cost efficiency is affected through the procedure of mergers and acquisitions.
This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost
efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of
the new firm increases. As output production rises there are chances that the cost per unit of
production will come down.
An increase in mar!et share is one of the plausible benefits of mergers and acquisitions. "n case
a financially strong company acquires a relatively distressed one, the resultant organi(ation can
experience a substantial increase in mar!et share. The new firm is usually more cost+efficient
and competitive as compared to its financially wea! parent organi(ation.
$;&
"t can be noted that mergers and acquisitions prove to be useful in the following situations1
Firs!)y, when a business firm wishes to ma!e its presence felt in a new mar!et. Se&o#*)y+ when
a business organi(ation wants to avail some administrative benefits. Thir*)y+ when a business
firm is in the process of introduction of new products. <ew products are developed by the 8=:
wing of a company.
3
INTRODUCTION TO A,,IANCES
Alliance is an agreement between two or more firms to #ointly manage assets and achieve
strategic ob#ectives. >ome alliances involve the creation of a separately #ointly owned entity.
This is a ?oint 2enture, which can be considered as a form of alliance. A strategic alliance is
essentially a partnership in which you combine efforts in pro#ects ranging from getting a better
price for supplies by buying in bul! together to building a product together with each of you
providing part of its production. The goal of alliances is to minimi(e ris! while maximi(ing
your leverage and profit.
Mergers and acquisition have only infrequently been compared as substitutes. -hile there are
many differences in practice between M = As and Alliances on such dimensions as si(e,
industry, relatedness, ris!iness, length of time, degree of integration, scope of overlap and
structural possibilities, the only fundamental difference concerns ownership, since a merger or
acquisition implies a controlling ownership interest whereas an alliance or #oint venture does
not. There are large alliances and small acquisitions. >ometimes M=As become alliances
through small changes in ownership. M=A an alliance decisions are complex and unusual, with
an informational context characteri(ed by incomplete information, agency problems, rapid
change, and time pressures.
4usinesses use strategic alliances to1
Achieve advantages of scale, scope and speed
"ncrease mar!et penetration
,nhance competitiveness in domestic and@or global mar!ets
,nhance product development
:evelop new business opportunities through new products and services
,xpand mar!et development
"ncrease exports
:iversify
4
7reate new businesses
8educe costs.
>trategic alliances are becoming a more and more common tool for expanding the reach of your
company without committing yourself to expensive internal expansions beyond your core
business.
S!'ges o% A))i'#&e Form'!io#
A typical strategic alliance formation process involves these steps1
A S!r'!egy De$e)o-me#!" >trategy development involves studying the alliances
feasibility, ob#ectives and rationale, focusing on the ma#or issues and challenges and
development of resource strategies for production, technology, and people. "t requires aligning
alliance ob#ectives with the overall corporate strategy.
A P'r!#er Assessme#!" Bartner assessment involves analy(ing a potential partners
strengths and wea!nesses, creating strategies for accommodating all partners management
styles, preparing appropriate partner selection criteria, understanding a partners motives for
#oining the alliance and addressing resource capability gaps that may exist for a partner.
A Co#!r'&! Nego!i'!io#" 7ontract negotiations involves determining whether all parties
have realistic ob#ectives, forming high caliber negotiating teams, defining each partners
contributions and rewards as well as protect any proprietary information, addressing termination
clauses, penalties for poor performance, and highlighting the degree to which arbitration
procedures are clearly stated and understood.
A A))i'#&e O-er'!io#" Alliance operations involves addressing senior managements
commitment, finding the caliber of resources devoted to the alliance, lin!ing of budgets and
resources with strategic priorities, measuring and rewarding alliance performance, and assessing
the performance and results of the alliance.
A A))i'#&e Termi#'!io#" Alliance termination involves winding down the alliance, for
instance when its ob#ectives have been met or cannot be met, or when a partner ad#usts priorities
or re+allocated resources elsewhere.
5
Ty-es o% S!r'!egi& A))i'#&es
.oi#! /e#!0res
A #oint venture is an agreement by two or more parties to form a single entity to underta!e a
certain pro#ect. ,ach of the businesses has an equity sta!e in the individual business and share
revenues, expenses and profits.
O0!so0r&i#g
*utsourcing and globali(ation of manufacturing allows companies to reduce costs, benefits
consumers with lower cost goods and services, causes economic expansion that reduces
unemployment, and increases productivity and #ob creation.C
A%%i)i'!e M'r1e!i#g
Affiliate mar!eting has exploded over recent years, with the most successful online retailers
using it to great effect. The nature of the internet means that referrals can be accurately trac!ed
right through the order process.
Ama(on was the pioneer of affiliate mar!eting, and now has tens of thousands of websites
promoting its products on a performance+based basis.

Te&h#o)ogy ,i&e#si#g

This is a contractual arrangement whereby trademar!s, intellectual property and trade secrets
are licensed to an external firm. "ts used mainly as a low cost way to enter foreign mar!ets. The
main downside of licensing is the loss of control over the technology D as soon as it enters other
hands the possibility of exploitation arises.

Pro*0&! ,i&e#si#g

6
This is similar to technology licensing except that the license provided is only to manufacture
and sell a certain product. Esually each licensee will be given an exclusive geographic area to
which they can sell to. "ts a lower+ris! way of expanding the reach of your product compared to
building your manufacturing base and distribution reach.

Fr'#&hisi#g

Franchising is an excellent way of quic!ly rolling out a successful concept nationwide.
Franchisees pay a set+up fee and agree to ongoing payments so the process is financially ris!+
free for the company. 'owever, downsides do exist, particularly with the loss of control over
how franchisees run their franchise.

R2D

>trategic alliances based around 8=: tend to fall into the #oint venture category, where two or
more businesses decide to embar! on a research venture through forming a new entity.

Dis!ri30!ors

"f you have a product one of the best ways to mar!et it is to recruit distributors, where each one
has its own geographical area or type of product. This ensures that each distributors success can
be easily measured against other distributors.

Dis!ri30!io# Re)'!io#shi-s

This is perhaps the most common form of alliance. >trategic alliances are usually formed
because the businesses involved want more customers. The result is that cross+promotion
agreements are established.

7onsider the case of a ban!. They send out ban! statements every month. A home insurance
company may approach the ban! and offer to ma!e an exclusive available to their customers if
7
they can include it along with the next ban! statement that is sent out.
"ts a win+win agreement D the ban! gains through offering a great deal to their customers, the
insurance company benefits through increased customer numbers, and customers gain through
receiving an exclusive offer.
A*$'#!'ges o% s!r'!egi& '))i'#&e i#&)0*es
%5 Allowing each partner to concentrate on activities that best match their capabilities,
)5 Fearning from partners = developing competences that may be more widely exploited
elsewhere,
G5 Adequacy a suitability of the resources = competencies of an organi(ation for it to survive.
8
Re%ere#&es
%. >udarsanam B.> 3%HH05, IEssence of Mergers and AcquisitionsC, Brentice 'all of "ndia Bvt.
Ftd, <ew :elhi, %%J+JJ%
). 'itt A. Michael, 'arrison >. ?effery, "reland :uane 8.3)JJ%5,CMergers and AcquisitionsC,
*xford Eniversity Bress inc, <ew Kor!, %JJ%L
G. 9aughan A. Batric!, ?an 3)JJJ5, Mergers, Acquisitions, and Corporate Restructurings,C
Journal of Corporate Accounting & Finance, 2ol no. )
;. 9aughan A. Batric!, Feb 3)JJJ5, IMergers and Acquisitions in the 1990s: A Record rea!ing
"ecade,C http1@@media.wiley.com@productMdata@excerpt@NH@J;N%;%;G@J;N%;%;GNH.pdf
0. Mc9arvey, 8obert. *ct 3%HHN5 , http1@@www.economywatch.com@mergers+
acquisitions@benefits.html
L. <ielsen 4o 4ernhard, *ct 3)JJ)5, ?ournal of Onowledge Management Bractice,
http1@@www.smallbusinessnotes.com@operating@leadership@strategicalliances.html
P. ,isenhardt M. Oathleen, S&hoo#ho$e# 4ird 7laudia, 3%HHL5+ 4Resource#$ased %ie& of
'trategic Alliance For(ation: 'trategic and 'ocial Effects in Entrepreneurial Fir(sC,
*rganisation science, 2ol.N
H. 9oodrich 4en, April 3)JJ;5, IAlliance For(ation),
http1@@www.people.fas.harvard.edu@Qgoodrich@"8notes@-ee!JH@4enMresponse.pdf
%J. http1@@www.mar!etingminefield.co.u!@traditional+mar!eting@strategic+alliances@types.html
%%. >amuel, poss., ?uly %HHH, ICarefull* &eigh ris!s, $enefits of strategic allianceC, Fos
Angeles business paper, http1@@www.encyclopedia.com@doc@%9%+00GPLPJL.html
9
CHAPTER-5
RE/IEW OF ,ITERATURE
A review of literature is an account of what has been published on a topic by accredited scholars
and researchers. "n writing the literature review, purpose is to convey to your reader what
!nowledge and ideas have been established on a topic, and what their strengths and wea!nesses
are. 4esides enlarging your !nowledge about the topic, writing a literature review lets you gain
and demonstrate s!ills in two areas1
%. I#%orm'!io# see1i#g" the ability to scan the literature efficiently, using manual or
computeri(ed methods, to identify a set of useful articles and boo!s
56 Cri!i&') '--r'is')" the ability to apply principles of analysis to identify unbiased and valid
studies.
,'#ge!ieg 7189:; employs four alternative two+factor mar!et+industry models in combination
with a matched non+merging control group. 'e reports that the cumulative excess return over
the time interval 3+N), +N5 for the acquiring firms is significantly positive. This positive pre+
merger excess return might be interpreted as a motivating factor for the merger. 'owever, he
finds that post+merger abnormal performance is not significantly different from that of a control
firm in the same industry.
Aror' '#* G'm3er*e))' 7188<; technology alliances arise as a result of1
The increasing complexity and multi disciplinarily of resources required for innovation, and of
the stoc! of !nowledge itself $which& tend to ma!e technological innovations the outcome of
interactions and cooperation among fundamentally autonomous organi(ations commanding
complementary resources.
Fr'#1s+ H'rris+ '#* Ti!m'# 71881; examined whether the negative abnormal returns found in
prior studies are due to an incorrect ad#ustment for ris!. The portfolio performance evaluation
10
literature emphasi(es that correctly ad#usting returns for ris! requires a benchmar! that is mean+
variance efficient. They evaluate post+merger performance with efficient multi+factor
benchmar!s. Acquirer returns are examined using monthly data beginning the month after the
final bid date in order to avoid pic!ing up share price reactions in the final bid month. They
suggest that using equally+weighted index confirm negative post+merger performance, however
this result is not robust to the choice of the benchmar!R the value+weighted benchmar! yielded
positive post+merger performance. Their results exhibit no statistically significant abnormal
performance for the acquiring firms.
(er1o$i!&h '#* N'r'y'#'# 7188=; concluded that acquisitions continue to be a prominent
vehicle for corporate growth and development, despite evidence that, on average, they reduce
the shareholder value of acquiring firms. As part of the effort to comprehend the generally
negative consequences of acquisitions, several studies have examined the effects of acquisitions
on technological innovation, generally finding that innovation rates decline after acquisitions
.The explanations for these drops in innovative outputs have centered primarily on strategic
factors, particularly the tendency for companies to use acquisitions as substitutes for organic
development, thereby reducing their commitment to research and development 38 = :5
spending and internal innovation has not yet been considered is that acquisitions++or at least
some acquisitions++are directly disruptive for technical personnel in acquired firms, causing
their performance to suffer. Fi!e many other types of !nowledge wor!ers, corporate scientists
and engineers develop socially embedded routines for conducting their tas!s.
,o0ghr'# '#* /i>h 71889; typically found three patterns1
3i5 Target shareholders earn significantly positive abnormal returns from all acquisitions,
3ii5 Acquiring shareholders earn little or no abnormal returns from tender offers, and
3iii5 Acquiring shareholders earn negative abnormal returns from mergers. The evidence is
usually based on returns computed over a pre+acquisition period starting immediately before the
announcement date and ending on or before the effective date.
,er#er '#* Merges 71889; have used this framewor! to underta!e an analysis of a small
number of biotech alliances to determine the balance of control of the alliance between the
biotech 3research unit5 and established pharmaceutical company 3customer5. Their main finding,
11
in !eeping with the Aghion and Tirole framewor!, is that the biotechs ceded the greatest
proportion of the control rights when their financial position is wea!est. The study also
examined which party was li!ely to control particular aspects of the alliances. This indicated
that the pharmaceutical company was most li!ely to control the mar!eting and manufacturing
aspects as well as the power to terminate the alliance. The biotech was more li!ely to retain
control over the patents and related litigation.
?'y 75<<1; said alliances are occurring within a broader context D one in which global firms
have been shedding non core activities along and between their value chains as they
concentrate on their core competencies. Farge multinational companies, which for decades
have pursued various types of integration strategies, have found defining the boundary between
core and non+core functions a difficult process. "t has required careful consideration of the
advantages and disadvantages of outsourcing each function. Farge global pharmaceutical
companies have been as involved in this evaluation process as any of the large corporations. "t
has led some observers to suggest that the core competitive advantage possessed by global
pharmaceutical companies is their organi(ational and resource management capabilities to
develop and distribute new pharmaceutical products and that, not only research, but other
functions such as sales and mar!eting should be outsourced using alliance and other structure.
R'#%! '#* ,or* 75<<5; according to them, one of the central dilemmas in managing
acquisitions++and perhaps the pivotal factor in affecting employee disruption++is the decision
about whether to integrate the newly acquired firm and the acquiring firm. "f the acquired firm
is not integrated, but instead is allowed considerable autonomy, there is little chance that any
!nowledge sharing or other forms of synergy will occur 3which is in most cases the original
reasons for the acquisition5. Moreover, if allowed autonomy, the acquired firm will not create
much more value than it would have created on its own, and the premium paid by the acquirer
will have been wasted.
D'#@o#+ P'!ri&i' M6+ E-s!ei#+ A#*re .oe) '#* Ni&ho)so#+ Se'# 75<<=; concluded that 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 companySs
12
product pipeline. For small firms, mergers are primarily an exit strategy for firms in financial
trouble.
-e find that it is important to control for a firmSs prior propensity to merge. Firms with
relatively high propensity scores experienced slower growth of sales, employees and 8=:
regardless of whether they actually merged, which is consistent with mergers being a response
to distress. 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. <either mergers nor propensity scores have any effect on subsequent
growth in enterprise value. This confirms that mar!et valuations on average yield unbiased
predictions of the effects of mergers. >mall firms that merged experienced slower 8=: growth
relative to similar firms that did not merge, suggesting that post+merger integration may divert
cash from 8=:.
M&F'*ye# '#* C'##e))' 75<<A; suggested that hen the context that supports those routines is
disrupted, as occurs with many acquisitions, these personnel can be expected to experience a
sense of dislocation, loss, even trauma, and their productivity may suffer. "nterestingly,
organi(ational scholars have devoted considerable attention to empirically examining how being
acquired affects top executives, particularly by examining their departure rates.
Chris /ieh3'&her 75<<8; characteri(ed two strategic camps in a recent interview with
4loomberg <ews1 they are the I7onsolidation 7ampC and the I:iversification 7ampC.
According to 7hris, Bfi(er 3BF,5 is the prime example of the 7onsolidation 7ampers with
expenditures of nearly T)JJ billion in the last several years to acquire -arner Fambert and
Bharmacia along with several other smaller acquisitions, only to have its stoc! mar!et cap for
the consolidated company reach under T%JJ billion despite loads of restructuring, re+
engineering and synergy targets. "t appears that once synergy targets are met 3%+; years5,
company values as measured by stoc! mar!et capitali(ation seem to wane quic!ly and the
quest@thirst for more consolidation continues at a frantic pace.
The leaders of the :iversification 7ampers are ?ohnson = ?ohnson 3?<?5 and Abbott 3A4T5.
4oth companies have ma#or lines of business outside traditional large molecule pharmaceuticals
13
with significant and growing businesses in consumer healthcare and medical devices and
diagnostics. Their acquisition strategy seems to be small to mid si(e chun!s, notably ?=?Ss T%L
billion. acquisition of Bfi(erSs 7onsumer 'ealthcare 4usinesses as well as numerous
biotechnology companies
.
Re%ere#&es
%. http1@@www.utoronto.ca@writing@litrev.html
). Oummer 4. 7hristopher, May 3)JJL5, IMergers and acquisitions in phar(aceutical
industr*: Acti+ities and strategic in+ersions), http1@@www.imaa+
institute.org@docs@!ummerMmergersU)JacquisitionsU)Jm=aU)JpharmaceuticalU)Jindustry
U)JsouthU)JamericaU)JactivityU)JstrategicU)JintentionsU)Jstrategy.pdf
G. Arora, A. and 9ambardella, A., 3%HHJ5, Co(ple(entarit* and e-ternal lin!ages in
$iotechnolog*: .he strategies of large fir(s in $iotechnolog*/, Journal of 0ndustrial
Econo(ics, +ol, 12, http1@@papers.ssrn.com@solG@papers.cfmVabstractMid/;LPGJ%
;. Baruchuri, >ri!anth R <er!ar, Atul R 'ambric!, :onald 7., >ept 3)JJL5, IAcquisition
integration and producti+it* losses in the technical core: disruption of in+entors in acquired
co(panies,) http1@@www.accessmylibrary.com@coms)@summaryMJ)PL+G)NLH;H;M"TM
0. Oargin 9or Ara . >ibel,3%HH)5,C Mergers And .ender 3ffers: A Re+ie& 3f .he
4iterature) http1@@www.bayar.edu.tr@Qiibf@dergi@pdf@7P>%)JJ%@>O.B:F
L. Oargin 9or Ara. >ibel,3%HH)5,C Mergers And .ender 3ffers: A Re+ie& 3f .he 4iterature)
http1@@www.bayar.edu.tr@Qiibf@dergi@pdf@7P>%)JJ%@>O.B:F
N. ?osh Ferner and 8obert B. Merges, ?une 3%HHP5 ,I.he Control of .echnolog* Alliances:
An E(pirical Anal*sis of the iotechnolog* 0ndustr*,) The ?ournal of "ndustrial ,conomics
;L3)5, http1@@www.essex.ac.u!@#indec@supps@lerner@lerner.pdf
P. Oay, ?. 3)JJ%5, 5Changes in (ar!et structure: .he econo(ic issues/, 7onsolidation and
7ompetition in the Bharmaceutical "ndustry, *ffice of 'ealth ,conomics 3*',5, and Fondon.
14
H. Annette F. 8anft, Michael :. Ford, ?uly 3)JJ)5,C Acquiring 6e& .echnologies and
Capa$ilities: A 7rounded Model of Acquisition 0(ple(entation), *rgani(ation science, 2ol.%G,
http1@@orgsci.#ournal.informs.org@cgi@content@abstract@%G@;@;)J
%J. :an(on, Batricia M., ,pstein, Andrew ?oel and <icholson, >ean >ept 3)JJG5, IMergers
and Acquisitions in the 8har(aceutical and iotech 0ndustries),
http1@@papers.ssrn.com@solG@papers.cfmVabstract
%%. 'ambric! 7. :onald, 3)JJL5, IAcquisition 0ntegration and 8roducti+it* 4osses in the
.echnical Core: "isruption of 0n+entors in Acquired Co(panies), organi9ation 'cience, %ol,
17, http1@@portal.acm.org@citation.cfmVid/%)G0;J)
%). 2iehbacher 7hris, March 3)JJH5, I8har(aceutical 0ndustr* Merger Mania:
Consolidation +s, "i+ersification), http1@@see!ingalpha.com@article@%)L0N%+pharmaceutical+
industry+merger+mania+consolidation+vs+diversification
15
CHAPTER B =
RESEARCH METHODO,OGC
4usiness relationships between companies can run the spectrum from a simple, short+term
transactional relationship to a full+fledged acquisition in which one company ta!es full
ownership of another. :ifferent sources have different definitions for the various options such as
alliances that are available to a company on the loo!out for a collaborator. "n an Acquisition, by
contrast, the acquirer expends resources to gain complete control through ownership of the
assets and capabilities of the acquired company. 4ut the acquirer also assumes full
responsibility for any ris!s those assets incur. Alliances fall in the middle of this spectrum. They
are inter firm collaborations in which two or more companies #ointly invest in an activity over a
number of years, sharing in the ris!s and potential returns but remaining independent economic
agents.
Nee* o% !he s!0*y
The need for the study arises to ma!e alternative potential choices for managers between M =
As and alliances. >ome dimensions of industry conditions have an influence in ma!ing such
choices li!e the industry demands on firms to ma!e significant commitment, the environmental
pressures for flexibility and the limitations on firm choices stemming from industry
concentrations and institutional conditions.
O3>e&!i$es o% !he S!0*y"
The *b#ectives of the study are1
To study the financial performance of the companies getting into the form of acquisitions
vis+W+vis alliance
To study the relatively best option available between acquisition vis+a+vis alliance

16
Rese'r&h Desig#"
A research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in procedure. "t
constitutes the blue print for the collection, measurement and analysis of data. 8esearch :esign
for my study is of descriptive nature as these studies are concerned with describing the
characteristics of the companies with narration of facts from their balance sheets.
S&o-e o% !he S!0*y"
The pro#ect lies in the study of acquisition of :r. 8eddys Faboratories, an "ndian
pharmaceutical company and 4etapharm, a 9ermany based company. :r 8eddys Faboratories
acquired the 4etapharm on %0
th
Feb )JJL, and the alliance of 9ranules "ndia ltd. and 'eritage
Bharmaceuticals ltd, A E> based pharmaceutical company that happened on L
th
?uly )JJN. "t is
a !ind of :istributor alliance as 'eritage is into supply and mar!eting of generic pharmaceutical
products for the E.>. prescription drug mar!et.
>tudy has been done to understand the difference between before and after effects of the merger
and the alliance li!e the effect on profitability, liquidity, solvency and other financial operations
of the companies and to compare after effects of the financial status of the companies. And
further to study which company performs better the one with the alliance or the one which
chose acquisition.
D'!' Co))e&!io#
The study is based on secondary data. "n case of the acquisition, the data required to calculate
the financial ratios of the companies is ta!en for up to two year prior and two year after the
acquisition and in case of the alliance data one year prior and one year after the alliance of the
companies is collected from the annual reports of the companies. Further the available
secondary data was collected from the published reports by websites, and annual reports
Com-0!'!io# Me!ho*o)ogy
The !ey financial ratios for pre+acquisition and post+acquisition period were computed which is
) year prior to, and ) year after the acquisition. For the year prior to the acquisition, the
standalone financial ratios of the acquiring company are ta!en. After the acquisition, the
17
financial ratios for the combined firm are ta!en. "n case of Alliance, the !ey financial ratios for
pre+alliance and post+alliance period were. For evaluating the effect on profitability, various
profitability ratios 39ross Brofit ratio5 are calculated. To measure the effect on liquidity position
of the firm after merger, Fiquidity 8atios 37urrent 8atio, Acid Test 8atio5 and to measure the
effect on the efficiency of the firm ,fficiency ratios 3"nventory Turnover 8atio5 are calculated.
Further for evaluating the effect on solvency of the firm, >olvency 8atios 3:ebt+,quity 8atio,
,quity 8atio5 are calculated. Then the productivity ratios and per share ratios are calculated for
evaluation of pre and post acquisition and alliance performance of the companies. The post
acquisition and alliance performance was compared with the pre+acquisition and alliance
performance and on the basis of that comparison, conclusions are drawn.
,imi!'!io#s"
There are few limitations of this study. And the discussion would not be complete if they are not
listed here. These limitations include1
The comparison between the acquisition and alliance is not ta!en from the same year.
There is a difference of one year as the acquisition occurred in )JJL and the Alliance in )JJN.
>o the results may vary accordingly.
The study included results of only "ndian companies as in both the cases i.e. in case of the
acquisition and alliance the data was available for only "ndian companies.
Though one will prove beneficial either the Acquisition or the Alliance but always
decision cannot be made on the basis of this analysis as each company has its own different
structure and areas of operation
CHAPTER-A
18
FINANCIA, ANA,CSIS OF ACQUISITION AND A,,IANCE
DR REDDCDS ,A(ORATORIES
I#!ro*0&!io# !o !he &om-'#y
:r. 8eddys Faboratories was founded in %HP; by :r An#i 8eddy. "n %HPL, :r. 8eddys went
public and entered international mar!ets with exports of Methyldopa. :r. 8eddys Faboratories
Ftd. is one of "ndiaSs leading pharmaceutical companies with global ambitions. The company
has departed from the "ndian pharmaceutical mar!et mainstream of copying patented drugs to
pursue the development of its own++patentable++molecules. As such, the company has already
achieved success with a number of promising anti+diabetic molecules. At the same time, :r.
8eddys is pursuing a share of the lucrative, but highly competitive, E.>. generics mar!et,
including the higher+margin Xbranded genericX mar!et. :r. 8eddys operates through several
strategic business units, including1 4randed Finished :osagesR 9eneric Finished :osagesR 4ul!
ActivesR 7ustom 7hemicalsR 4iotechnologyR :iagnosticsR 7ritical 7areR and :iscovery
8esearch. A leader in its domestic mar!et, the company is also active on the international scene,
which accounted for L; percent of the companySs total sales of 8s %P billion 3TGH) million5 in
)JJG. <orth America contributed G) percent of sales, while 8ussia added )P percent. The rest of
the companySs international revenues were generated through the Asian, African, and >outh
American mar!ets. :r. 8eddys is led by founder and 7hairman :r. An#i 8eddy and 7,* 3and
son+in+law5 9.2. Brasad. :r. 8eddys Faboratories was the first Asian pharmaceutical company,
excluding ?apan, to list on the <ew Kor! >toc! ,xchange.
"n %HPN, :r. 8eddys obtained its first E>F:A approval for "buprofen AB" and started its
formulations operations. "n %HPP, :r. 8eddys acquired 4en(ex Faboratories Bvt. Fimited to
expand its 4ul! Actives business. "n %HHJ, :r. 8eddys entered a new territory when it, for the
first time in "ndia, exported <orfloxacin and 7iprofloxacin to ,urope and Far ,ast. "n %HHG, :r.
8eddys 8esearch Foundation was established and the company started its drug discovery
programmed. "n %HH;, :r. 8eddy launched a 9:8 issue of E>T ;P million. "n %HH0, the
company set up a #oint venture in 8ussia. "n %HHN, :r. 8eddys became the first "ndian
pharmaceutical company to out+license an original molecule when it licensed anti+diabetic
molecule, :8F )0HG 34alaglita(one5, to <ovo <ordis!. "n %HHP, :r. 8eddys licensed anti+
19
diabetic molecule, :8F )N)0 38agaglita(ar5, to <ovo <ordis!. "n %HHH, the company acquired
American 8emedies Fimited, a pharmaceutical company based in "ndia. "n the year )JJJ,
became the first Asia Bacific pharmaceutical company, outside ?apan, to be listed on the <ew
Kor! >toc! ,xchange. "n )JJ%, :r. 8eddys Faboratories became "ndiaSs third largest
pharmaceutical company with the merger of 7heminor :rugs Fimited, a group company. "n
)JJ), :r. 8eddys made its first overseas acquisition + 4M> Faboratories Fimited and Meridian
'ealthcare in EO. "n )JJG, :r. 8eddys launched "buprofen, first generic product to be
mar!eted under the X:r. X label in the E>. "n )JJL, :r. 8eddys achieved revenue of E>T %
4illion. "n the same year, :r. 8eddys acquired 4etapharm+ the fourth+largest generics company
in 9ermany.
Pro*0&!s o% Dr6 Re**yDs ,'3or'!ories
A&!i$e Ph'rm'&e0!i&') I#gre*ie#!s 7API;" :r. 8eddys Faboratories product list spans
); ma#or chemistries including stereo+selective synthesis, cryogenics, hydrogenations
and cyanations. "t has filed P; E> :MFs, the highest in "ndia and second highest in the
world.
C0s!om Ph'rm'&e0!i&') Ser$i&es" :r. 8eddys executes cost+effective and time+bound
pro#ects for its customers, and provides them 9MB+compliant products manufactured in
F:A+inspected, ">*+certified facilities.
Ge#eri& Dos'ges" :r. 8eddys Fab is a leading generic drugs manufacturer. "t is the
fourth largest player in 9ermany after the acquisition of betapharm. The company has
expertise in customer+specific pac!aging, compliance pac!aging, anti+counterfeit
pac!aging, and has won several awards globally for its pac!aging efforts, including the
Asia >tar, Ameri>tar and -orld>tar awards.
(r'#*e* Dos'ges" :r. 8eddys brands such as *me( 3*mepra(ole5, <ise 3<imesulide5,
>tamlo 3Amlodipine5, 7iprolet 37iprofloxacin5, ,nam 3,nalapril5 and Oetorol
3Oetorolac5 are leaders in their category in several countries.
20
Dis&o$ery Rese'r&h" :r. 8eddys is actively involved in drug+discovery and clinical
development programs.
S-e&i')!y Ph'rm'&e0!i&')s" "n the field of speciality pharmaceuticals, :r. 8eddys
deals in deals acquired proprietary technologies, internally developed proprietary drug+
delivery platforms, and current internal compounds under pre+clinical and clinical
development.
(io-h'rm'&e0!i&')s" 9rafeel 3Filgrastim5 was the first biologics product by :r.
8eddys to enter the mar!et. The companySs second product 8editux 38ituximab5 is the
first biosimilar monoclonal antibody to be developed and launched anywhere in the
world.
:r 8eddys Faboratories on Feb %0, )JJL acquired The 9erman based pharmaceutical company
4etapharm. 4etapharm was 9ermanys fourth largest 9enerics pharmaceutical company. :r
8eddys entirely bought out the company for Y;PG million which the largest international
acquisition was made by an "ndian company up to date. -ith a portfolio of %;0 mar!eted
products and several more in the pipeline, betapharm had a turnover of Y%L; million in )JJ0.
"n )JJ0+JL, :r 8eddys reali(ed that organic growth was not enough. "n order to become a
small si(ed global pharmaceutical player, it required a concerted focus on acquisitions.
Fortunately the company had a strong balance sheet with hardly any long term debt. "t therefore
had the capability to ma!e ma#or acquisitions. Thus it made its acquisition of betapharm. The
company currently has a portfolio of %;0 mar!eted products. 4etapharm has given :r 8eddys a
strong foothold in the large 9erman generics mar!et.
Following ratios have been calculated for the comparison of :r. 8eddys lab for comparison of
its revenues before and after the Alliance.
A6 ,IQUIDITC RATIOS
21
These ratios are calculated to measure the short+term solvency or financial position of a firm.
The short term obligations are met by reali(ing amounts from current, floating or circulating
assets.
16 C0rre#! r'!io1 "t is the relationship between the current assets and current liabilities of
the company. "t is mostly used for analysis of a short+term financial position of the company. "t
is calculated as follows
7urrent ratio/7urrent assets@7urrent liabilities
The 7urrent 8atio for :r. 8eddys lab before the acquisition and after the acquisition is as
follows
Table no.%
CURRENT RATIO
4efore Acquisition After Acquisition
)JJ;+J0 )JJ0+JL )JJL+JN )JJN+JP
%P,)PG,NLN@;,;%J,))
N
/;.%
)G,0)H,J%G@L,%JG,GJ
)
/G.H
GN,J;;,%G)@N,GL),NG
L
/0.J
)H,LP%,LH)@N,NJH,;;
H
/G.H
"n the year )JJ0+JL, there was decrease in the ratio from ;.% to G.H as there was decrease in the
current assets by approx. 8s.0G thousand la!h which includes increase in inventory by 8s. %;
la!h thousand, increase in the debtors by 8s.%N la!hs, loans and advances by 8s.;L la!h but on
the other hand the cash advances has decreased by 8s.); la!h. The liabilities which is ma#or
reason for decrease in the current assets as the increase in total current liabilities by 8s.%L la!h
thousand in which ma#or contribution is of creditors by 8s.%; la!h thousand.
For the year )JJL+JN, there was increase in the current ratio from G.H to 0.J as there was
increase in the current assets of the company li!e the inventories increased by 8s. ;;;,PLP. The
22
sundry debtors increased by 8s.;, N;;,P;P. The cash and ban! balances of the company also
increased by 8s. PJ, 0N,LP) and the loans and advances by 8s. )LP,HN;.
"n case of liabilities, the liabilities also increased but not much as compared to the assets. The
liabilities increased by 8s. %,JGN,NP) and that due to increase in the sundry creditors and other
liabilities. "n )JJN+JP, however the ratio again decreased from 0.J to G.H as the current assets of
the company especially the ban! balances decreased by 8s. H,%HG,LH;.
56 Q0i&1 r'!io"
Zuic! ratio also !nown as Fiquid 8atio is a more rigorous test of liquidity than the current ratio.
Zuic! ratio may be defined as the relationship between quic!@Fiquid assets and current
liabilities. An asset is said to be liquid if it can be converted into cash within a short period
without loss of value. The Zuic! ratio can be calculated as follows1
Zuic! ratio/ Fiquid assets@7urrent Fiabilities
Table no.)
QUIC? RATIO
%0,);0,L0H@;,;%J,))N
/G.0
%H,JHP,J;0@L,%JG,GJ)
/G.%
G),%LP,)HL@N,GL),NGL
/;.;
)G)N)G;H@N,NJH,;;H
/G.J
"n the year )JJ0+JL, the quic! ratio decreased from G.0 to G.% as there was increase in the assets
which includes increase in the debtors by 8s.%N la!hs, loans and advances by 8s.;L la!h but on
the other hand the cash advances decreased by 8s. ); la!h. The liabilities increased in total
current liabilities by 8s.%L la!h thousand in which ma#or contribution is of creditors by 8s.%;
la!h thousand. For the year )JJL+JN, the quic! ratio increased from G.% to ;.; as there was
increase in the liquid assets of the company li!e the sundry debtors increased by 8s.;, N;;,P;P.
The cash and ban! balances of the company also increased by 8s.PJ, 0N,LP) and the loans and
23
advances by 8s.)LP, HN;. There was also increase in the liabilities of the company by
8s.%, JGN,NP) as there was increase in the sundry creditors and other liabilities. 'owever, in
)JJN+JP the ratio decreased to G.J from ;.; in )JJL+JN as there was decrease in the current
assets of the company especially the ban! balances decreased by 8s.H, %HG,LH;.
EFFICIENCC RATIOS"
The efficiency ratios are calculated to measure the efficiency with which the resources of a firm
have been employed. These ratios are also called turnover ratios as they indicate the speed with
which assets are being turned over into sales.
16 I#$e#!ory T0r#o$er r'!io"
"nventory turnover 8atio also !nown as >toc! 2elocity is normally calculated to chec! whether
inventory has been efficiently used or not. As every firm has to maintain a certain level of
inventory of finished goods so as to be able to meet the demands of business and it should be
ta!en care that inventory should neither be too high nor too low. The inventory turnover ratio is
calculated as follows1
"nventory Turnover 8atio/ 7ost of goods sold@Average inventory at cost
Table no.G
IN/ENTORC TURNO/ER RATIO
N,LJ,HLLG@),PJH,%J
H
/).N times
%J,)PJ,L0L@G,NG;,0G
P
/).P times
%0,)L),NHL@;,L0G,;J
)
/G.G times
%N,JL0,PNN@0,L;),0PH.
0
/G.J times
"n the years )JJ;+J0 and )JJ0+JL, the ratio increased from ).N to ).P because of increase in cost
of goods sold where material cost increased by )%%N)L) and the personnel costs has increased
by 8s.GJ, ;NHH. 7onsidering the year )JJL+JN and )JJN+JP, the inventory turnover ratio has
24
decreased from G.G to G.J. The ma#or reason is increase in inventory holding which has
8s.%J, JJJ la!hs and the cost of goods sold have #ust increased by 8s.%P thousand la!h.
The difference in pre+acquisition and post+acquisition because of increase in material cost which
has increased from 8s.N0,JJJ la!h to 8s.%%),JJJ la!h. 7onversion charges have increased from
8s.0 la!h to 8s.%% la!h.
I#$e#!ory &o#$ersio# -erio*
"nventory conversion period is calculated to see the average time ta!en for clearing the stoc!s. "t
can be calculated as1
"nventory conversion period/ :ays in a year@"nventory Turnover ratio
Table no.;
IN/ENTORC CON/ERSION PERIOD
GLJ@).N
/%GG days
GLJ@).P
/%)H days
GLJ@G.G
/%JH days
GLJ@G.J
/%)J days
For the year )JJ0+JL, there was decrease in the number of days from %GG to %)H days as there
was increase in the net sales of the company from 8s.%0,0NL,H;L to 8s.)J,J;;,;LP. For the year,
the days further decreased from %)H days to %JH days as there was increase in net sales of the
company by 8s.%N,;0L,0)G. 'owever for the year )JJN+JP, there was increase in the number of
days as the sales of the companies declined by 8s.;,%N0,;)%.
56 Wor1i#g C'-i!') T0r#o$er r'!io
-or!ing 7apital 8atio indicates the velocity of the utili(ation of net wor!ing capital. This ratio
indicates the number of times the wor!ing capital is turned over in the course of a year. This
25
ratio measures the efficiency with which the wor!ing capital is being used by the firm. The ratio
is calculated as1
-or!ing 7apital Turnover ratio/ 7ost of >ales@<et -or!ing 7apital
Table no.0
WOR?ING CAPITA, TURNO/ER RATIO
%0,0NL,H;L@%G,PNG,0
;J
/%.% times
)J,J;;,;LP@%N,;)0,N
%%
/%.) times
GN,;P%,HNP@)H,LP%,G
HL
/%.G times
GG,GJL,00N@)%,HN),)
;G
/%.0 times
The wor!ing capital turnover ratio for )JJ0+JL increased by 8s.;,;LN,0)) as there was increase
in the material costs by 8s.),%%N,)L) as there was decrease in the current assets by approx.
8s.0G thousand la!h which includes increase in inventory by 8s. %; la!h thousand, increase in
the debtors by 8s.%N la!hs, loans and advances by 8s.;L la!h but on the other hand the cash
advances has decreased by 8s.); la!h. The liabilities which is ma#or reason for decrease in the
current assets as the increase in total current liabilities by 8s.%L la!h thousand in which ma#or
contribution is of creditors by 8s.%; la!h thousand.
For the year )JJL+JN, the ratio increased by J.% times as there was increase in the cost of sales
by 8s.%N,;GN,0%J as there was increase in the stoc! by 8s.%G;,H)0. Also there was increase in
the consumption of raw materials by 8s.G,PPJ,N%L. "n case of personnel costs, there was
increase in the salaries, wages and bonus by 8s.;HP,GGG and wor!man and staff welfare
expenses also increased by 8s.NH,0%G. The net wor!ing capital also increased by 8s.%),)00,LP0
as there was increase in the current assets of the company li!e the inventories increased by 8s.
;;;,PLP. The sundry debtors increased by 8s.;,N;;,P;P. The cash and ban! balances of the
company also increased by 8s.PJ,0N,LP) and the loans and advances by 8s.)LP,HN;.
26
"n case of liabilities, the liabilities also increased but not much as compared to the assets. The
liabilities increased by 8s.%,JGN,NP) and that due to increase in the sundry creditors and other
liabilities.
"n )JJN+JP, there was decrease in the cost of goods sold as there was decrease in the conversion
charges by 8s.%J,NLG,NNH, there was also decrease in the net wor!ing capital as the current
assets of the company especially the ban! balances decreased by 8s.H,%HG,LH;.
C6 So)$e#&y r'!ios
4y >olvency, we mean the ability of a concern to meet its obligations. They indicate the firms
ability to meet the fixed interest and costs and repayment schedules associated with its long
term borrowings.
%6 De3!- EE0i!y r'!io
This ratio is calculated to measure the relative claims of outsiders and the owners against the
firms assets. This ratio is calculated as1
:ebt+,quity ratio/*utsiders Funds@>hareholders funds
Table no.L
DE(T-EQUITC RATIO
),NG),GN%@)J,N;J,PG H,)GP,LH0@)),L)%,;% G,)HH,J%H@;G,NGG,0L ;,L)G,JN;@;P,%%PJ;H
27
P
/J.JH
N
/J.;%
L
/J.JN
/J.JH
"n )JJ0+JL, debt@equity ratio has shifted from J.JH to J.;% which is due to increase in secured
loans by 8s.%,;%P,00L and unsecured loans by 8s.0,JPN,NLP because in case of secured loans
they have ta!en loans from >tate 4an! of "ndia of 8s.%,;),L;J by pledging fixed deposits and
unsecured loans have ban! overdraft of 8s.P)G,;%) thousand from 7itiban! and ':F7 as well
as foreign currency pac!ing credit loans of 8s . ;,))P,G%P.
"n the year )JJL+JN, there was decrease in the outsiders funds by 8s.0,HGH,LNL as there was
decrease in the secured loans by 8s.%,;G),JLJ and the unsecured loans by 8s.;,0JN,L%L . "n case
of unsecured loans the pac!ing credit loans decreased as Foreign currency pac!ing credit loan is
from >tate 4an! of "ndia carrying an interest rates LJ bps, repayable on expiry of L months from
the date of drawdown whereas Bac!ing credit loans for the previous year were ta!en from >tate
4an! of "ndia, '>47, 7itiban!, >tandard 7hartered 4an!, 4an! of America and A4< Amro
4an! carrying an interest rate of F"4*8 plus 0J+NJ bps and repayable on expiry of L months
from the dates of respective drawdown.
"n case of ban! overdrafts, these also decreased as ban! overdraft is on the current accounts
with ':F7 4an!, which carry interest rates of HU per annum. Brevious year ban! overdraft
was on the current accounts with 7itiban! and ':F7 4an!, with interest rates of %%U and HU
per annum respectively.
EE0i!y r'!io
This ratio establishes the relationship between the shareholders funds to the total assets of the
firm. This ratio can be calculated as
,quity ratio/ >hareholders funds@ Total assets
Table no.N
28
EQUITC RATIO
)J,N;J,PGP@);,0%J,;
G0[%JJ
/P;.L
)),L)%,;%N@GJ,)NL,G
);[%JJ
/N;.N
;G,NGG,0LL@;L,LNJ,0
HH[%JJ
/HG.N
;P,%%P,J;H@;),J%),H0
J[%JJ
/%%;.0
"n )JJ0+JL, the total assets increased from 8s. );,0%J,;G0 to 8s.GJ,)NL,G);, as there was
increase in the fixed assets of the company as compared to the shareholders funds. The gross
bloc! increased by 8s.;PL,NGG. "n case of the current assets there was increase in the
inventories, sundry debtors though there was decrease in the cash and ban! balances of the
company therefore ratio has decreased from P;.L to N;.N
"n )JJL+JN, there was increase in the >hareholders funds by 8s.%,PPJ,0NH as there was increase
in the share capital by 8s.;0L,JPP and the reserves and surpluses of the company also increased
by 8s.%,PNH,NJ%. There was also increase in the total assets of the company by 8s.%L,GH;,)N0 as
the fixed assets increased by 8s.),PNH,%0L due to increase in gross bloc! and capital wor! in
progress. "n case of fixed assets, the assets increased by 8s.0,);0,);L as there was increase in
the inventories, sundry debtors as well as cash and ban! balances of the company.
For the year, )JJN+JP there was increase in the shareholders funds as there was increase in the
issued share capital. Also the reserves and surpluses of the company increased by 8s.;,GPG,%NH
due to increase in the employee stoc! options outstanding, deferred stoc! compensation stoc!,
general reserve. The total assets decreased by 8s.;,L0N,L;H as there was decrease in the current
assets of the company li!e the sundry debtors and cash balances decreased.
Pro%i!'3i)i!y r'!ios
The primary ob#ective of a business underta!ing is to earn profits. Brofit earning is considered
essential for the survival of the business. A business does not need profits for its existence but
29
also for expansion and diversification. Thus these ratios are calculated to measure the overall
efficiency of a business. These ratios are calculated either in relation to sales or investment.
16 Gross -ro%i! r'!io"
9ross profit ratio measures the relationship of gross profit to net sales and is usually represented
as a percentage. "t is calculated as follows1
9ross profit ratio/ 9ross profit@<et sales[%JJ
Table no.P
GROSS PROFIT RATIO
N,HLN,)PG@%0,0NL,H;
L[%JJ
/0%.%
H,NLG,P%)@)J,J;;,;L
P[%JJ
/;P.N
)),)%H,%P)@GN,;P%,HN
P[%JJ
/0H.G
%L,);J,LPJ@GG,GJL,00
N[%JJ
/ ;P.P
The 9ross profit ratio for the year )JJ0+JL decreased as there was increase in the expenditure
of the goods produced due to increase in the manufacturing expenses and salaries and wages of
the employees though there was increase in the net sales by 8s.;,;LN,0)).but the cost of goods
sold increased from )JJ;+J0 to )JJ0+JL by 8s.),LNJ,HHG
For the year )JJL+JN there was increase in the net sales from 8s.)J,J;;,;LP to 8s.GN,;P%,HNP.
Though the expenditure on the goods sold also increased. 4ut net sales were higher than the
expenditure. "n )JJN+JP, there was decrease in the net sales of the company by 8s.;,%N0,;)%
which was due to the de+growth of one of their products steraline hydrochloride due to lower
revenues.
30
,. O$er')) -ro%i!'3i)i!y R'!ios
These are calculated to measure the overall efficiency of a business. The higher the profits, the
more efficient are the business considered. These profits are measured in relation to the
investments made in the business.
16 Re!0r# o# EE0i!y C'-i!')
The return on ,quity capital is the relationship between the profits of a company and its equity
capital. "t can be calculated as1
8eturn on ,quity 7apital/<et profit after tax+Breference :ividend@,quity share capital 3paid+
up5
Table no.H
RETURN ON EQUITC CAPITA,
L0;,0PP@)J,N;J,PGP
[%JJ
/G.%L
),%%%,)GH@)),L)%,;%N
[%JJ
/H.GG
%%,NLP,0HG@;G,NGG,0L
L[%JJ
/)L.H
;,N0),)%H@;P,%%P,J;H
[%JJ
/H.PL
"n the above table, for the period )JJ0+JL, there was increase in the 8eturn on equity capital as
there was increase in the net profit after tax from 8s.L0;,0PP to 8s.),%%%,)GH. Though there was
increase in the expenditure li!e manufacturing costs, administrative expenses but there was
decrease in the loss of sale of non+trade investments and provision of decline in the value of
long term investments. The equity share capital also increased due to increase in the reserves
and surplus of the company by 8s.%,PNH,NJ% due to securities premium account received during
the year on exercise of stoc! options issued to employees.
For the year )JJL+JN, there was an increase in the net profit of the company by 8s.H,L0N,G0; as
there was no loss on sale of non+traded investments. There was also increase in the sales of the
31
company by 8s.%N,;0L,0)G. There was also increase in the ,quity share capital and reserves and
surpluses of the company due to increase in the securities premium account by 8s.H,LG%,H0%
received due to employee stoc! option and received during the year by American depository
>hares. "n )JJN+JP, however the net profit decrease by 8s.N,J%L,GN; as there was decline in the
sales of the company and there was increase in the manufacturing costs. 'owever the
conversion charges decreased by 8s.0NG,NNH. Also there was increase in the personal costs due
to increase in the salaries and wages a well as contribution to provident funds.
The equity share capital increased by 8s. ;,GP;,;PG as there was increase in the equity shares
issued for employee stoc! option plans and there was also increase in the reserves and surpluses
of the company.
=6 E'r#i#gs -er sh're
,arnings per share are a small variation of return on equity capital and are calculated as follows1
,.B.>/<et profit after tax+preference dividend@no. of ,quity shares
Table no.%J
EARNINGS PER SHARE
L0;,0PP@NL,0%P,H;
H
/J.JJP
),%%%,)GH@NL,LH;,0N
J
/J.JG
%%,NLP,0HG@%LN,H%),%P
J
/J.JN
;,N0),)%H@%LP,%N),N;
L
/J.JG
32
The earnings per share for the companies increased for the year )JJ0+JL as there was increase
in the net profit after tax by 8s.%,;0L,L0%. Also there was increase in the no. of equity shares by
8s.%N0,L)% as these were allotted to the employees of the company on exercise of the vested
stoc! options in accordance with the terms of exercise under the I:r 8eddys ,mployees stoc!
option plan, )JJ)C.
:uring the year )JJL+JN as there was increase in the net profit of the company due to increase
in revenue of the company after the acquisition and the cost of goods also decreased. There was
also increase in the number of equity shares by 8s.H%,)%N,L% as there was increase in the
number of equity shares allotted as bonus shares and shares allotted against American
depository schemes.
For the year )JJN+JP, there was decrease in the net profits of the company as there was increase
in the manufacturing expenses, There was also increase in the 8=: expenses by 8s.)L,%H0.
Also there was increase in the operating expenses of the company by 8s.LH%,%)0 of which
ma#or contribution was of carriage outwards, selling expenses and repair and maintenance of
building, plant and machinery. There was also increase in the number of equity shares by
8s.)LJ,0LL which were vested in the employee stoc! options.
GRANU,ES INDIA ,TD6
9ranules "ndia Ftd 39"F5 was incorporated as a Brivate Fimited 7ompany on March %L, %HH%
and was later converted into a Bublic Fimited 7ompany on February P, %HHG. 9"F commenced
its operations in April %HH% as a merchant exporter of bul! drugs li!e Baracetamol, 9uaifenesin
and 7hloro Bheniramine Maleste. "t has been exporting mainly to the developed mar!ets such
as E.>.A., ,urope, Mexico and 'ong Oong. >ince %HH), 9"F concentrated on export of
Baracetamol powder, which was procured from a 9roup 7ompany, M@s.Triton Faboratories Bvt
Ftd 3TFBF5, and a small scale unit. "n %HHG+H;, the international prices of bul! drugs li!e
Baracetamol were under pressure and 9"F decided to enter into value added areas. "n April
%HHG, 9"F also #oined as a partner of M@s.Triton Faboratories 3TF5, a partnership firm promoted
by the promoters in %HP0. After 9"F became a partner. TF crested facilities for manufacture of
33
:7 blends of Baracetamol and directly entered into its export mar!et. Fater, TF decided to
diversify into manufacturing of bul! drugs and started implementing a pro#ect for the same. "n
August %HH;, as part of consolidation and restructuring the 9roups operations. TF was
dissolved and its assets and liabilities were ta!en over by 9"F at boo! value.
9ranules "ndia Fimited manufactures and sells active pharmaceutical ingredients 3AB"s5 for
various pharmaceutical applications. "t also offers multiple pharmaceutical formulation
intermediates, including Acetaminophen@Baracetamol, 9uaifenesin :7 granules, "buprofen :7
granules, Metformin :7 granules, 7iprofloxacin :7 granules, <aproxen :7 granules, Analgin
:7 granules, and Bhena(opyridine :7 granules. "n addition, the company provides
microencapsulated products for capsules and bul! tablets, as well as produces various tablets. "t
sells its products primarily in "ndia, <orth America, Fatin America, and ,urope
*n ?uly )JJL, granules "ndia ltd and heritage Bharmaceutical 7ompany, A Es based
pharmaceutical company entered into strategic alliance for the development, supply and
mar!eting of generic pharmaceutical products for the E.>. prescription drug mar!et. "t was a
!ind of Ender the Agreement, 9ranules shall develop and register selected products for E.>.
A<:A submission and 'eritage retains exclusive sales and mar!eting rights to such products.
9ranules shall receive up front and milestone payments and the parties shall share net profits
from the product sales.
'eritage Bharmaceuticals "nc. is an emerging generic pharmaceutical company engaged in the
acquisition, licensing, development, mar!eting, sale and distribution of generic pharmaceutical
products for the global prescription drug mar!ets. "t is a :istributor type of alliance
As 9ranules "ndia Ftd. is a fully integrated pharmaceutical formulations manufacturer with the
worldSs largest SgranulationS capacity. The company manufactures several strategic Active
Bharmaceutical "ngredients 3AB"s5 and multiple Bharmaceutical Formulation "ntermediates
3BF"s5, which are distributed in G0 countries. "t is foraying into manufacturing of tablets with a
capacity of L billion tablets per annum. This alliance will strengthen its presence in the pharma
outsourcing space as it will have capabilities of offering a wide range of products beginning
from AB"s to finished dosages 3coated@uncoated5.
34
Ender the agreement, 9ranules will develop and register selected products for E> A<:A
submission, and will receive up front and milestone payments. 'eritage will retain exclusive
sales and mar!eting rights to such products. 4oth parties will share net profits from the product
sales.
9ranules "ndia Ftd. announced that the companySs accounting period originally being April+
March was extended to %0 months in the year )JJG+J; that is up to ?une GJ, )JJ; and
accordingly, from the year )JJ;+J0, the financial year was for the period ?uly+?une and the same
was followed up to the year )JJN+JP. For the year )JJP+JH, the board of directors, at the
meeting held on *ctober )J, )JJP had resolved to close the accounts as at March G%, )JJH and
hence, the financial year )JJP+JH was for a period of nine months only which is ?uly %, )JJP to
March G%, )JJH. The financial year )JJH+)J%J onwards, the accounting period of the company
would be the period April+March.
Following ratios have been calculated for the comparison
,IQUIDITC RATIOS
These ratios are calculated to measure the short+term solvency or financial position of a firm.
The short term obligations are met by reali(ing amounts from current, floating or circulating
assets.
%. C0rre#! r'!io" "t is the relationship between the current assets and current liabilities of
the company. "t is mostly used for analysis of a short+term financial position of the company. "t
is calculated as follows
7urrent ratio/7urrent assets@7urrent liabilities
The 7urrent 8atio for 9ranules "ndia Ftd. before the acquisition and after the acquisition are as
follows1
Table no.%%
CURRENT RATIO
4efore Alliance After Alliance
35
)JJL+JN )JJN+JP
P0N,HGL,;;H@%N),J)%,NPN
/;.H
NGJ,))),%N;@%H0,GJ;,0H%
/G.N
The 7urrent ratio for 9ranules "ndia ltd in )JJL+JN was ;.H, "n )JJN+JP it decreased by
8s.%)N,N%;,)N; and the ratio came up to G.N due to decrease in cash and ban! balances. There
was increase in the liabilities by 8s.;H,0)J,%H% due to small scale underta!ingsR also there was
increase in the goods and services.
"n case of the assets there was increase in the inventories as there was increase in finished goods
as well as stores and spares. There was decrease in the sundry debtors by 8s.G%,PNP,0H; and
also there was decrease in cash and ban! balances of the company by 8s.)%%,NP),)J% and other
current assets li!e interests receivables decreased by 8s.G,NP0,%0% whereas loans and advances
increased by 8s.)N,J;J,HPG as there was increase in the ,xcise duty from 8s.G;, 0%P,;LH to
8s.LN,P0P,P0P.
Q0i&1 r'!io"
Zuic! ratio also !nown as Fiquid 8atio is a more rigorous test of liquidity than the current ratio.
Zuic! ratio may be defined as the relationship between quic!@Fiquid assets and current
liabilities. An asset is said to be liquid if it can be converted into cash within a short period
without loss of value. The Zuic! ratio can be calculated as follows1
Zuic! ratio/ Fiquid assets@7urrent Fiabilities
Table no.%)
QUIC? RATIO
36
)JJL+JN )JJN+JP
L0H,J%0,J0J@%N),J)%,NPN
/G.P
NJJ,L%J,JPL@%H0,GJ;,0H%
/G.0
The 7urrent ratio for 9ranules "ndia ltd in )JJL+JN was G.P, "n )JJN+JP it decreased by
8s.%)N,N%;,)N; and the ratio came up to G.0 due to decrease in cash and ban! balances by
8s.)%%,NP),)J% and other current assets li!e interests receivables decreased by 8s.G,NP0,%0%,
the sundry debtors decreased by 8s. G%,PNP,0H; whereas loans and advances increased by
8s.)N,J;J,HPG as there was increase in the ,xcise duty from 8s.G;, 0%P,;LH to 8s.LN,P0P,P0P.
The liabilities increased by 8s.;H,0)J,%H% due to small scale underta!ingsR also there was
EFFICIENCC RATIO"
The efficiency ratios are calculated to measure the efficiency with which the resources of a firm
have been employed. These ratios are also called turnover ratios as they indicate the speed with
which assets are being turned over into sales.
I#$e#!ory T0r#o$er r'!io"
"nventory turnover 8atio also !nown as >toc! 2elocity is normally calculated to chec! whether
inventory has been efficiently used or not. As every firm has to maintain a certain level of
inventory of finished goods so as to be able to meet the demands of business and it should be
ta!en care that inventory should neither be too high nor too low. The inventory turnover ratio is
calculated as follows1
"nventory Turnover 8atio/ 7ost of goods sold@Average inventory at cost
37
Table no.%G
IN/ENTORC TURNO/ER RATIO
)JJL+JN )JJN+JP
%,G)P,NH;,LJH@)JG,H00,0GJ.0
/L.0
NJJ,L%J,JPL@%H0,GJ;,0H%
/L.G
There is a minor change in the inventory turnover ratio because of increase in cost of goods sold
as there was increase in the consumption of raw materials by 8s.)00,0)L,GPL and there was
increase in the cost of material consumed by 8s.%N;,;%%,;;H. The manufacturing expenses also
increased as there was increase in the salaries and wages by 8s.%G,;NL,GLN, Also the repair and
maintenance costs of factory and buildings, plant and machinery increased.
7onsidering the year )JJL+JN and )JJN+JP, The inventory turnover ratio also decreased during
the period )JJN+JP as the cost of materials consumed increased %L.)0U from 8s. %JN.G; crore
in )JJL+JN to 8s. %);.NP crore in )JJN+JP, following enhanced operations. The proportion of
raw material cost, as a percentage of total income, increased marginally by %JG bps to 0P.JPU,
following rupee appreciation for a ma#or part of )JJN+JP.
I#$e#!ory &o#$ersio# -erio*
"nventory conversion period is calculated to see the average time ta!en for clearing the stoc!s. "t
can be calculated as1
"nventory conversion period/ :ays in a year@"nventory Turnover ratio
Table no.%;
38
IN/ENTORC CON/ERSION PERIOD
)JJL+JN )JJN+JP
GLJ@L.0
/0L days
GLJ@L.G
/0P days
The inventory conversion period increased from 0L days in )JJL+JN to 0P days in )JJN+JP as
there was increase in the stoc! by )H,H%J,NL% and the repairs and maintenance cost also
increased by 8s.%)H,0P0 as there was increase in the consumption of raw materials by
8s.)00,0)L,GPL
Wor1i#g C'-i!') T0r#o$er r'!io
-or!ing 7apital 8atio indicates the velocity of the utili(ation of net wor!ing capital. This ratio
indicates the number of times the wor!ing capital is turned over in the course of a year. This
ratio measures the efficiency with which the wor!ing capital is being used by the firm. The ratio
is calculated as1
-or!ing 7apital Turnover ratio/ 7ost of >ales@<et -or!ing 7apital
Table no.%0
WOR?ING CAPITA, TURNO/ER RATIO
)JJL+JN )JJN+JP
%,P0N,J%J,%)%@LP0,H%;,LL)
/).N Times
),%;%,;L0,GGG@0G;,H%N,0PG
/ ; Times
39
The wor!ing capital ratio increased in )JJN+JP to ; times from ).N times in )JJL+JNas there was
increase in the 7ost of >ales as the manufacturing expenses 3excluding salaries and wages5
increased by %J.0NU from 8s. %0.PH crore in )JJL+JN to 8s. %N.0N crore in )JJN+JP, following a
rise in crude prices. The principal manufacturing expenses \ power and fuel 3;N.PNU of the
total manufacturing expenses5 increased by P.LGU, and repair and maintenance charges
3)J.PHU of the manufacturing expenses5 decreased by H.0)U.
So)$e#&y r'!ios
4y >olvency, we mean the ability of a concern to meet its obligations. They indicate the firms
ability to meet the fixed interest and costs and repayment schedules associated with its long
term borrowings.
De3!- EE0i!y r'!io
This ratio is calculated to measure the relative claims of outsiders and the owners against the
firms assets. This ratio is calculated as1
:ebt+,quity ratio/*utsiders Funds@>hareholders funds
Table no.%L
DE(T EQUITC RATIO
)JJL+JN )JJN+JP
%,J);,%%J,00%@%,N;G,GGJ,H;P
/J.0P
%,%%J,P%N,JG%@%,PJL,P;0,;0%
/J.L%
40
The 7ompanys reliance on external funding increased during )JJN+JP. The 7ompanys debt
stood at 8s. %%%.JP crore on ?une GJ, )JJP, as against 8s. %J).;% crore on ?une GJ, )JJN. -hile
secured loans increased %P.LLU in )JJN+JP, unsecured loans declined by GH.NHU, following
loan pay+off through accrual. The increase in secured loans was mainly on account of funding
business growth and expansion. 7orrespondingly, debt+equity ratio increased from J.0P to J.L%.
EE0i!y r'!io
This ratio establishes the relationship between the shareholders funds to the total assets of the
firm. This ratio can be calculated as
,quity ratio/ >hareholders funds@ Total assets
Table no.%N
EQUITC RATIO
)JJL+JN )JJN+JP
%,N;G,GGJ,H;P@),P0G,G;G,PPG
/L%.%
%,PJL,P;0,;0%@G,J%N,J%J,%LJ
/0H.H
The equity ratio after alliance in the year )JJN+JP was lesser as compared to previous year.
Though there was an increase in the fixed assets of the company as there was increase in the
gross bloc! by 8s.%L0,%0J;LN but there was decrease in the current assets of the company as
there was decrease in the sundry debtors by 8s.G%,PNP,0H; and cash and ban! balances also
decreased by 8s.)%%,NP),)J%. 4ut there was increase in the inventories from 8s.%HP,H)%,GHH to
41
8s.)H%,L%),JPP. The shareholders funds however increased by increase in the share capital of
the company by 8s.GG0,)JJ.
PROFITA(I,ITC RATIOS
The primary ob#ective of a business underta!ing is to earn profits. Brofit earning is considered
essential for the survival of the business. A business does not need profits for its existence but
also for expansion and diversification. Thus these ratios are calculated to measure the overall
efficiency of a business. These ratios are calculated either in relation to sales or investment.
Gross -ro%i! r'!io
9ross profit ratio measures the relationship of gross profit to net sales and is usually represented
as a percentage. "t is calculated as follows1
9ross profit ratio/ 9ross profit@<et sales[%JJ
Table no.%P
GROSS PROFIT RATIO
)JJL+JN )JJN+JP
0)P,)%0,L%)@%,P0N,J%J,))%
/)P.;
LJL,0H;,%P)@),%;%,;L0,GGG
/)P.G
The gross profit did not have much impact as it decreased by J.%U. Though the <et sales also
increased during the period )JJN+JP but this slight difference in the gross profit ratio occurred
due to the increase in the expenditure of the goods sold as there was increase in the
manufacturing expenses from 8s.)00,GHP,;%H to 8s.)PN,JLG,0%). There was also increase in the
salaries and wages by 8s.%G,;NL,GLN of the employees. The conversion charges increased by 8s.
L,G)H,;%;. There was also increase in the consumables and chemical labs by 8s.L,;HH,L;H.
42
O/ERA,, PROFITA(I,ITC RATIOS
These are calculated to measure the overall efficiency of a business. The higher the profits, the
more efficient are the business considered. These profits are measured in relation to the
investments made in the business.

Re!0r# o# EE0i!y C'-i!')
The return on ,quity capital is the relationship between the profits of a company and its equity
capital. "t can be calculated as1
8eturn on ,quity 7apital/<et profit after tax+Breference :ividend@,quity share capital 3paid+
up5
Table no.%H
RETURN ON EQUITC CAPITA,
)JJL+JN )JJN+JP
%J%,%HN,GP%@%,N)%,%LG,GNP[%JJ
/0.PP
H%,G;;,H0H@%,L0H,%JG,HJP
/0.0%
The table explains that the 8eturn on ,quity capital decreased from 0.PP in )JJL+JN to 0.0% for
the year )JJN+JP as there was decline in the <et profit after Tax. The decline in the net profit
was greater than that in total revenue due to an increase in the tax expenses by 8s.%;,JNL,)L).
There was also increase of ;GU in the research and development cost from 8s. ),;LG million in
)JJLDJN to 8s. G,0GG million in )JJNDJP.
43
E'r#i#gs -er sh're
,arnings per share is a small variation of return on equity capital and is calculated as follows1
,.B.>/<et profit after tax+preference dividend@no. of ,quity shares
Table no.)J
EARNINGS PER SHARE
)JJL+JN )JJN+JP
%J%,%HN,GP%@)J,J)G,LG;
/0.J0
H%,G;;,H0H@)J,J0N,%0;
/;.0
The ,arning per share of the company for the year )JJN+JP also decreased due to decline in net
profit of the company on account of depreciation provided on the new manufacturing plants as
well as the adverse industry realities and also to lead time in revenue generation from new
capital investments and an appreciating rupee. There was increase in the cost of materials
consumed by 8s.%N;,;%%,;;H. The administrative expenses increased from 8s.PG,;JG,P%% to
8s.%%G,0NN,N0G. The depreciation charges also increased by 8s.%0,;GL,G;%. The number of
equity shares had an increase by 8s.GG,0)J as they were issued as per the >cheme of
Amalgamation.
44
Com-'riso# o% A))i'#&e '#* A&E0isi!io#
Table no.)%
Dr Re**yDs ,'3 Gr'#0)es I#*i' )!*6
4efore Acquisition After Acquisition 4efore Alliance After Alliance
8atios )JJ;+J0 )JJ0+JL )JJL+JN )JJN+JP )JJL+JN )JJN+JP
7urrent ratio ;.% G.H 0.J G.H ;.H G.N
Zuic! ratio G.0 G.% ;.; G.J G.P G.0
"nventory
Turnover3days5
%G0 %GJ %%% %)J 0L 0P
-or!ing capital
turnover3in times5
%.% %.) %.G %.0 ).N ;
:ebt@,quity ratio J.JH J.;% J.JN J.JH J.0P J.L%
,quity 8atio P;.L N;.N HG.N %%;.0G L%.% 0H.H
9ross profit ratio 0%.% ;P.N 0H.G ;P.P )P.; )P.G
8eturn on equity %N% 00J %;J%.N 0L0.) 0J.% ;0.%
,arnings per
share
J.JP J.JG J.JN J.JG 0.J0 ;.0J
45
The year )JJN+JP was not favorable for "ndian pharmaceutical companies as the value of
acquisitions and alliances by "ndian pharmaceutical and healthcare companies declined sharply
in the second half 3')5 of )JJN+JP. The main reason for the decline was the economic
slowdown. 'igh valuations of brands in the domestic mar!et and a lac! of viable facilities in
"ndia and abroad also contributed to the slowdown.
Table no. )% shows the detailed data on the financial ratios of both the companies before their
amalgamation and after the amalgamation.
"n case of :r 8eddys lab, the ratio before acquisition came to G.H in )JJ0+JL from ;.% in )JJ;+
J0 a there was decline in the cash and ban! balances of the company as fixed deposits amounting
to 8s.;,;LP,PNJ had been pledged against a loan ta!en by the subsidiary company 8eddy holding
9mbh. The liabilities for the year )JJ0+JL also increased by 8s.%,N0L,%N;. 'owever after the
acquisition, there was increase in the companys ratio from G.H to 0.J as there was increase in the
current assets as there was increase in the sundry debtors. The cash and ban! balances of the
company also increased. *ne year prior the acquisition i.e. in )JJN+JP the ratio again decreased
to G.H the current assets of the company especially the ban! balances decreased by 8s.H,%HG,LH;.
"n case of 9ranules "ndia ltd, the ratio decreased from ;.H in )JJL+JN to G.P in )JJN+JP as there
was increase in the liabilities by 8s.;H,0)J,%H% due to small scale underta!ingsR also there was
There was decrease in the sundry debtors by G%,PNP,0H; and also there was decrease in cash and
ban! balances of the company by 8s.)%%,NP),)J% and other current assets li!e interests
receivables decreased by 8s.G,NP0,%0% whereas loans and advances increased by 8s.)N,J;J,HPG
as there was increase in the ,xcise duty from 8s.G;, 0%P,;LH to 8s.LN,P0P,P0
For :r 8eddys lab, the "nventory turnover ratio for the year )JJ0+JL decreased from %GJ
days to %%% days but for the next year from )JJL+JN, it again increased from %%% days to
%)J days as there was decline in the sales for the year )JJN+JP.
"n case of 9ranules "ndia ltd, the turnover ratio was not much affected for the year )JJN+
JP as the net sales declined by a small proportion
46
The -or!ing capital of :r 8eddys lab, increased after the acquisition for the year )JJ0+
JL but in the year )JJN+JP there was rise in the wor!ing capital ratio as there was decline
in the current assets of the company as well as <et sales were also affected due to
appreciation of "ndian rupee against E> dollars.
"n case of 9ranules "ndia ltd, the wor!ing capital was highly affected i.e. from ).N times
to ;times. 8eason the same that an unprecedented appreciation in the "ndian rupee by
more than %JU eroded almost NU of top line, leaving with a declining room to over
fixed costs.
The debt equity ratio in )JJN+JP increased as compared to the next year i.e. by J.J)U
which meant that the outsiders funds were increased during the year. "n case of 9ranules
"ndia ltd, there was also increase in the debt equity ratio by J.JGU
:r 8eddys Fab saw an increase in the equity ratio of the company by )%U, which meant
that the solvency position of the company for the long term will be safe as any decline in
assets could not affect the interest of the creditors of the company. "n case of 9ranules
"ndia ltd, there was decline in the equity ratio which meant that the decline in assets of
the company would somehow affect the creditors of the company.
The gross profit ratio for :r 8eddys lab decreased from 0H.G to ;P.P as there was decline
in the sales due to pricing pressures in the 9erman generics mar!et as well as supply
chain problems. "n case of 9ranules "ndia ltd, there was not much difference in the 9ross
profit ratio but a slight difference of J.J% as compared to :r 8eddys lab.
There was a sharp decline in 8eturn of equity from %;J%.N to 0L0.) for the Fy)JJN+JP in
case of :r 8eddys lab as the net profit were affected by the declining sales. The 8eturn
on equity for 9ranules "ndia ltd also declined from 0J.% to ;0.% as an unprecedented
appreciation in the "ndian rupee , they derived almost N;U of their revenues from
international mar!ets, and right si(ed there product mix with speed, selected to retain
those products where could generate reasonable margins or effect price increases.
The earnings per share for :r 8eddys lab decreased by J.J;U from J.JN to J.JG
whereas in case of 9ranules "ndia ltd, it decrease by J.0U from 0.J to ;.0
47
Re%ere#&es
%. http1@@www.moneycontrol.com@stoc!s@companyMinfo@companyMhistory.phpVscMdid/:8F
). http1@@www.bioportfolio.com@search@BroductsMofM:r.M8eddyMsMFaboratoriesMFtd..html
G. http1@@www.drreddys.com@coverview@aboutus.htm
;. http1@@www.granulesindia.com@
0. http1@@myiris.com@shares@company@snap>hot>how.phpVicode/98A<EF,>
48
CHAPTER F
SUMMARC AND FINDINGS
7ompanies around the globe are now more fixated on their bottom line than ever.
Fuelling this mad rush to attain and sustain profits, companies are invariably opting for
inorganic growth strategies such as mergers, acquisitions and strategic alliances to deliver better
value for their shareholders. This trend was earlier seen primarily in developed countries, but
now, the developing economies are catching up fast. "ndia for example, has seen the value of its
global deals surge from a mere T;L million to close to TG.N billion in )JJ0.
Alliances and M=A are rarely considered alternati+e strategies, and are loo!ed at as two sides
to one coin.
M&As involve the merging and acquiring firm integrating the target firm according to its own
strategic purpose, and shifting mar!et behavior to its internal structural management behavior.
"n this way, firms grasp the initiative and control rights in reali(ation of their strategic goals. "n
highly competitive and saturated mar!ets, an M=A is the quic!est entry mode. -hen a firm
see!s its further development through M=A, it gains not only the production capacity and all
assets of the original firm, but also the experience of the original firm. A S!r'!egi& A))i'#&e is a
formal relationship formed between two or more parties to pursue a set of agreed upon goals or
to meet a critical business need while remaining independent organi(ations. "t is collaboration
where each partner hopes that the benefits from the alliance will be greater than those from
individual efforts. Bartners can pool the advantages development of their value chain, exploit
available resources, and share benefit #ointly. Thus, the members of the alliance may not only
acquire what they need from other members, but also maintain their independence.
49
"n this way, this study consisted of comparison of an Alliance and Acquisition, which performed
better. For conducting the study two "ndian pharmaceutical companies were ta!en. The first one
:r. 8eddys laboratories which acquired 9erman based pharmaceutical company 4etapharm, to
become a small si(ed global pharmaceutical player and the second 9ranules "ndia ltd which
entered into strategic alliance with 'eritage pharmaceuticals, a E> based pharmaceutical
company for the development, supply and mar!eting of generic pharmaceutical products for the
E.>. prescription drug mar!et. Ender the Agreement, 9ranules shall develop and register
selected products for E.>. A<:A submission and 'eritage retains exclusive sales and
mar!eting rights to such products.
A comparative study was done to see which company performed better the one which acquired
the company or the one which entered into strategic alliance.
O3>e&!i$es o% !he S!0*y
To study the financial performance of the companies getting into the form of acquisitions
vis+W+vis alliance
To study the relatively best option available between acquisition vis+a+vis alliance
Fi#*i#gs o% !he s!0*y"
The following are the impact on the companies having acquisitions and alliances.
Im-'&! o# ,iE0i*i!y Posi!io#"
"n case of the acquisition, though during the year of acquisition, :r 8eddys lab became highly
liquid as its assets increased, but there was decline in the liquidity position of the company
during the year )JJN+JP as its assets declined considerably wit increase in the inventories.
'ence, effecting the liquidity position of the company. This happened in the second quarter of
year due to economic slowdown.
50
"n case of Alliance, The 7urrent ratio for 9ranules "ndia ltd, decreased in the year )JJN as there
was a decrease in the cash and ban! balances of the company and increase in inventories, also
increase in the liabilities of the company due to increase in small scale underta!ings and unpaid
dividend. Also, there was increase in the inventory and the expenditures li!e manufacturing
expenses along with] cost of materials consumed. 'ence effecting the liquidity position of the
company

Im-'&! o# !he E%%i&ie#&y o% !he &om-'#y
The efficiency of the company is determined by its resource utili(ation. "n case of :r 8eddys
lab, the efficiency of the company improved during the year of acquisition as its inventory
turnover ratio increased from ).P times to G.G times thus reducing the days of inventory turnover
from %)H to %JH days whereas during the period of )JJN+JP, due to the increase in the
expenditure of the cost of goods, and increase in the inventory, the turnover ratio again
increased from %JH days to %)J days.
There was decline in the sales as )JJNDJP saw exceptional fluctuations in the "ndian rupee+E>
dollar exchange rate. The average daily E> dollar value for )JJNDJP was 8s. ;J.)P compared to
8s. ;0.); during the previous year. -hile the 7ompany too! adequate foreign exchange cover
against its exports, depreciation of the E> dollar adversely affected reali(ations. Also >elling,
9eneral and Administrative 3>9=A5 expenses increased by P percent to 8s. %0,%N0 million in
)JJNDJP, compared to 8s. %;,J0% million in )JJLDJN. This was largely on account of higher
manpower costs, which rose by %) percent in )JJNDJP due to annual increments and normal
year+on+year increase in the headcount. There was also a growth in mar!eting expenses, which
increased by N percent in )JJNDJP \ mostly on account of higher shipping costs and higher
commission on sales due to increased revenues, as well as higher advertisement expenses due to
campaigns underta!en in 8ussia, 4elarus and E!raine.
"n case of Alliance, The efficiency of the company decreased during the period )JJN+JP by
J.)U as there was increase in the finished goods and in the year )JJN+JP due to appreciation of
"ndian rupee against us dollars and economic slowdown as all transactions were done in E>
dollars
51
E%%e&! o# Pro%i!'3i)i!y r'!io
The 9ross profit ratio for the year )JJL+JN rose after the acquisition by :r. 8eddys lab as there
was increase in net sales of the company. Though the sales declined for the next year that is
during the financial year )JJN+JP which resulted in decrease in the gross profit ratio for that
year as compared to the previous year. This was because during the last year, revenues from
authori(ed generics contributed to ); percent to total revenues and earned gross margins which
were below the 7ompanys average.
"n case of Alliance, the gross profit did not had much impact as there was increase in the <et
sales though the difference occurred due to increase in expenditure costs of the 9oods produced
as the manufacturing expenses increased during the year
E%%e&! o# So)$e#&y o% !he &om-'#y
:uring the year )JJ0+JL, there was increase in the outsiders funds were a bit more as compared
to the previous year resulting in high ris! to the solvency of the company. 'owever after the
acquisition, the equity ratio was more than the debt ratio this was due to increase in accumulated
comprehensive income as well as profit retained during the years. Though during the next year
from )JJN+JP, there was increase in the debt equity ratio as there was increase in the
shareholders funds but there was also increase in the outsiders funds also.
After the acquisition, the ,quity ratio of the company increased for the next two years of
acquisitions that tells that the solvency position of the company was stable and improving.
"n case of the Alliance, The debt equity ratio for the period )JJN+JP was more as there was
increase in the outsiders funds as well as the shareholders funds as there was increase in the
secured loans and decrease in the unsecured loans and also there was increase in the
shareholders funds and reserves and surplus. Also the ,quity ratio, declined which resulted in
ris! on solvency of the company
52
E%%e&! o# O$er')) -ro%i!'3i)i!y o% &om-'#y
For the year )JJ0+JL, there was a tremendous increase in the shareholders funds which gave a
higher return on capital as there was increase in the reserves and surplus as well as ,quity share
capital of the company. Though for the next financial year, there was decline in the reserves and
surplus of the company which resulted in low return on ,quity. The earnings per share of the
companies also considerably declined for the year )JJN+JP
"n case of alliance, the 8eturn on ,quity capital decreased from 0J.%U to ;0.%U as there was
decline in the <et profit after Tax. The decline in the net profit was greater than that in total
revenue due to an increase of ;GU in the research and development cost from 8s. ),;LG million
in )JJLDJN to 8s. G,0GG million in )JJNDJP. The earnings per share of the company also
decreased during the period.
To ma!e a comparison based on above findings, it can be interpreted that if immediate effects
are to be seen of the acquisition and alliance and are to be compared then :r 8eddys lab
performed much better as there was increase in the revenues of the company with increase in
the <et sales and *verall Brofitability of the company in the year of acquisition. Though in case
of 9ranules "ndia ltd, in the year of alliance there was increase in the revenues of the company,
but there profits declined.
4ut if we consider the year )JJN+JP in both the cases, both the companies went into losses as the
year )JJN+JP was not much not favorable for "ndian pharmaceutical companies as the value of
acquisitions and alliances by "ndian pharmaceutical and healthcare companies declined sharply
in the second half 3')5 of )JJN+JP. The main reason for the decline was the economic
slowdown. 'igh valuations of brands in the domestic mar!et and a lac! of viable facilities in
"ndia and abroad also contributed to the slowdown.
>o to ma!e a comparison between alliance and acquisition in such given conditions is not
possible.
53
(i3)iogr'-hy"
%. >udarsanam B.> 3%HH05, IEssence of Mergers and AcquisitionsC, Brentice 'all of "ndia Bvt.
Ftd, <ew :elhi, %%J+JJ%
).'itt A. Michael, 'arrison >. ?effery, "reland :uane 8.3)JJ%5,CMergers and Acquisitions),
*xford Eniversity Bress "nc, <ew Kor!, %JJ%L
G.9aughan A. Batric!, ?an 3)JJJ5, IMergers, Acquisitions, and Corporate Restructurings,C
?ournal of 7orporate Accounting = Finance, 2ol no. )
;. 9aughan A. Batric!, Feb 3)JJJ5, IMergers and Acquisitions in the 1990s: A Record rea!ing
"ecade,C http1@@media.wiley.com@productMdata@excerpt@NH@J;N%;%;G@J;N%;%;GNH.pdf
0. Mc9arvey, 8obert., *ct 3%HHN5, http1@@www.economywatch.com@mergers+
acquisitions@benefits.html
L. <ielsen 4o 4ernhard, *ctober 3)JJ)5, ?ournal of Onowledge Management Bractice,
http1@@www.smallbusinessnotes.com@operating@leadership@strategicalliances.html
P. ,isenhardt M. Oathleen, S&hoo#ho$e# 4ird 7laudia, 3%HHL5+ 4Resource#$ased %ie& of
'trategic Alliance For(ation: 'trategic and 'ocial Effects in Entrepreneurial
Fir(sC,*rganisation science, 2ol.N
H. 9oodrich 4en, April 3)JJ;5, IAlliance For(ationC,
http1@@www.people.fas.harvard.edu@Qgoodrich@"8notes@-ee!JH@4enMresponse.pdf
%J. http1@@www.mar!etingminefield.co.u!@traditional+mar!eting@strategic+alliances@types.html
54
%%. >amuel, poss., ?uly 3%HHH5, ICarefull* &eigh ris!s, $enefits of strategic allianceC, Fos
Angeles business paper, http1@@www.encyclopedia.com@doc@%9%+00GPLJL.html
%). Oummer 4. 7hristopher, May 3)JJL5, IMergers and acquisitions in phar(aceutical
industr*: Acti+ities and strategic in+ersionsC. http1@@www.imaa+
institute.org@docs@!ummerMmergersU)JacquisitionsU)Jm=aU)Jpharmaceutical
U)JindustryU)JsouthU)JamericaU)JactivityU)JstrategicU)JintentionsU)Jstrategy.pdf
%G. Arora, A. and 9ambardella, A., 3%HHJ5, Co(ple(entarit* and e-ternal lin!ages in
$iotechnolog*: .he strategies of large fir(s in $iotechnolog*, ?ournal of "ndustrial
,conomics, vol. GP. http1@@papers.ssrn.com@solG@papers.cfmVabstractMid/;LPGJ%
%;. Baruchuri, >ri!anth R <er!ar, Atul R 'ambric!, :onald 7., >ept 3)JJL5, IAcquisition
integration and producti+it* losses in the technical core: disruption of in+entors in acquired
co(panies.C http1@@www.accessmylibrary.com@coms)@summaryMJ)PL+G)NLH;H;M"TM
%0. Oargin 9or Ara. >ibel,3%HH)5,C Mergers And .ender 3ffers: A Re+ie& 3f .he 4iteratureC
%L. Oargin 9or Ara. >ibel, 3%HH)5,C Mergers And .ender 3ffers: A Re+ie& 3f .he 4iteratureC
%N. ?osh Ferner and 8obert B. Merges, ?une 3%HHP5 ,I.he Control of .echnolog* Alliances: An
E(pirical Anal*sis of the iotechnolog* 0ndustr*,C The ?ournal of "ndustrial ,conomics
;L3)5, http1@@www.essex.ac.u!@#indec@supps@lerner@lerner.pdf
%P. Oay, ?. 3)JJ%5, 7hanges in mar!et structure1 The economic issues, Consolidation and
Co(petition in the 8har(aceutical 0ndustr*, *ffice of 'ealth ,conomics 3*',5, and
Fondon. http
55
%H. Annette F. 8anft, Michael :. Ford, ?uly 3)JJ)5, IAcquiring 6e& .echnologies and
Capa$ilities: A 7rounded Model of Acquisition 0(ple(entationC, *rgani(ation science,
2ol.%G, http1@@orgsci.#ournal.informs.org@cgi@content@abstract@%G@;@;)J
)J. :an(on, Batricia M., ,pstein, Andrew ?oel and <icholson, >ean >ept 3)JJG5, IMergers and
Acquisitions in the 8har(aceutical and iotech 0ndustriesC,
http1@@papers.ssrn.com@solG@papers.cfmVabstract
)%. 'ambric! 7. :onald, 3)JJL5, IAcquisition 0ntegration and 8roducti+it* 4osses in the
technical Core: "isruption of 0n+entors in Acquired Co(paniesC, organi(ation >cience, 2ol.
%N+ http1@@portal.acm.org@citation.cfmVid/%)G0;J)
)). 2iehbacher 7hris, March 3)JJH5, I8har(aceutical 0ndustr* Merger Mania: Consolidation
+s, "i+ersificationC, http1@@see!ingalpha.com@article@%)L0N%+pharmaceutical+industry+merger+
mania+consolidation+vs+diversification
56

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CHAPTER-1

INTRODUCTION TO MERGERS AND ACQUISITIONS

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