Digesting acquisitions is never easy in the corporate world, especially when the acquirer and target are of similar size. And when one of the two companies is in distress, the merger can be testing indeed. This is the
challenge that Sun Pharmaceuticals faces in its acquisition of Ranbaxy Laboratories. In what is probably the biggest such all-stock merger deal between two Indian companies, Sun Pharma announced on April 7 that it will be acquiring Ranbaxy using its own shares as currency. The $4 billion deal, subject to approvals, also includes an $800 million loan in Ranbaxy’s books. Analysts have been quick to point out that this is a bargain acquisition by Sun, given that Ranbaxy’s valuation is half of what it was when Japanese major Daiichi Sankyo acquired the company from the original promoters in 2008. But there is a reason why Ranbaxy came so cheap, and that is its run-ins with regulatory authorities in its largest overseas market, the U.S. The company’s four plants in India have been blacklisted and barred from making supplies to the U.S. by that country’s regulator for sub-standard manufacturing practices. Worse, Ranbaxy underwent the humiliation of pleading guilty to felony charges, paying up $500 million as fine. So, the question to ask is not whether it is a cheap acquisition but a smart one for the ambitious Sun Pharma. Sun, and its founder Dilip Shanghvi, seem to believe it is. The troubles aside, Ranbaxy is known for its strength in generics and has a long research and product pipeline. Besides, Ranbaxy owns well-known over-the-counter brands such as Revital and is present in emerging markets and in parts of the developed world too. In India, the combined entity catapults itself to the top of the table. Importantly, buying distressed assets cheap and reviving them seems to be part of Sun Pharma’s DNA. It has nursed at least three major companies abroad back to health after acquiring them. Sun’s confidence probably stems from this trait. Yet, Mr. Shanghvi will be the first person to concede that Ranbaxy is qualitatively a different challenge and more than just turnaround skills will be needed to make this deal shine. His biggest asset as he sets out to repair Ranbaxy’s name in the U.S., however, will be Sun’s own clean image. From a domestic market perspective, the merger is good as it will create an entity of a scale and size big enough to take on emerging competition from multinationals. The stock markets seem to agree with Sun’s strategy, which is a big battle won. However, quickly settling the issues with the U.S. regulators will be key to the success of the merger, and Sun’s capabilities will be fully tested in this effort.
