FINAL DISSERTATION

DECLARATION FORM

I hereby declare that the Project work entitled Corporate Restructuring in Industries

around the Globe submitted by me for the partial fulfillment of the Post Graduate

Diploma in Management Program to Institute for Integrated Learning in

Management, Greater Noida is my own original work and has not been submitted

earlier either to IILM GSM or to any other Institution for the fulfillment of the requirement

for any course of study. I also declare that no chapter of this manuscript in whole or in

part is lifted and incorporated in this report from any earlier / other work done by me or

others.

Place: Delhi

Date : 27th April 2009 Signature:

Name of Student : AJAY MALIK

Address: House no. 658,Sector-31 Gurgaon

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Corporate Restructuring in Industries

Around Globe

Dissertation submitted in partial fulfillment of the requirements of the

Two year full-time Post Graduate Diploma in Management Programme.

Submitted by

AJAY MALIK

Roll No: FT- 07- 512

Batch: 2007-2009

Institute For Integrated Learning in ManagementGraduate School of Management

16, Knowledge ParkGreater Noida– 201 306

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ACKNOWLEDGEMENT

I would like to take this opportunity as a platform to thank various individuals, without

the support of whom, this project would not have been successful.

A task or project cannot be completed alone. It requires the effort of many individuals. I

take this opportunity to thank all those who helped me directly or indirectly in the

completion of this research project.

I express my sincere gratitude to my Faculty Guide Prof. Birendra Prasad for giving

me the opportunity to undergo the project in which I used my finance knowledge with

skills and learning developed in analysis during my two years of MBA. I further thank

him to render me his continuous support, encouragement and guidance while

accomplishing this task and also for lending a patient ear when it came to solving my

problem related to the project. The project will not be possible without his valuable time

and support

I also forward my deep regards and thankfulness to my family & friends for guiding me

throughout and providing me with valuable suggestions for making this project a

success.

Any suggestions for further improvement shall be welcomed.

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TABLE OF CONTENTS

Acknowledgement.........................................................................................3Executive Summary………………………………………………..….….….5-7Main Text1. Introduction (objective and limitation) ……………..…………………… 82. Corporate Restructuring………………………………….……………....9-19

Review of existing literature

About corporate restructuring

3. Data and Methodology……………………………..……….……………20-33 Data analysis

Research methodology

4. Industry Analysis……………………………………..………….………34-42 Industry analysis: Pharmaceutical Industry Industry analysis: Steel Industry

5. Result and suggested portfolio…………………..………….…………...….. 43-48

6. References…………………………………………………….……….………..49

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EXECUTIVE SUMMARY

The Management Research project focuses on understanding of corporate restructuring

and its various forms, which can be used to suggest a better Strategy for Creating

Breakthrough Innovation in various industries and help companies to grow faster than

normal.

An understanding of Corporate restructuring methods will help in understanding the

current trends in different industries and there merger and acquisition activity. The in-

depth understanding of different industries like pharmaceutical & steel industry and

analysis of key value factors of that industry leads to framing of different scenarios for

suggesting different expansion methods and there implementation through corporate

restructuring of companies in that particular industry.

There is an ongoing global debate on the effects of M&As on firms. Mergers and

acquisitions have become common in India today. However, very little appears to be

known about the long-term post-merger performance of firms in India, and the strategic

factors that affect this performance. Our study attempts to find and suggest ways to

enhance post performance of M&A in industries.

Result:

The increasing economic power of emerging economies has led to a dramatic

expansion in multinationals from these markets. Mergers and acquisitions have become

a popular vehicle for these companies to rapidly access new markets, assets and

capabilities. More than 1,100 mergers and acquisitions were conducted by emerging

market multinationals in 2006, representing US$128 billion in value.

Indian companies have significantly increased their M&A activity over recent years,

particularly in terms of cross-border acquisitions. The value of deals conducted by

Indian companies grew at a compound annual growth rate of 28.3 percent over 2000-

2007 to reach US$30.4 billion in 2007, of which US$22.6 billion represented cross-

border transactions.

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Indian M&A transactions are primarily driven by the desire for growth. Indian

companies are leveraging their low-cost advantage to create efficient global

business models; they are seeking entry into fast-growing emerging markets and

market-share in profitable developed economies; they are looking to augment

their knowledge, reach and capabilities through acquisitions of companies for

their brands, technology, and talent and product portfolios. Moreover, the

competition to achieve these benefits is intense, heightening the need for speed.

These trends in Indian M&A strategies uncover important implications for operating

models. In this context, Accenture and the Confederation of Indian Industry (CII) have

partnered on a project to investigate the new dynamics of M&A by Indian companies

and their impacts. In addition to extensive secondary research we also analyzed IMRB

International survey of 66 C-level executives from Indian companies that have

undergone a merger or an acquisition in the last five years. The survey findings

support and validate the growth-focused M&A strategies of Indian companies, but

they also reveal the lack of attention paid to the operational implications of M&A.

The research findings suggest that Research & development and supply chain-

related opportunities—which can account for up to 70 to 80 percent of costs —are not

given the attention they warrant. Only 11 percent of survey respondents identified

supply chain management as an area that requires attention during M&A planning and

integration. 89 percent of respondents believe that their latest merger has lived up to

expectations yet less than half of these satisfied respondents (45 percent) consider that

they had undergone a successful supply chain integration. The supply chain is in many

cases the most significant source of operational synergies. It is where much of the value

that drives M&A deals is lost or captured. Indeed, 73 percent of the M&A operational

savings identified by our survey respondents derive directly from the supply chain.

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Our research and experience highlight the following operations focused lessons for

sustainable growth:

1. Raise the strategic importance of operational synergies through involvement of

relevant leadership and experts throughout the M&A process. This includes bringing

operations leadership to the top table, involving operations leadership in globalization

strategies and leveraging supply chain skills to raise performance across the

organization.

2. M&A strategies should target R&D Integration not only as a source of cost saving, as

has been typical of the past mergers, but also as an opportunity to realize long-term

gains via development of the new chemical entities that drive market value.

Looking forward, Indian businesses aspiring to high performance will need to have

honed their expertise in M&A, including cross-border acquisitions, with an emphasis on

leveraging operational synergies through supply chain excellence and low cost

Research and development. Executives leading the supply chain in these organizations

will play a central role in achieving operational excellence, and making them an integral

part of the high performance business of the future whereas companies involved in R&D

will develop products for future opportunities.

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INTRODUCTION

The objective of this Management research project is to understand the corporate

restructuring and its various forms, wherein live cases of corporate restructuring

have been taken from industries like Pharmaceutical and steel across the globe.

These industries have been taken after the consideration of Major events of Merger

and Acquisition in globe. The case of Ranbaxy and Daiichi in pharmaceutical and

Tata-Corus deal in steel are the major focus of this report while understanding the

steps undertaken by different management to restructure their operations. The study

focus on understanding the elements of significance in growth in these industries

and suggesting portfolio expansion i.e. corporate restructuring strategy for

enhanced and better performance of companies in these industries.

The limitation of this management research project is the availability of past

data related to the cases of corporate restructuring and the steps companies have

taken for making these restructuring a success for the company’s operations.

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CORPORATE RESTRUCTURING

Corporate restructuring, out of all emerging concepts of findings ways to serve

shareholders better, has been a very successful concept abroad and it’s been followed

all the more in high context cultures like India. The rapidity with corporate finance due to

external factors like increased price volatility, a general globalization of the markets, tax

asymmetric, development in technology, regulatory change, liberalization, increased

competition and reduction in information and transaction costs and also intra firm factors

like liquidity needs of business, capital costs and growth perspective have lead to

practice of corporate restructuring as a strategic move to maximize the shareholder's

value.

The "Corporate restructuring" is an umbrella term that includes mergers and

consolidations, divestitures and liquidations and various types of battles for corporate

control. The essence of corporate restructuring lies in achieving the long run goal of

wealth maximization. This study of historical events is an attempt to highlight the impact

of corporate restructuring on the shareholders value in the Indian context. Thus, it helps

us to know, if restructuring generates value gains for shareholders (both those who own

the firm before the restructuring and those who own the firm after the restructuring), how

these value gains have be created and achieved or failed.

Further, it will also focus on issues involving ownership and controls. This leads logically

to the subject of leveraged buyouts. It was during 1980s that many of the new tools

which made leveraged buyouts possible, including high yield or junk bonds, found favor.

Last year, M&A activities were largely restricted to IT and telecom sectors. They have

now spread across the economy.

The term corporate restructuring encompasses three distinct, but related, groups of

activities; expansions – including mergers and consolidations, tender offers, joint

ventures, and acquisitions; contraction – including sell offs, spin offs, equity carve outs,

abandonment of assets, and liquidation; and ownership and control – including the

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market for corporate control, stock repurchases program, exchange offers and going

private (whether by leveraged buyout or other means). Mergers and acquisitions (M&A)

and corporate restructuring are a big part of the corporate finance world. One plus one

makes three: this equation is the special alchemy of a merger or an acquisition. The key

principle behind buying a company is to create shareholder value over and above that

of the sum of the two companies. Two companies together are more valuable than two

separate companies - at least, that's the reasoning behind M&A.

About corporate restructuring

The phrase mergers and acquisitions (M&A) refers to the aspect of corporate strategy,

corporate finance and management dealing with the buying, selling and combining of

different companies that can aid, finance, or help a growing company in a given industry

grow rapidly without having to create another business entity. It is a form corporate

restructuring.

Forms of corporate restructuring

Expansion

1. Merger – Combination of two or more companies into a single company by way

of Amalgamation or Absorption.

2. Tender offer – involves making a public offer for acquiring the shares of

Target Company to acquire the management control in that company.

3. Assets acquisition – involves buying tangible or intangibles assets like brands of

a particular company.

4. Joint ventures – two companies entering into agreement to provide certain

resources towards achievement of particular common business goal.

Contraction

1. Spin-offs – Shares of subsidiary co. are distributed on pro rata basis to existing

shareholders.

2. Split-offs – A portion of the existing shareholders gets shares of new company in

exchange of their holding in parent co.

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3. Split ups – Parent co. broken into small companies. Stockholders in the new

companies exchange their existing shares with share in the new entities.

4. Divestiture – Sale of a portion of the firm to outsider generally for cash.

5. Equity carve out- involves the sale of a portion of the firm through equity offering

to outsider. New shares are sold to outsiders who give them ownership of a

portion of the previously existing firm.

6. Assets sale - Sale of Tangible or Intangible Asset

Corporate control

1. Takeover defenses – intends to change the corporate control position of the

promoter.

This includes pre-bid & post-bid defenses.

2. Share repurchases – leads to reduction in the equity capital of the company

thereby increasing the promoter’s stake.

3. Exchange offers – involves exchanging common stock for debt or vice versa for

changing the capital structure & keeping the investment policy unchanged.

4. Proxy contests – is an attempt by a single shareholder or a group of shareholder

to take control or bring about changes in a company thru the use of proxy

mechanism of corporate voting.

Changes in ownership structure

1. Leverage buyouts – is a financing technique where debt is used to acquire a

company.

2. Going private – converting public corporation into privately held firm by

purchasing entire equity interest by a small group of investors.

3. ESOP – is a mechanism whereby a corporation can make tax deductible

contributions of cash or stock into a trust. The assets are allocated to the

employees and are not taxed until withdrawn by them.

4. MLPs – Master Limited Partnership is a type of limited partnership whose shares

are publicly traded.

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Mergers & Acquisitions: different forms

1. Horizontal merger

Mergers between two firms operating & competing in the same kind of business

activity;

Main purpose is economies of scale by elimination of duplication of facilities and

operations and broadening the product line, reduction in investment in working

capital, elimination of competition in a product, reduction in advertising costs,

increase in market share etc.

- Decrease in no. of firms in an industry;

- Potential to create monopoly.

2. Vertical mergers

- Involves merger between firms that are in different stages of production or

value chain

- Combination of companies that usually have buyer – seller relationships

- Backward & Forward integration

- Motive is to reduce inventories of raw materials and finished goods,

implements its production plans as per the schedules and better working

capital management, elimination of transaction costs etc.

3. Conglomerate mergers- Merger between the firms engaged in unrelated types of business activity;

- Motive is to utilize financial resources, enhance the stability of acquirer

company by creates balance in the company’s total portfolio of diverse

products production processes.

Types of Conglomerate mergers:

- Product extension mergers or Concentric mergers

- Geographic market extension merger

- Pure conglomerate merger

- Financial conglomerate

- Managerial conglomerate

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The Merger & Acquisition process

The acquisition plan can be divided into a planning stage and an implementation stage.

The planning stage consists of development of business and the acquisition plans. The

Implementation stage consists of the search, screening, contacting the target,

negotiation, integration and the evaluation activities.

1. Developing the business plan

A merger or an acquisition decision is a strategic choice. The acquisition strategy

should fit the company's strategic goals of increasing the net cash flows and reduce

risk.

A business plan communicates a mission or vision for the firm and a strategy for

achieving that mission. A well-structured business plan consists of the following

activities:

a. Determining where to compete i.e., the industry or the market in which the

firm desires to compete.

b. Determining how to compete. An external industry or the market analysis

can be made to determine how the firm can most effectively compete in its

chosen market(s).

c. Self-assessment of the firm by conducting an internal analysis of the firm's

strengths and weaknesses relative to the competition.

d. Defining the mission statement by summarizing where and how the firm

has chosen to compete and the basic operating beliefs of the

management.

e. Setting objectives by developing quantitative measures of performance. vi.

Selecting the strategy most likely to achieve the objectives within a

reasonable time period subject to constraints identified in the self-

assessment.

The firm's Mergers and Acquisitions strategy should complement this process, targeting

only those industries and companies that improve the acquirer's strengths or lessen the

weaknesses.

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2. Building the acquisition plan

After a proper analysis of the various available options if it is determined that a merger

or an acquisition process is appropriate to implement the business strategy then an

acquisition plan is prepared. This plan focuses on the tactical rather than the strategic

issues. The acquisition plan defines the key management objectives for the takeover,

resource constraints, appropriate tactics for implementing the proposed transactions

and the schedule or a time table for completing the acquisition. It furnishes a proper

guidance to those responsible for successfully completing the transaction by providing

valuable inputs to all the later phases of the acquisition process.

Management objectives

Management objectives are both financial and non-financial. The financial objectives

include a minimum rate of return or operating profit, revenue and cash flow targets to be

achieved within a specified time period. Non-financial objectives address the

motivations for making the acquisition that support the achievement of the financial

returns predetermined in the business plan.

Resource assessment

The assessment of the resources involves the determination of the maximum amount of

resources available to assign to the merger or acquisition. This information is useful in

the selection of the right candidate for the merger or the acquisition. The resources

available generally include the financial resources like the internal cash flows in excess

of the normal operating requirements plus funds from equity and the debt markets. If the

target is identified, resources should also include funds which the combined firm can

raise by issuing equity or by increasing leverage. It is the management's perception

about the likely risks that it would be exposed to by virtue of acquisition that determines

the financial implications. These risks may be :

1. Operating risk

2. Financial risk

3. Overpayment risk

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Time Table

A time table or a schedule that recognizes all the key events that should take place in

the acquisition process is the final component of a properly structured acquisition plan.

It should be both realistic and aggressive to motivate all the participants in the process

to work as fast as possible to achieve the management objectives established in the

acquisition plan. The schedule should also include the names of the individuals who will

be responsible for ensuring that the set objectives are achieved.

The search process

After the firm has developed a viable business plan that requires an acquisition to

realize the firm's strategic direction and an acquisition plan the search for the right

candidate for acquisition begins. The search for a potential acquisition candidate

generally takes place in two stages.

The first stage of the search process involves establishing a primary screening

process. The primary criteria based on which the search process is based include

factors like the industry, size of the transaction and the geographic location. The size of

the transaction is best defined in terms of the maximum purchase price a firm is willing

to pay. It can be expressed as the maximum purchase price to earnings, book, cash

flow or revenue ratio or a maximum purchase price stated in terms of rupees.

The second stage involves developing the search strategy. Such strategies generally

involve using computerized database and directory services to identify the prospective

candidates. Law, banking and accounting firms also form valuable sources from which

information can be obtained. Investment banks, brokers, and leveraged buyout firms are

also useful sources although they are likely to require an advisory fee.

The first contact

The contact phase of the process involves meeting the acquisition candidate and

putting forward the proposal of acquisition. It could run through several distinctively

identifiable phases that need a little more elaboration.

A face to face meeting is then arranged when the target is willing to entertain the idea of

an acquisition. Contact is made through an intermediary for a medium sized company.

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The intermediaries might include members of the acquirer's board of directors,

accounting firm, lender or an investment banker. For a large sized company contact is

made through an intermediary but it is important that the contact is made with the

highest level of the management of the target firm.

Discussing values

Valuation of the target company is the most critical part of a deal. A conservative

valuation can result in collapse of the deal while an aggressive valuation may create

perpetual problems for the acquiring company. The commonly used valuation methods

are:

1. Discounted Cash Flow Method

2. Comparable Companies Method

3. Book Value Method

4. Market Value Method

Preliminary legal documents

The common first step in a merger or an acquisition transaction is to negotiate a

bilateral confidentiality agreement and a letter of intent

Negotiations & defining the purchase price

The negotiation phase of the acquisition process consists of many activities conducted

simultaneously by the various members of the acquisition team. The actual purchase

consideration is determined during this phase. This is different from the preliminary

valuation of the target company made when the first contact is made.

Structuring the deal

Deal structuring involves meeting the needs of both the parties by dealing with issues of

risk and reward by constructing an appropriate set of compensation, legal, tax and

accounting structures.

The decisions made throughout the deal structuring process influence various attributes

of the deal. These attributes include how the ownership is determined, how assets are

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transferred, how the interests of the ownership are protected, and how the risk is shared

among the parties to the transaction. Other aspects like the type, number, and

complexity of the documents required for closing, the type of approval required, and the

time needed to complete the transaction are also dictated by this document. The

process starts with the determination by each party of their initial negotiating positions,

potential risks, alternatives for managing risk, and levels of tolerance for risk, and the

conditions under which either of the parties would withdraw from the deal.

Due diligence

The basic function of due diligence is to assess the benefits and the costs of a proposed

acquisition by inquiring into all relevant aspects of the past, present and the predictable

future of a business to be purchased. Due diligence is of vital importance to prevent

"unpleasant surprises" after completing the acquisition. The due diligence should be

thorough and extensive. Both the parties to the transaction should conduct their own

due diligence to get the accurate assessment of potential risks and rewards.

Developing the financing plan

One of the very important activities in the negotiation phase is to develop a financing

plan. This activity is a key input in determining the purchasing price, as it helps in

identifying a practical limit of the amount of the purchase price the buyer can offer the

seller. According to the capital budgeting theory, an investment should be funded as

long as its net present value is greater than or equal to zero. Applying the concept of

capital budgeting to acquisition financing, we can determine the purchase price as the

present value of the target company plus the synergy created by combining the

acquiring and target companies discounted at the acquirer's cost of capital.

Based on the purchase price determined, a financing plan is attached to the acquirer's

business and the acquisition plan and is used to obtain the financing for the transaction.

A financing plan is usually used as a marketing or sales document to negotiate the best

possible terms for financing the proposed transaction.

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Developing the integration plan

Making the combined firm perform in line with the expectations is a difficult task. For the

result to be in line with expectations proper planning is needed before the agreement of

purchase and sale is signed. Without adequate planning, integration is unlikely to

provide the synergies anticipated by, at the cost included in, and within the time

provided in the acquisition plan.

The benefit packages, contracts for employees, retention bonuses, etc. all should be

negotiated before closing. Covenants and conditions in the contract also impact

integration. Successful integration of the firms requires getting the employees in both

the firms to work towards the achievement of the common goals. This is achieved

through trust and mutual cooperation.

Closing

It consists of all necessary shareholder, regulatory and third party consents. All the

necessary legal approvals are attained at this stage. Considerable planning before

closing is essential to minimize the obstructions that a target company may place before

the buyer. Non-compliance with the law may delay or prevent the merger or acquisition.

Many transactions also require approval of the shareholders of both the acquiring and

the target companies before the ownership is legally transferred.

At the end of the closing phase a closing document is prepared which is a definitive

agreement of purchase and sale that indicates all the rights and obligations of both the

parties before and after closing. The complexity of the transaction determines the length

of this document

Contents of closing document

- Purpose of acquisition

- Price , allocation of price

- Payment mechanism

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- Assumption of liabilities

- Representations and warranties

- Covenants, Conditions for closing

- Indemnification

Participants in restructuring activities

1. Investment Bankers – to assist companies in achieving their strategic financial

objectives like growth, shareholder wealth maximization etc. The services

includes:

a. Identification of areas for restructuring

b. Buyer/Seller identification

c. Structuring and Valuation

d. Negotiations

e. Legal compliance

2. Lawyers – in the area of tax implication, employee benefit, real estate, securities

and intellectual property & compliance of all other requirements.

3. Accountants - provides services in the area of financial due-diligence, financial

structure, optimal tax planning, audit etc.

4. Valuation Experts – for valuation of the firm by building model that incorporates

various assumptions such as cost & revenue growth.

5. Institutional investors - for seeking their support for managements action for

mergers & acquisition.

6. Arbitrageurs – They buy the stock and make profit on the difference between

the bid price & current stock price. They placed themselves in a position to

influence the out come of takeover attempt.

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DATA AND METHODOLOGY

Data

ACQUISITION EVENT IN PHARMACEUTICAL INDUSTRY: RANBAXY - DAIICHI

DEAL

Ranbaxy: Company profile

Ranbaxy Laboratories Limited, India's largest pharmaceutical company, is an

integrated, research based, international pharmaceutical company, producing a wide

range of quality, affordable generic medicines, trusted by healthcare professionals and

patients across geographies. Ranked 8th amongst the global generic pharma

companies, Ranbaxy today has a presence in 23 of the top 25 pharma markets of the

world. The Company has a global footprint in 49 countries, world-class manufacturing

facilities in 11 countries and serves customers in over 125 countries.

Earlier in June 2008, Ranbaxy entered into an alliance with one of the largest Japanese

innovator companies, Daiichi Sankyo Company Ltd., to create an innovator and generic

pharmaceutical powerhouse. The transformational deal will place Ranbaxy in a higher

growth trajectory. The ranking of the combined entity will be catapulted to the No. 15th

position in the global pharmaceutical space and it will emerge stronger in terms of its

global reach and in its capabilities in drug development and manufacturing.

Financials: Ranbaxy was incorporated in 1961 and went public in 1973. For the year

2007, the Company's Global Sales at US$ 1,619 Mn reflected a growth of 21%. Profit

after Tax at US$ 190 Mn registered an increase of 67% over the previous year.

The Company has a balanced mix of revenues from developed and emerging markets

and is well positioned to leverage the growth potential offered by these markets. For the

year 2007, North America, the Company's largest market contributed sales of US$ 419

Mn, contributing 26% of total sales followed by Europe garnering US$ 365 Mn. The

Company’s business in Asia was led by a strong performance in India that clocked

sales of US$ 301 Mn with market leadership backed by its strong brand-building skills.

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Strategy : Ranbaxy is focused on increasing the momentum in the generics business in

its key markets through organic and inorganic growth routes. It continues to evaluate

acquisition opportunities in India, emerging and developed markets to strengthen its

business and competitiveness. The Company’s growth is well spread across

geographies with near equal focus on developed and emerging markets. Ranbaxy has

entered into new specialty therapeutic segments like Bio-similars, Oncology, Peptides

and Limuses. These new growth areas will add significant depth to its existing product

pipeline.

R&D : Ranbaxy views its R&D capabilities as a vital component of its business strategy

that will provide the company with a sustainable, long-term competitive advantage. The

Company today has a pool of over 1,200 scientists engaged in path-breaking research.

Ranbaxy is among the few Indian pharmaceutical companies in India to have started its

research program in the late 70's, in support of its global ambitions. A first of its kind

world class R&D centre was commissioned in 1994. Today, the Company's multi-

disciplinary R&D centre at Gurgaon, in India, houses dedicated facilities for generics

research and innovative research. The Company's robust R&D environment for both

drug discovery & development reflects the Company's commitment to be a leader in the

generics space offering value added formulations based on its Novel Drug Delivery

System (NDDS) and New Chemical Entity (NCE) research capability.

The new drug research areas at Ranbaxy include anti-invectives’, inflammatory /

respiratory, metabolic diseases, oncology, urology and anti-malaria therapies.

Presently, the Company has 8-10 programs including one anti-malaria molecule which

has recently obtained approval from the Drug Controller General of India to initiate

Phase III human clinical trials in India. The Company has two programs in Phase I with

the balance in the pre-clinical stage. This includes a collaborative research program

with GSK.

The company's NDDS focus is mainly on the development of NDA/ANDAs of oral

controlled- release products for the regulated markets. The Company’s first significant

international success using the NDDS technology platform came in September 1999,

when Ranbaxy out-licensed its first once-a-day formulation to a multinational company.

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ABOUT DAIICHI SANKYO:

Daiichi Sankyo- Two traditions, One Vision. Adding to the Balance of Life.

The union of Daiichi and Sankyo brings together two pharmaceutical companies bound

by a century of vision and a legacy of firsts.

From the discovery of epinephrine to the development of the statin class of lipid-

lowering agents, and the development of the first glitazone, which revolutionized long-

term control of type 2 diabetes, the people of Daiichi Sankyo remain committed to a

unique ideal – Adding to the Balance of Life.

To physicians, this means objective data, the highest ethical standards, and a desire to

deliver practical human benefits with each product we develop.

To our partners, we balance the strength and stability of our global presence with the

spirit, agility, and quick reaction times of much smaller companies.

To our employees, we offer an operational structure that balances creativity with

discipline and individualism with collaboration.

To patients, we are committed to developing medications that put lives into balance –

and add to the balance of life.

We believe good science walks hand-in-hand with humanity – and, as we move forward

into our next century, Daiichi Sankyo seeks to build on our history of discovery with the

development of new therapies in cardiovascular disease, cancer, metabolic disorders,

and infection.

At Daiichi Sankyo, our strength is derived from shared values. They are the heart of our

commitment to form a culture built on mutual trust and operational excellence.

Our values help us balance our inventive nature with a strong desire to deliver new

therapies to patients worldwide.

Innovation: We value innovation as the foundation of helping people today and

providing for a healthier tomorrow. We draw upon the scientific expertise of our

researchers and the creative talents and diverse thinking of our employees to create

world-class products.

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Integrity: We are honest with ourselves and with others. We follow the letter and the

spirit of the law and. we meet our own ethical standards in every professional

interaction. We always strive to do the right thing

.

Collaboration : We prize our collaborative atmosphere where respect for others and

confidence in the abilities. of our colleagues is paramount. The power of our collective

experience delivers individual and. team success.

DEAL : step wise process

Big time in news ? Number of reasons:

- Ranbaxy is a very high profile generic pharmaceutical company in India.

- Deal represents the first foreign acquisition of a controlling stake in a listed

Indian entity

- Indication that FDI in pharmaceutical sector has really been rolled back

- Remarkable because it involves warring tribes making peace as is the first

acquisition by a proprietary pharmaceutical company of a generic company

in India

What happened while finalizing the deal?

- Daiichi has agreed to:

- acquire the Singh’s 35% stake

- subscribe for 46 million new shares

- subscribe for 24 million new warrants

- make an open offer to purchase 20% of the remaining shares of the

65% minority shareholders

- Deal was subject to:

- Shareholder approval

- Regulatory consent

- Daiichi subscribed Rs 737 for new shares and warrants

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- Price represents a 53.5% to Ranbaxy’s average daily closing price on

India’s NSE for the three months ending and a 31.4% premium to share

price immediately prior to announcement of the deal

- The acquisition will cost Daiichi up to USD4.6 billion

- Ranbaxy will be valued at USD8.5 billion

- Indian law only allows block trades at a price that is 1% more or below the

previous day’s closing price thus the trading price needs to get to RS729

before deal can be done on market.

Consequences for Ranbaxy shareholders

- Massive dilution for existing shareholders

- Improves the Ranbaxy balance sheet as it will use the cash to pay down debt

- Gives the Ranbaxy board surplus cash to use for organic growth opportunities

or acquisitions

- Allowed shareholders the chance to cash out 20% of their Ranbaxy holdings

at the same 30% premium

- Opportunity to stay around and obtain post integration benefits

So why did the Singh family did it:

- Had held shares for 50 years and the Ranbaxy growth curve had peaked

- 2006 – 16% growth

- 2007 – 7% growth

- 2008 – 9% growth forecast

- Business model was struggling with high litigation costs and devaluation of

the rupee against the USD.

- US strategy was looking in the face of more expensive litigation

- Selling entire stake at a 30% premium represents excellent timing

Why did Daiichi Acquired Ranbaxy a Indian Generic Pharma firm (Benefits):

- Japan has an ageing population

- There is a growing recognition in Japan of the importance of generic drugs

24

- Japanese Health Ministry is encouraging doctors to use generic drugs to ease

the health budget

- Non proprietary drugs will help to ease health costs as time goes on.

- Suggestion is that generic drugs will represent 30% of total medicine market in

Japan by 2012

- Daiichi were behind the game and needed to resort to acquisitions to catapult

them ahead

- Daiichi needed a generic play similar to the one that Novartis has with Sandoz

(which is the second largest generic company in the world)

- Acquisition of Ranbaxy gives Daiichi a low cost manufacturing base in India

- Presumably, Daiichi will call upon Ranbaxy’s talent pool to help with origination

and new research and development initiatives.

- The deal represents a new interest by Japanese businesses in pharmaceutical

sector in India

- Deal represents 2 times the total FDI in India from Japan over the last 8 years

- Daiichi will now have a strong generics operation in India and operations in 60

different countries

- Daiichi moves from No 22 to No 15 in the world’s largest pharmaceutical

companies

- May open up retail opportunities for Ranbaxy's partners including Jupiter

Biosciences, Orchid chemicals and so on.

Consequences for India pharmaceutical industry

- This signal and end to the war between proprietary and generic drug companies?

- Alternatively, with a “deep pockets” parent like Daiichi, does this mean that

generic operators such as Ranbaxy will be able to fund even more audacious

litigation?

After deal analysis

- Signifies a deepening integration between India and the world economy

25

- Thus far, we have only seen Indian reaching out to other parts of the world (e.g.

Tata)

- Rest assured, the rest of the world is eyeing off the jewels in the Indian industrial

crown

- Companies with ageing populations in home markets will applaud Daiichi’s

strategy

- Relaxation of FDI in India will continue and more acquisitions will occur

- International scene – We will see further acquisitions due to:

- Low barriers to entry

- Inherent R&D workforce

- Low cost base

- Targets could be:

- Dr Reddys lab., Cipla

- founders and promoters will diversify into new sectors such as financial services,

banking, private equity, hedge funds etc

Daiichi deal to drive the growth:

In June 2008, Daiichi Sankyo signed a deal to acquire 34.8% controlling stake in

Ranbaxy, which will improve the financial strength of Daiichi and will provide enhanced

R&D skills for new drug discovery to Ranbaxy. Moreover, this deal will help Ranbaxy to

have access of other markets. Hence, we believe that it is a win-win situation for both

the Companies. In addition, Ranbaxy acquired 14.7% stake in Orchid Chemicals &

Pharmaceuticals Ltd., which manufactures Cephalosporins and Penams. We expect

that this deal will help Ranbaxy in gaining traction for manufacturing new drugs, and in

turn Orchid will be able to access its strong distribution network.

The launch of a generic version of Imitrex in Dec’08, which is still in an FTF status, will

boost the Company’s sales in CY09E. Apart from Lipitor, Nexium will contribute around

USD 1.5 bn revenues over 2009-2014. However, we have not included this in our

projections for CY09E.

26

ACQUISITION EVENT IN STEEL INDUSTRY: TATA-CORUS - DAIICHI DEAL

Tata Steel

Tata steel, India’s largest private sector steel company was established in the 1907.The

Tata steel which falls under the umbrella of Tata sons has strong pockets and strong

financials to support acquisitions. Tata steel is the 55th in production of steel in world.

The company has committed itself to attain global scale operations.

Production capacity of Tata steel is given in the table below:-

The product mix of Tata steel consist of flat products and long products which are in the

lower value chain. The Tata steel is having a low cost of production when compared to

Corus. The Tata steel was already having its capacity expansion with its indigenous

projects to the tune of 28 million tones.

Corus

The Corus was created by the merger of British Steel and Dutch steel company,

Hoogovens. Corus was Europe’s second largest steel producer with a production of

18.2 million tonnes and revenue of GDP 9.2 billion (in 2005). The product mix consisted

of Strip steel products, Long products, Distribution and building system and Aluminum.

27

With the merger of British Steel and Hoogovens there were two assets the British plant

asset which was older and less productive and the Dutch plant asset which was

regarded as the crown jewel by everyone in the industry. They have union issues and

are burdened with more than $ 13 billion of pension liabilities. The Corus was making

only a profit of $ 1.9 billion from its 18.2 million tonnes production per year (compared to

$ 1.5 billion form 8.7 million tone capacity by Tata).

The Corus was having leading market position in construction and packaging in Europe

with leading R&D. The Corus was the 9th largest steel producer in the world. It opened

its bid for 100 % stake late in the 2006. Tata (India) & CSN (Companhia Siderurgica

Nacional) emerged as most powerful bidders.

Corus decides to sell Reasons for decision:

Total debt of Corus is 1.6bn GBP

Corus needs supply of raw material at lower cost

Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata’s

revenue was $4.84 bn & profit $ 824mn)

Corus facilities were relatively old with high cost of production

Employee cost is 15 %( Tata steel- 9%)

Tata Decides to bid: Reasons for decision:

Tata is looking to manufacture finished products in mature markets of Europe.

At present manufactures low value long and flat steel products while Corus

produces high value stripped products

A diversified product mix will reduce risks while higher end products will add to

bottom line.

Corus holds a number of patents and R & D facility.

Cost of acquisition is lower than setting up a green field plant and marketing and

distribution channels

Tata is known for efficient handling of labor and it aims at reducing employee

cost and improving productivity at Corus

28

It had already expanded its capacities in India.

It will move from 55th in world to 5th in production of steel globally.

Financing the Acquisition

By the first week of April 2007, the final draft of the financing structure of the acquisition

was worked out and was presented to the Corus' Pension Trusties and the Works

Council by the senior management of Tata Steel. The enterprise value of Corus

including debt and other costs was estimated at US$ 13.7 billion

The Integration Efforts

Industry experts felt that Tata Steel should adopt a 'light handed integration’ approach,

which meant that Ratan Tata should bring in some changes in Corus but not attempt a

complete overhaul of Corus’ systems. N Venkiteswaran, Professor, Indian Institute of

Management, Ahmedabad said, “If the target company is managed well, there is no

need for a heavy-handed integration. It makes sense for the Tata’s to allow the existing

management to continue as before.

The Synergies

Most experts were of the opinion that the acquisition did make strategic sense for Tata

Steel. After successfully acquiring Corus, Tata Steel became the fifth largest producer

of steel in the world, up from fifty-sixth position. There were many likely synergies

between Tata Steel, the lowest-cost producer of steel in the world, and Corus, a large

player with a significant presence in value-added steel segment and a strong

distribution network in Europe. Among the benefits to Tata Steel was the fact that it

would be able to supply semi-finished steel to Corus for finishing at its plants, which

were located closer to the high-value markets.

The Pitfalls

Though the potential benefits of the Corus deal were widely appreciated, some analysts

had doubts about the outcome and effects on Tata Steel's performance. They pointed

out that Corus' EBITDA (earnings before interest, tax, depreciation and amortization) at

29

8 percent was much lower than that of Tata Steel which was at 30 percent in the

financial year 2006-07.

The Road Ahead

Before the acquisition, the major market for Tata Steel was India. The Indian market

accounted for sixty nine percent of the company's total sales. Almost half of Corus'

production of steel was sold in Europe (excluding UK). The UK consumed twenty nine

percent of its production.

After the acquisition, the European market (including UK) would consume 59 percent of the merged entity's total production.

Research Methodology

Most sciences have their own specific scientific methods, which are supported by

methodologies (i.e., rationale that support the method's validity).

The social sciences are methodologically diverse using qualitative, quantitative, and

mixed-methods approaches. Qualitative methods include the case study,

phenomenology, grounded theory, and ethnography, among others. Quantitative

methods include hypothesis testing, power analysis, Ratio analysis, observational

studies, re sampling, randomized controlled trials, regression analysis, multilevel

modeling, and high-dimensional data analysis, among others.

Types of Research

The research study under consideration is exploratory type.

Basically there are two broad kinds of researches

Exploratory Research: This seeks to discover new relationships.

Conclusive Research : It is designed to help executive choose the various

Course of action.

As research design applicable to exploratory studies are different from objectives firmly

in mind while designing the research. Which searching for hypothesis, exploratory

designs are appropriate; when hypothesis have been established and are to be listed,

30

conclusive designs are needed. It should be noted however, that the research process

tends to become circular over a period of time. Exploratory research may define

hypothesis, which are then tested by conclusive research; but a by product of the

conclusive research may be a suggestion of a new opportunity or a new difficulty.

Other characteristics of exploratory research are flexibility and ingenuity, which

characterize the investigation. As we proceed with the investigating it must be on the

alert to recognize new ideas, as it can then swing the research in the new direction until

they have exhausted it or have found a better idea. Thus they may be constantly

changing the focus of invest as new possibilities come to attention.

It should be added here that formal design in the researcher is the key factor.

Study of secondary sources of information.

The reason for selecting this mode of research for this type is that it’s a probably

quickest and most economical way for research to find possible hypothesis and to take

advantage of the work of to others and utilize their own earlier efforts. Most large

companies that have maintained marketing research programs over a number of years

have accumulated significant libraries of research organizations furnishing continuing

data.

Procedure followed:

As it is a secondary research, all the data is selected after rigorous analysis of articles

from newspapers, magazines and internet.

All the research collected is done by professional analyst across the world and is

compiled in this project to understand the financial and business impact of merger and

acquisition more effectively.

Descriptive work

Valuation of Merger and acquisition

31

Merger and acquisition decision is an investment decision. This is the most important

decision, which influences both the acquiring firm and the target firm, which is to be

acquired. An organization cannot make that crucial decision without incisive analysis by

financial planners and corporate managers. The acquiring firm must correctly value the

firm to be acquired and the acquired firm must get the returns for the goodwill they have

created over the years in the market. Growth through acquisition is occurring in an

unprecedented number of companies today as strategic acquisitions replace the once-

prevalent hostile takeovers by corporate raiders. In the current business environment, it

is vital to understand how to blend strategic and financial concepts to evaluate potential

acquisitions.

Motives

There are two types of motives involved in merger and acquisition and these are

Explicit and Implicit motives.

Explicit Motives

Synergy: Synergy means that the merged firm will have a greater value than

the sum of its parts as a result of enhanced revenues and the cost base.

Economies of Scale: Economic of scale refer to the reduction in unit cost

achieved by producing a large volume of a product. Horizontal mergers aim

at achieving economies of scale. This phenomenon continues while the firm

grows to its optimal size, after which a firm experiences diseconomies of

scale.

Economies of Vertical Integration: Economies of vertical integration are

achieved in vertical mergers. It makes coordination of closely related

operating activities easier.

Entry to New Markets and Industries: A firm that wants to enter a new

market but lacks the know-how can do so through the purchase of an

existing player in that product or geographical market. This makes the two

firms worth more together than separately.

32

Tax Advantages: Past losses of an acquired subsidiary can be used to

minimize present profits of the parent company and thus lower tax bills.

Thus, firms have a reason to buy firms that have accumulated tax losses.

Diversification: One of the reasons for conglomerate mergers is

diversification of risk. There are two types of risks associated with

businesses- systematic and unsystematic risk. Systematic variability cannot

be removed by diversification and hence mergers are not able to eliminate

this risk. Though, unsystematic risk can be spread through mergers.

Managerial Motives: The management team of the acquiring firm tends to

benefit from the merger activity. The four most important managerial motives

for merger are empire building, status, power and remuneration.

Implicit Motives

Hubris: It is like a maturity test for the owners and the company boards of

directors when they see the opportunity to form a new business cycle.

Excess of Money: When a company has excess of money, the question of

what to do with it eventually comes up and this leads towards merger and

acquisition.

33

INDUSTRY ANALYSIS

INDUSTRY ANALYSIS: PHARMACEUTICAL INDUSTRY

The performance of pharmaceutical industry has been well historically, by late 1990s,

many pharmaceutical companies had found that their innovation capabilities can’t keep

pace with investor’s expectation for double digit growth. As a result, merging companies

grew by acquiring other companies’ products or pipelines, however, these mergers are

not currently providing the solid, long-term productivity benefits most companies need to

maintain a competitive advantage.

To meet shareholders lofty expectations, companies typically focus on three sources

of value creation, leveraging volume, price and product portfolio in ever-changing

equation to boost earnings.

Pharmaceutical companies are finding that increases in R&D costs have put additional

strain on the bottom line. As companies target more diverse populations and therapeutic

areas, clinical trials and resources—such as patient and physician volunteers and new

technologies—increase in cost and complexity. Because companies are exploring

compounds in unprecedented areas, their failure rates are higher than ever before, and

trial and- error clinical tests are becoming increasingly expensive. Add to that the rising

costs that companies incur for escalating regulatory requirements, and many

pharmaceutical companies face seemingly insurmountable odds to sustained

productivity.

The constant struggle to increase shareholder value despite these unrelenting industry

obstacles is producing a continual stream of industry mergers. Although M&A activity in

the pharmaceutical industry has been directed at boosting sagging earnings, most

strategies have focused on short-term gains instead of long-term cures. Revenue

growth from increasing the sales force to gain market share, moving into new

geographic regions or gaining access to another company’s pipeline or current products

34

is difficult to sustain. The same is true for achieving cost savings from spreading fixed

costs across a greater base and eliminating duplication. In fact, the only sustainable

quick-hit benefit gained from current M&A strategies is access to a widely applicable

platform, novel technology or patent.

Typically, companies that focus solely on short-term gains struggle to maintain their

premerger market position. For these companies, the number of new drugs produced

has not increased at the same rate as R&D spending. In the absence of new product

launches, many pharmaceutical companies have had to focus on volume and price to

grow. Unless the trend of declining R&D productivity is reversed, pharmaceutical firms

will be forced to merge continually to plug product gaps, creating a never-ending

treadmill effect where pharmaceutical companies grow larger and larger while chasing

growth rates that are increasingly difficult to obtain and—more importantly—sustain.

PORTER ANALYSIS ON PHARMA INDUSTRY:

Power Of Suppliers: Medium

Volume benefits:- Input standard . Availability Locally.

Numerous suppliers:-low switching cost. Raw material cost more than 50 % of

total cost

Entry Barrier: Low

Low entry barrier: Supportive government Policy, Economies of scale,

Proprietary Policy.

Industry Competition

Highly competitive. Low fixed Cost and High Market Share

Threat Of Substitutes

No Substitute, Biotechnology threat to synthetic Pharma products

Power of Buyers

End consumers have no bargaining power. Brand Identity in Hand Of Doctor.

Price Sensitivity Less.

Short-term growth versus long-term productivity

35

The R&D benefits typically sought through M&A focus on taking advantage of the

increased scale of the organization. Increased size enables pharmaceutical companies

to:

- Fill pipeline gaps

- Spread risk by placing bets on more projects and technologies

- Become a more attractive research partner

- Negotiate better deals with suppliers.

However, to optimize the benefits afforded by greater size, companies must understand

where scale benefits productivity, and where it does not. In fact, industry experts

speculate that many larger pharmaceutical companies may have already reached a

point of diminishing returns to R&D scale. Increasing corporate complexity drives up the

costs of communication and coordination across the organization, which means that it

takes longer for good ideas to even be recognized, much less acted on or implemented.

Larger companies tend to be more conservative, bureaucratic and risk averse, and as a

company grows larger, the probability of naturally occurring creativity decreases.

That said, in order to optimize the benefits of scale, companies must determine the

appropriate degree of post-merger R&D integration. Of course, there are advantages

and disadvantages to both full and limited R&D integration, depending on the merger

benefits the company desires; however, the greater the degree of integration, the more

opportunity that arises from benefits of scale:

With limited R&D integration, a company can avoid diluting the acquired

company’s strength, especially the entrepreneurial environment typically found in

a smaller acquisition. In addition, the company may suffer fewer cultural clashes

than if it chose full integration. Initially, limited integration costs less; however, it

also offers fewer opportunities for cost savings. With limited integration,

companies may experience difficulty in identification and realization of innovation

synergies, waning corporate morale and camaraderie, and inhibited knowledge

sharing, which can be crippling to the company’s progress and productivity.

36

Full R&D integration increases opportunities to eliminate duplicate costs for

resources, such as staff and technology. Integrating scientists within the same

facilities forces different cultures to work together and provides a greater

opportunity to identify and leverage the strengths of each company. Also, full

integration of processes and technology are advantageous in promoting internal

collaboration that leads to innovation. Full integration costs more than limited

integration and takes more time to achieve. Cultural differences must be worked

out between the two companies, and company leadership must make difficult

decisions regarding staff cuts and facility closings.

Benefits from economy of scope—the ability to maintain a diverse portfolio of research

projects, while simultaneously capturing the internal and external knowledge that

strengthens and increases the corporate knowledge base—is the primary advantage of

large pharmaceutical companies. As the diversity of projects in a company grows, each

project has access to a larger pool of knowledge. Companies can leverage the benefits

of a broader corporate knowledge base to increase the diversity of source drug targets,

discern new methods for lead identification and optimization, and improve research

technologies.

In larger companies, a well-defined process to capitalize on diversity of knowledge and

expertise will allow good ideas and opportunities t o “rise t o the top.” Focusing on the

benefits of diversity allows an R&D organization to exploit the sustainable benefits of

scale resulting in stronger innovation. When other scale benefits are exhausted, the

benefits to companywide innovation provided by economies of scope remain, boosting

long-term R&D productivity.

37

INDUSTRY ANALYSIS: STEEL INDUSTRY

THE GLOBAL STEEL INDUSTRY

Steel Industry globally is still fragmented. The top five steel makers control only about

20% of the global production as against Aluminum where the top five producers have

40% of the market share. Transactions like Tata-Corus would strengthen the ongoing

consolidation in the Industry. It is clear that further consolidation will soon take place.

The cyclical nature of the industry means that low-volume, high-cost producers have to

generate sufficient cash or create a strong enough borrowing position during market

peaks to survive the market troughs. The sector is still very fragmented and cannot

therefore control its raw materials costs or the price of its finished goods. Arguably, the

only way to counteract the situation is to acquire other steelmakers and become a larger

player on the global scene, thereby obtaining greater bargaining power with suppliers

and customers, and increased operating flexibility. It will ultimately ensure they are

better able to survive. Further, there are parts of the World which have surplus steel

production and other parts of the World which do not have adequate production

capacities. Such mergers will enable companies to freely move steel from surplus

production areas to shortage areas. The need to consolidate, reduce over capacity and

to secure greater market clout will only accelerate the process of mergers and

acquisitions in the steel industry.

The current global steel industry is in its best position in comparing to last decades. The

demand expectations for steel products are rapidly growing for coming years. The steel

industry is enjoying its 6th consecutive years of growth in supply and demand. And there

is many more merger and acquisitions which overall buoyed the industry and showed

some good results.

The subprime crisis has lead to the recession in economy of different Countries, which

may lead to have a negative effect on whole steel industry in coming years. However

steel production and consumption will be supported by continuous economic growth.

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY

The countries like China, Japan, India and South Korea are in the top of the above in

steel production in Asian countries. China accounts for one third of total production i.e.

38

419m ton, Japan accounts for 9% i.e. 118m ton, India accounts for 53m ton and South

Korea is accounted for 49m ton, which all totally becomes more than 50% of global

production. Apart from this USA, BRAZIL, UK accounts for the major chunk of the whole

growth.

The steel industry has been witnessing robust growth in both domestic as well as

international markets.

Production: The global steel production stood at 1.3 bn tonnes in 2007, showing an increase of

7.5% as compared to 2006 levels. The global steel production showed a growth of 8% CAGR

between 2003 and 2007. China accounts for around 36% of world crude steel production

followed by Japan (9%), US (7%), Russia (5%) and India (4%). In 2008, all the top five steel

producing countries have showed an increase in production except US, which showed a decline.

Rank Country Production (Mn Ton) World share (%)

1 China 489 36.0%

2 Japan 120 9.0%

3 US 98 7.0%

4 Russia 72 5.0%

5 India 53 4.0%

6 South Korea 51 3.5%

Source: Tata Steel

FY08

Consumption: The global steel consumption grew by 6.6% to 1.2 bn tonnes as

compared to 2006 levels. The global finished steel consumption showed a growth of 8%

CAGR, in line with the production, between the period 2003 and 2007. The finished

steel consumption in China and India grew by 13% and 11% respectively in 2007. The

BRIC countries were the major demand drivers for steel consumption, accounting for

nearly 80% of incremental steel consumption in 2007.

Rank CountryConsumption (Mn tones)

World share (%)

39

1 China 408 36.0%

2 US 108 9.0%

3 Japan 80 6.7%

4 South Korea 55 4.6%

5 India 51 4.2%

6 Russia 40 3.3%

Source: Tata Steel AR FY08

Outlook: As per IISI estimates, the finished steel consumption in world is expected to

reach a level of 1.75 bn tonnes by 2016, growth of 4% CAGR over the consumption

level of 2007. The steel consumption in 2008 and 2009 is estimated to grow above 6%

Indian Steel Industry

India, which has emerged among the top five steel producing and consuming countries

over the last few years, backed by strong growth in its economy.

Capacity: Steel capacity increased by 6% to 60 m tonnes in FY08. It registered a robust

growth of 8% CAGR between the period FY04 and FY08. The capacity expansion in the

country was primarily through brown field expansions as it requires lower investments

than a Greenfield expansion.

Production: Steel production has registered a growth of 6% to reach a level of 54 m

tonnes in FY8. The production has grown nearly in line with the capacity expansion and

registered a growth of 7% CAGR with an average capacity utilization of 92% between

the period FY04 and FY08. India is currently the fifth largest producer of steel in the

world, contributing almost 4% of the total steel production in world. The top three steel

producing companies (SAIL, Tata Steel and JSW Steel) contributed around 45% of the

total steel production in FY08.

Consumption: Steel consumption has increased by 10% to 51.5 m tonnes in FY08.

Consumption growth has been exceeding production growth since past few years. It

grew at a CAGR of 12% between FY04 and FY08. Construction & infrastructure,

40

manufacturing and automobile sectors accounted for 59%, 13% and 11% for the total

consumption of steel respectively in FY08. Although steel consumption is rapidly

growing in the country, the per capita steel consumption still stands at 48 kgs.

Moreover, in the rural areas in the country, it stands at a mere 2 kg. It should be noted

that the world’s average per capita steel consumption was 189 kg and while that of

China was 309 kg in 2007.

Trade equations: India became net importer of steel in FY08 with estimated net

imports of 1.9 m tonnes. In the past few years, its exports have remained at more or

less the same levels while on the other hand, imports have increased on the back of

robust demand and capacity constraints in the domestic markets. The imports showed a

growth of around 48% while exports declined by around 6% in FY08.

PORTER ANALYSIS ON STEEL INDUSTRY:

THREAT OF NEW ENTRANT: LOW

• Entry barrier-high due to economies of scale, high investment, Market dominated

by major players.

BARGAINING POWER OF BUYER: Moderate

• Due to government regulated prices

COMPETITIVE RIVALRY WITHIN THE INDUSTRY: HIGH

• Prices are Controlled

• Highly fragmented industry

BARGAINING POWER OF SUPPLIERS: HIGH

• Limited availability quality coal

THREAT OF SUBSTITUTE : MEDIUM

• Emergence of Aluminum industry, Iron can be used as substitute

41

Outlook: As per IISI estimates, the demand for steel in India are expected to grow at a

rate of 9% and 12% in 2008 and 2009. The medium term outlook for steel consumption

remains extremely bullish and is estimated at an average of above 10% in the next few

years.

RESULT AND SUGGESTED PORTFOLIO: PHARMACEUTICAL AND STEEL

42

To optimize operational productivity after a merger, strategies should be built around

four main areas:

a. Portfolio investment—Determining the most attractive research areas and

projects in which to invest and the amount to invest in each area.

b. Number of products in process—Maximizing the number of products

discovered and in development

c. Failure rate— Enabling early identification of failures.

d. Cycle time—Decreasing the time it takes for discovery and development

of new products.

Each of these four key strategic areas must be supported by actions or initiatives that

encourage effective integration and enable long-term innovation. Each area carries its

own integration benefits and challenges.

Pharmaceutical Strategy

1. Portfolio investment: Pharmaceutical

Identify research areas where the new company can develop or leverage existing

competitive advantage by evaluating commercial value potential, probability of success,

and known or anticipated development costs.

Benefits• Provides focus to the new organization on the future opportunity areas.

• Allows company to take advantage of scope benefits of the merger

• Spreads investment risk across more opportunities.

Challenges• Driving acceptance of new priorities

• Cutting previously important projects in nonstrategic therapeutic areas

• Avoiding attrition of strong talent as research priorities shift.

2. Number of compounds in process:

43

Develop an incentive program that encourages researchers to fail earlier in the cycle

and counters the more risk-averse behavior typical in larger organizations.

Benefits• Improves quality of compounds that go into development

• Optimizes research investments.

Challenges• Avoiding potential culture clashes as one firm’s research group

critiques the other company’s work.

3. Failure Rate:

In the new research organization, promote a culture that rewards “failure” as much as it

does the creation of new compounds.

Benefits• Decreases development costs by increasing the likelihood that

compounds will succeed once in development

• Lowers the stress on development organizations.

Challenges• Convincing research to accept a lower output number

• Shifting the research mindset from quantity of targets to quality of

targets.

4. Cycle time:

Conduct skills assessment of both organizations to determine “fit” within newly combined R&D processes.

Benefits• Allows company to ascertain how fast it can execute on new strategies

• Identifies skill training needs.

Challenges• Calming workers concerned about their jobs

• Developing an objective list of valued skills

44

Motivate staff to achieve speed targets and reward collaboration in reaching overall

goals, not just functional ones.

Benefits• Helps ensure that one function does not excel at the expense of

another

• Aligns corporate and individual unit goals.

Challenges• Pushing past initial resistance from legacy cultures until the new

corporate culture takes hold.

Steel Strategies

1. Portfolio investment

Develop a collaborative environment so that the new company can achieve more value

for each investment dollar. This environment should be enabled by collaborative

technologies and an incentive structure that balances the needs of individuals and the

organization.

Benefits• Optimizes the investments that companies make in research by

leveraging knowledge gained in one area across another

• Improves understanding of target products through improved

communication and knowledge sharing.

Challenges• Combating inwardly focused corporate cultures that may hinder

collaboration across functions and organizations

• Integrating legacy technologies that may not be well-suited for a

collaborative environment.

2. Number of products in process:

Develop a uniform discovery approach and leverage mutual assets to meet the growth

goals of the newly merged organization. Use best practices, lessons learned and “best

45

fit” technologies. To support higher quantities of candidates, create new processes and

invest in new technologies, where appropriate.

Benefits• Helps identify synergy opportunities

• Gives “street credibility” to the processes, policies or technologies that

are brought forward into the new organization

• Allows the new company to start fresh and abandon organizational

“baggage”

• Encourages people to develop operational approaches not possible in

separate, smaller organizations.

-Challenges

• Developing new approaches that combine the best that both

companies have to offer depends on creation of criteria that are

accepted by both organizations

• Including appropriate representation from both organizations on the

leadership team

• Breaking mental ties to a legacy operational approach

• Convincing staffs from both organizations that decisions were made

objectively based on established criteria.

3. Failure rate

Rationalize discovery technology across both companies’ research processes to

develop high-quality compounds and capture data that can be mined for future

experiments.

Benefits• Increases the speed at which new compounds can be developed

• Allows organization to collect, analyze and share more data points

than otherwise possible

• Enables researchers to focus on value added tasks.

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Challenges• Managing large amounts of complex data generated at different point

of development of steel.

• Integrating research systems in a way that the data can be shared

might be difficult because of:

Reliance on custom programs

Incompatible technology standards

Business cultures that is hesitant to share information.

4. Cycle time

Develop a uniform development approach and leverage key assets to improve

efficiency and promote speed to market: use best practices, lessons learned and “best

fit” technologies from both organizations. Create new processes, invest in new

technologies or outsource, where appropriate, to be able to support higher quantities of

candidates.

Benefits Enables new company to take advantage of scale benefits where

appropriate

Provides the organization with tangible goals and specific

expectations

Permits company to focus on parts of development where true

competitive advantage can be gained

Reduces costs by:

Streamlining internal operations

Automating processes

Outsourcing costly, noncore functions.

Challenges• Implementing an organizational design to meet new goals

• Managing to new goals despite resistance

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• Blending differing philosophies about what drives competitive

advantage

• Breaking emotional ties to legacy technologies that are no longer

applicable with new processes

• Relinquishing control of appropriate processes to third parties.

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REFERENCES

1. Books:a. Merger and Acquisition : INDIAN SCENARIO

b. Corporate Restructuring: Enhancing the shareholder value

c. ICFAI journal for Mergers & Acquisition

d. Annual report of Companies

e. Mckinsey Quarterly

f. Pharma blogs

g. HBR Reviews

h. Newspapers: Economic Times, Business standard, TOI.

2. Web portals: a. www.ibef.org

b. www.ranbaxy.com

c. www.daiichisankyo.com

d. www.datamonitor.com

e. www.vccircle.com

f. www.drugstorenews.com

g. www.sail.co.in

h. www.bseindia.com

i. www.ibm.com

j. www.sebi.gov.in

k. www.worldpharmanews.net

l. www.pharmweb.net

m. www.worldsteel.org

n. www.crisil.com

o. www.indianindustry.com

p. www.steel.nic.in

q. www.en.wikipedia.org/wiki/steel

r. Search engine like Google and Yahoo etc.

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Thank You

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