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8/2/2019 M&A Study
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Doctor
Pro
IND
al student, I
fessor, IIM
IAN INSTI
Speci
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ANAGE
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659/ July 2
Arbitrage:
by
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Securities
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ENT CA
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5 Caselets
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lkata 700 1
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04 India
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Special Situation Arbitrage: 5 Caselets
P. Srikant Ayyar1
Vibhor Gupta2
Rama Seth3
Prerak Vohra4
Indian Institute of Management Calcutta
July 2010
1 IIMC, [email protected] Securities,[email protected] Corresponding Author, IIMC, [email protected] Consulting,[email protected]
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Contents
Preface ........................................................................................................................................ 7
Motivation .............................................................................................................................. 7
Case Selection ........................................................................................................................ 7
Introduction ................................................................................................................................ 8
Definition of Merger Arbitrage .............................................................................................. 8
How does Merger Arbitrage Work? ...................................................................................... 9
Empirical Findings on Merger Arbitrage Strategies ............................................................ 10
Are Profits Guaranteed? ....................................................................................................... 12
Methodology ............................................................................................................................ 12
Data Collection .................................................................................................................... 12
Analysis................................................................................................................................ 13
ICICIs Partly Paid Securities .................................................................................................. 14
Introduction .......................................................................................................................... 14
Motivation for the Issuance ................................................................................................. 14
Offering and Subscription Details ....................................................................................... 15
Motivations for Issuing Partly Paid Securities..................................................................... 16
Tata Motors Differential Voting Rights ................................................................................... 28
Introduction .......................................................................................................................... 28
Funding of the Acquisition .................................................................................................. 28
Details of the Rights Offering .............................................................................................. 30
Post- Issue Performance ....................................................................................................... 30
Ranbaxy Acquisition by Daiichi Sankyo ................................................................................. 42
Introduction .......................................................................................................................... 42
Execution of Arbitrage ......................................................................................................... 42
Understanding Futures Movement ....................................................................................... 43
RIL RPL Merger Deal ............................................................................................................. 50
Introduction .......................................................................................................................... 50
Calculating Market Implied Probability .............................................................................. 50
Inaccuracy of Market Implied Probability ........................................................................... 50
Novelis Acquisition by Hindalco ............................................................................................. 57
Introduction .......................................................................................................................... 57
Strategic Rationale for the Deal ........................................................................................... 57
Deal Structure ...................................................................................................................... 58
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Arbitrage Opportunity .......................................................................................................... 59
Corus Steel Acquisition by Tata Steel ..................................................................................... 63
Introduction .......................................................................................................................... 63
Strategic Rationale for the Deal ........................................................................................... 63
Deal Structure ...................................................................................................................... 65
Arbitrage Opportunity .......................................................................................................... 65
Teaching Notes ........................................................................................................................ 72
ICICI Bank Partly Paid Issue ............................................................................................... 72
Suggested Questions ........................................................................................................ 72
Hypothetical Evolution of the ICICI Bank Case ............................................................. 73
Simplified profit/loss calculations ................................................................................... 77
Tata Motors DVR Issue ....................................................................................................... 79
Suggested Questions ........................................................................................................ 79
How the case unfolded ..................................................................................................... 79
Theoretical background as per behavioral finance: ......................................................... 81
Ranbaxy-Daiichi Sankyo Deal ............................................................................................. 84
Suggested Questions ........................................................................................................ 84
Discussion Material ......................................................................................................... 84
Novelis-Hindalco Deal......................................................................................................... 86
Suggested Questions ........................................................................................................ 86
Discussion Material ......................................................................................................... 86
Tata-Corus Deal ................................................................................................................... 87
Suggested Questions ........................................................................................................ 87
Discussion Material ......................................................................................................... 88
Bibliography ............................................................................................................................ 90
Data Sources ............................................................................................................................ 90
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ExhibitsEXHIBIT A: ICICI .................................................................................................................. 18Exhibit A1: Economic trends .................................................................................................... 18Exhibit A2: Balance Sheet for ICICI Bank Limited ................................................................... 19Exhibit A3: Income Statement for ICICI Bank Limited ............................................................ 20
Exhibit A4: Bond Issuance activity of ICICI Bank.................................................................... 20Exhibit A5: Equity Issuance activity of ICICI Bank.................................................................. 23Exhibit A6: Issue Prospectus..................................................................................................... 24Exhibit A7: ASX Press Release on Partly Paid Securities ........................................................... 25Exhibit A8: Historical Data ....................................................................................................... 26EXHIBIT B: TATA MOTORS ................................................................................................ 31Exhibit B1: Balance Sheet ......................................................................................................... 31Exhibit B2: Income Statement .................................................................................................. 32Exhibit B3: Cash Flow Statement.............................................................................................. 33Exhibit B4: Terms of bridge loan (summarized) ........................................................................ 34
Exhibit B5: Shareholding Pattern at the time of issue ................................................................ 36Exhibit B6: Offer Document .................................................................................................... 37Exhibit B7: Daily Share Prices................................................................................................... 38Exhibit B8: Pricing Rights ......................................................................................................... 39Exhibit B9: Differential Voting Rights Price History................................................................. 40EXHIBIT C: RANBAXY......................................................................................................... 45Exhibit C1: Key developments during the deal period............................................................... 46Exhibit C2: Evolution of Ranbaxy Shareholding Structure ........................................................ 48EXHIBIT D: RIL-RPL ............................................................................................................. 52
Exhibit D1: RIL Press Release .................................................................................................. 52Exhibit D2: JM Financial Deal Memo ....................................................................................... 54EXHIBIT E: NOVELIS........................................................................................................... 60
Exhibit E1: Market data trends.................................................................................................. 60
Exhibit E2: Key developments during deal period .................................................................... 62EXHIBIT F: CORUS STEEL .................................................................................................. 67Exhibit F1: Acquisition Financing............................................................................................. 67Exhibit F2: Timeline of events during the deal .......................................................................... 70Exhibit F3: Stock Price Movement............................................................................................ 71
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FiguresFigure 1: Risk Return Characteristics in Merger Arbitrage ..................................................... 11Figure 2: ICICI Partly-Paid Securities - Spread and Volume .................................................. 17Figure 3: Historical Stock Price Movement of Ranbaxy ......................................................... 44Figure 4: Difference between 1 and 2 month Futures Prices for Ranbaxy .............................. 45Figure 5: Stock Price Movement - Rabaxy and Daiichi Sankyo ............................................. 45
Figure 6: 1 Month Futures Price Movement and Key Develpments for Ranbaxy .................. 46Figure 7: Evolution of Trading Positions in RIL-RPL Deal .................................................... 50Figure 8: RIL RPL Swap Ratio ................................................................................................ 51Figure 9: RIL and RPL Stock Price Movement ....................................................................... 52Figure 10: Regions of Integration and Segregation of Two Different Outcomes by an Investor.................................................................................................................................................. 83Figure 11: Ranabaxy Profit/Loss Evolution on a Per Share Basis ........................................... 84Figure 12: Profit/Loss Evolution from a Hedged Ranbaxy Position ....................................... 85Figure 13: Profit/Loss Evolution on a Per Share Basis of Novelis .......................................... 86Figure 14: Novelis Trading Volumes in the US and Canadian Markets ................................. 87Figure 15: Profit/Loss Evolution on a Per Share Basis Corus .............................................. 88
TablesTable 1: ICICI Bank's Equity Issuance .................................................................................... 15Table 2: ICICI Subscription Details ........................................................................................ 16Table 3: Tata Motors Shares Outstanding if Rights Issue Fully Subscribed ........................... 30
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Preface
Motivation
Building a successful arbitrage position requires a trader to know the details of the deal such as
the parties involved, their incentives and motives, and where possible, their commitment to the
deal. It also requires an ability to collate existing information, understand the data and ascertain
likely outcomes.
The cases in this compendium have been developed by our team to explain how typical
arbitrage situations would evolve and what kind of input and analysis would be required to
make trading in them profitable. The idea is that the readers of the cases view the situations
described from the point of view of an arbitrage trader.
The idea of many caselets rather than one case is that it would expose students to a range of
special situations, and let them develop a stylized understanding of a class of situations and
the ability to analyse unseen variations as presented in the real world. The information
gathered and the theories explained here provide the requisite tools to allow students to
understand and appreciate the nuances involved in merger arbitrage.
Case
Selection
We selected cases in risk arbitrage that were recent, interesting (in the sense that there was a
unique learning in each of the situations) and that were novel and hitherto unpublished. This
selection was partially enabled by drawing on the knowledge of some of the team members. We
confirmed the selection after discussions with various market participants active in equity
research, brokerage trading and principal trading.
We discuss six situations, each of which give insights into the behavior of market participants.
We present these caselets in a structured way, analyzing how publicly available information may
be used to implement trades and manage positions. We present below a brief introduction
highlighting the uniqueness of each case.
1. ICICI bank issue: This issue was a fund raising event rather than an M&A situation. The
opportunity for arbitrage was present due to the issue having a clause for part payment
for select investors.
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2. Tata Motors issue: This issue was an unprecedented financing situation in India, where the
company created a shareholding structure with differential voting rights. The markets
pricing of control vs. cash flows was different between the two classes of stocks
3. Ranbaxy-Daiichi Sankyo deal: This deal involved a less than 100% open offer for the public
shareholders and hence carried significant uncertainties regarding the acceptance ratio.There were also uncertainties about the deal closure date due to regulatory hold ups.
These uncertainties created arbitrage opportunities.
4. RIL-RPL deal: As opposed to other M&A situations discussed here, this deal entailed a
pure share swap where the expected profitability depended on the movement of the price
ratio of the two stocks.
5. Hindalco-Novelis deal: This deal was a straight cash bid. What made it unusual was the
differential price movement in two markets. Novelis was listed in both US and Canada
and the trading volumes in Novelis stock reacted very differently to deal announcementin the two markets. We conclude that this behavior reflected the presence of arbitrageurs
in one market but not the other.
6. Tata-Corus deal: The announcement of this deal led to a bidding war between various
suitors. The market had certain expectations about the possibility of a bidding war but
the unfolding of the situation led to a revision of these expectations amongst market
participants. The result was a series of interesting price movements that arbitrageurs
could use to their advantage.
Introduction
DefinitionofMergerArbitrage
Merger arbitrage involves trading the stocks of companies engaged in mergers and takeovers.
The arbitrage does not denote the practice of trading on speculation about a possible
announcement of an M&A transaction; rather the trades are executed only after a definitive
agreement is reached. If all goes as planned, the target company's stock price should eventuallyrise to reflect the agreed per-share acquisition price, and the acquirer's price should fall to reflect
what it is paying for the deal.
The opportunity for arbitrage arises before the consummation of the merger and once the terms
of the potential merger become public. It is then that an arbitrageur will go long, or buy shares
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of the target company, which in most cases trade below the acquisition price. At the same time,
the arbitrageur will short sell the acquiring company (in case of full or partial share swap) by
borrowing shares with the hope of repaying them later with lower cost shares. The wider the
gap, or spread, between the current trading prices and their prices valued by the acquisition
terms, the better the arbitrageur's potential returns.
HowdoesMergerArbitrageWork?
A merger arbitrage opportunity is created when a probable event occurring in the future, i.e. the
consummation of a merger, renders the pricing of the shares of two companies in proportion to
each other. However, after the announcement of a merger, the shares do not trade exactly at
prices as per the relationship implied by the terms of the deal; they trade disparately.
This disparity exists because the consummation of a merger is not a certain event and the
disparity is proportional to the probability that the merger falls through. Thus, the arbitrage is a
risky one where the arbitrageur is holding the event risk of deal failure. There are also other
components of risk which exist in this strategy, which we shall relegate to a later discussion.
To elaborate this supposition, let us consider an example of a hypothetical merger deal:
Company X announces its intention to buy company Y in a share swap of 2:1 (i.e. 2 shares of X
per share of Y). Assume that X traded at 50 and Y at 75 before the announcement and that
immediately after the announcement Xs price goes down to 45 and Ys prices rises to 85.
The example illustrates that the shares do not trade as per the relationship implied in the share
swap, that is: Price(Y) = 2* Price(X). This is because the market is cautious about the completion
of the deal. The degree of skepticism will be reflected in the relative gap in pricing. We discuss
this aspect next.
If the merger were to go through, 2 shares of X would be equivalent to 1 share of Y. Hence, a
merger arbitrageur who is essentially betting on the deal being consummated exploits this mis-
pricing by buying one share of Y for 85 and shorting 2 shares of X for a cash inflow of 90. Upon
the completion of the deal, one Y share will be exchanged for two X shares which will be used to
cover the short sale. This strategy provides a net profit of 5 (ignoring the net interest earned on
short sales for now) for a holding period beginning at the announcement of a deal and ending at
its closure.
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However, if the merger fails, then, assuming no externalities, X should again trade around 50 and
Y around 75. In this case, the loss on the arbitrageurs position would be 20 (-85 + 90 + 75
100) when he unwinds his position.
We can find the market determined probability of completion of the merger as indicated by thepricing of shares by the market. If we assumed that arbitrage profits are on an average zero (i.e.
expected profits are zero), then:
p*5 (1-p)*20 = 0 => p = 80%
In practice, expected arbitrage profits are not zero because the market prices in a lower
probability to successful deal closure in mergers than is experienced in reality.
EmpiricalFindingsonMergerArbitrageStrategies
Prevailing research suggests that financial markets exhibit systematic inefficiency in the pricing of
firms involved in mergers and acquisitions. It documents excess returns in cases of successful
deal closures for arbitrage positions taken following the announcement of the deal.5
The following figure displays a representative picture of the losses and gains from risk arbitrage.
This figure tracks the median arbitrage spread (the percentage difference between the target's
stock price and the offer price) over time, measured from the deal resolution date. For unsuccessful
deals, the spread remains relatively wide during the life of the merger. When a merger deal fails,
the median spread widens dramatically, increasing from 15 percent to more than 30 percent on
the termination announcement day. A much different pattern exists for risk arbitrage
investments in successful merger transactions. In successful deals, the arbitrage spread decreases
continuously as the deal resolution date approaches. Upon successful consummation of the
merger, the spread collapses to zero. The fact that spreads are much wider for unsuccessful
transactions suggests that the probability of deal failure is incorporated into the stock prices of
target firms.
5 Mark Mitchell, Todd Pulvino, Characteristics of Risk and Return in Risk Arbitrage. The Journal of Finance,Vol. 56, No. 6 (Dec., 2001), pp. 2135-2175
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Figure 1: Risk Return Characteristics in Merger Arbitrage
There have also been empirical studies6
of the actions of risk arbitrageurs in takeovers. Theirhypothesis is that merger arbitrageurs are better informed than the market about the takeover
probability of success. Findings suggest that takeovers in which arbitrageurs bought shares have
an actual success rate higher than the average probability of success implied by market prices. As
a result, they can generate substantial positive returns on their portfolio positions. Other
researchers have argued that this result is indistinguishable from one where merger arbitrageurs
do not know ex-ante which takeover attempts are more likely to be successful, but their presence
increases the probability of success, since they are more likely to tender.
In practice, carefully structured risk arbitrage positions are executed by large institutional
investors who often have knowledge of probable actions of a subset of other arbitrageurs.
Hence, the size of positions taken by merger arbitrageurs is endogenously determined and the
resulting impact on the probability of successful merger follows from the discussion above. The
market will continue to under-estimate this probability of success as long as the arbitrageurs
manage to not fully reveal their presence in the share-holding structure of the involved parties.
Similar studies also establish a positive relationship between trading volume and the probability
that the takeover is successful. This is consistent with the widely observed phenomenon that,after the takeover announcement, both the stock price and the transaction volume of the target
rise tremendously relative to their preannouncement levels.
6 Cornelli and Li, 2002, show that since arbitrageurs are more likely to tender, their presence in the marketendogenises the value of the target shares.
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AreProfitsGuaranteed?
This arbitrage would be risk-less only if the merger is certain to be completed, since the pricing
disparity can be locked in now and unwound later for profit. If all mergers in all situations were
priced correctly, then profits from disparities in pending mergers that are eventually completed
should balance losses from those in mergers that are eventually busted.
However, as discussed above, the mis-pricing exists systematically and hence, such trades are
profitable. It can also be seen from the preceding discussion and from Figure-1 that the profits
are not guaranteed. In situations where the merger falls through, the losses can be far larger than
the possible gains accruing from successful consummation of the deal.
For this reason, merger arbitrageurs build a portfolio of such positions which are aimed to
exploit the statistically profitable nature of the trades without depending fully on one or a small
number of deals. Such portfolios can be churned based on managers discretion or through a
strictly rule based (automated) system of trading with minimal subjective intervention.
Methodology
DataCollectionThe building of each case required extensive qualitative and quantitative data collection and
hence we referred to multiple sources for gathering data. We collected data from primary sources(i.e. market participants) and various secondary sources, which we note below:
1. Bloomberg: used for prices, volumes and corporate action details regarding various
instruments and companies
2. Reuters: used for market news about the companies as each of the situations progressed
3. Company annual reports
4. Company websites
5. Academic articles on risk arbitrage
6. Corporate investor relation departments of the companies involved7. Traders, merchant bankers & brokers for the deals
8. Various other news and media article sources including Hindu business line and Wall
Street journal (Livemint)
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AnalysisThe data gathered was structured to present a logical story of developments and to emphasize
the diverse and widespread nature of sources from which information needs to be gleaned by an
arbitrageur when he/she decides to setup a trade.
The simulated profit and loss charts from hypothetical arbitrage positions are included in the
exhibits of the cases. From the data gathered, we also calculated the market implied probabilities
of deal consummation which is an important parameter to monitor in special situations risk
arbitrage.
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ICICIsPartlyPaidSecurities
Introduction
On May 2 2007, ICICI Bank, a leading private sector bank in India, detailed plans to raise anadditional USD 5 bn ( 20,000 cr7 INR8 ) by selling additional shares to the public. The plans
came in the wake of a disappointing earnings release on April 30, along with which it announced
that it would seek around $5bn in equity capital. Markets reacted negatively to this news, and the
stock dropped over 7% amid concerns on dilution.
The Industrial Credit and Investment Corporation of India Limited (ICICI Limited) was
incorporated in 1955 with the backing of the Government of India, the World Bank, and Indian
industry to promote Indias economic development by providing medium to long term project
financing to Indian business. In 1994, ICICI Limited established a banking subsidiary (ICICIBanking Corporation, later ICICI Bank Limited) to engage in banking operations including
taking deposits. Years of rapid growth saw the ICICI group becoming Indias largest private
bank, and venturing into the securities business. In 2002, the group integrated its financing
banking operations through a reverse merger, in which ICICI Bank took over ICICI Limited and
other group companies. ICICI Bank continued to grow as Indias economy, after decades of
modest growth, grew rapidly at 8-9% in real terms each year between 2003 and 2007. By March
31 2007, ICICI was Indias second largest bank, with total assets of Rs 3950 bn (USD 99 bn) and
profits of Rs 26.3 bn (USD 660 mn).
MotivationfortheIssuanceIn order to fuel the burgeoning growth of assets in its book, ICICI Bank had repeatedly accessed
both domestic and international debt markets in the 5 years preceding the issue. ICICI Bank
diversified its borrowing into in foreign currencies and experimented with innovative financing
schemes. A summary of ICICI Banks capital raising activities for the preceding five years is
presented in Exhibit 4.
Nonetheless, from a regulatory perspective, the core measure of a banks financial strength is itsequity capital. The Basel-II capital adequacy norms adopted in 2004 follow this philosophy, and
focus on a banks Tier-I capital ratio, which is defined as the ratio of a banks core equity capital (
7 A crore is a unit equivalent to 10 million.8 On March 31 2007, the USD/INR exchange rate was Rs. 43. For convenience, Rs. 40 has been usedthroughout the case for currency conversions. The actual exchange rates are presented in Exhibit I.
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common stock + reserves ) to its total risk weighted assets. Therefore, in parallel with bond
issues, ICICI had also sought to shore up its equity (Exhibit 5 ) by raising approximately USD
565 mn ( 2,260 cr INR ) and USD 2.5 bn ( 10,000 cr INR ) in 2005. To diversify its share
holding structure and encourage participation, domestic retail shareholders received a 5%
discount to the issue price of the 2005 offering.Table 1: ICICI Bank's Equity Issuance
Year Approx shares in millions
(incl. ADS equivalents)
Issue size in ADS
relative to US issue size
Approx USD
Notional
2004 166.37 33% 1.3 bn
2005 153.53 38% 2.0 bn
2007 195.76 92% 4.9 bn
As can be seen from Table I (last column), the proposed 2007 issue was larger than the previous
issues made by the bank, both in terms of the number of shares and in value; the latter
remarkably so since the share price had appreciated considerably. This was also a consolidated
capital raising exercise while ADRs were around 35% of the past 2 issues, the 2007 issue
sought equal amounts from domestic and international capital markets. The stated purpose of
the issue according to the offer documents was to augment the banks capital base to meet future
capital adequacy requirements arising out of growth in its businesses and for other general
corporate purposes. Specifically, ICICI Bank intended to use the funds to meet its
i. capital adequacy requirements ahead of switching to Basel-II norms in March 2008
ii. asset growth needs spurred by an economy that has grown 9.4% in the fiscal year
ended March 31, 20079
OfferingandSubscriptionDetailsThe 2007 Follow-on Public Offering (FPO) had several interesting features. ICICI hired four
leading investment banks - Goldman Sachs (India), DSP Merrill Lynch, Enam and JM Financial
to book-build the domestic leg, and Goldman Sachs and Merrill Lynch to underwrite the ADS
issue. DSP Merrill Lynch was to act as a price-stabilizing agent for the issue post the listing. Likein the 2005 issue, ICICI reserved a portion of the issue for retail investors, and offered them a
discount to encourage participation while institutions had to pay Rs. 940 a share, retail
investors could purchase a share for Rs. 890. Interestingly, retail investors could elect to pay this
amount in installments: Rs. 250 on application, another Rs 250 on allotment, and the remaining
9 Offer document
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amount (Rs. 390) when the company called for the balance funds, which would occur within the
next six months. Between the time of allotment and the call, these partly-paid securities would
trade in secondary markets to allow investors an exit route in the event that they were unable to
pay the balance amount on call. Once the balance amount was called, the partly paid securities
would cease trading and be replaced by fully paid securities.The issue was strongly subscribed by institutions10. In particular, agencies controlled by the
Singapore government, Temasek and Government of Singapore Investment Corporation (GIC),
doubled their investment in the company to 20%, shelling out about $1.8 billion to buy this
additional stake.
Table 2: ICICI Subscription Details
QIB Bucket of Rs. 4803.2 crs was subscribed 17.7 times
HNI Bucket of Rs. 1,893.8 crs. was subscribed 3.86 times
Retail Bucket of Rs. 2,909.3 crs. was subscribed 0.95 times
Overall issue of Rs. 10,044 crs. was subscribed 9.36x
MotivationsforIssuingPartlyPaidSecuritiesICICI Banks primary motivation for issuing partly paid securities was to diversify its
shareholding pattern by building up a strong retail shareholding base. Concentrated
shareholdings mean that a group of large shareholders can effectively combine to control the
firm, whereas shareholders are primarily interested in owning shares for economic reasons.
To make its offering attractive to domestic retail shareholders, ICICI firstly offered its shares at a
50 INR (5.32%) discount to the institutional offer price. However, recognizing that retail
investors may face difficulties in arranging funds, it threw in a further sweetener by allowing
them to pay in installments.
Theoretically, the law of one price dictates that
Partly Paid = Fully Paid Present Value (Balance Amount)
Retail investors are thereby able to acquire an instrument that would track the fully-paid share at
a lower investment. In this sense, partly-paid securities can offer leverage to an investor who
intends to sell such securities before the balance amount is called. Also, if we consider a scenario
where the price of the underlying share drops below the balance amount, the investor can
choose to walk away from paying the call amount. Therefore, a partly paid security contains an
embedded put, since the loss is limited to ones investment.
10 Based on information received from JM Financial, one of the book running lead managers
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Profit
-600
-400
-200
0
200
400
600
800
290
370
450
530
610
690
770
850
930
1010
1090
1170
1250
1330
1410
1490
However, investing in partly paid securities also has risks, since they incorporate future
obligations to contribute additional capital. The most obvious risk is that the investor is unable
to arrange the funds to pay the balance amount on call. Even if partly paid securities are listed,
the secondary market may not always provide a satisfactory exit since such shares can trade at a
steep liquidity discount to their theoretical prices. The inability to pay the balance amount on call
leads the investor forfeiting the shares.11
Figure 2: ICICI Partly-Paid Securities - Spread and Volume
11In markets like Australia which have several partly paid securities, regulators require market participants and retailclients to enter into a partly paid security agreement where the risks of such investments are explained. For moredetails, see Exhibit 7
350
360
370
380
390
400
410
420
430
440
450
460
8/14
/2007
8/21
/2007
8/28
/2007
9/4/20
07
9/11
/2007
9/18
/2007
9/25
/2007
10/2/2007
10/9/2007
10/16/20
07
10/23/20
07
10/30/20
07
11/6/2007
11/13/20
07
date
spread
0
50000
100000
150000
200000
250000
300000
350000
volume
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Figure 2 (data in Exhibit A8) plots the difference between the fully paid common share and the
partly paid security, and the volumes of the partly paid security. The partly paid securities were
listed on 14 Aug 2007 and traded upto 15 Nov 2007, when the balance amount was called and
the securities delisted.
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EXHIBIT A: ICICIExhibit A1: Economic trends
Indian economic growth
12
USD/INR Exchange rates13
12 Source: RBI Database on Indian Economy13 Source: Google finance
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1950
-51
1953
-54
1956
-57
1959
-60
1962
-63
1965
-66
1968
-69
1971
-72
1974
-75
1977
-78
1980
-81
1983
-84
1986
-87
1989
-90
1992
-93
1995
-96
1998
-99
2001
-02
2004
-05
2007
-08
GDP growth rate 10yr avg
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Exhibit A2: Balance Sheet for ICICI Bank Limited14
In Millions of Rupee
(except per share items)
2008
2008-03-31
2007
2007-03-31
2006
2006-03-31
2005
2005-03-31
Cash & Due from Banks 298,008.0 192,410.0 89,859.4 63,701.4
Other Earning Assets, Total 1,755,750.0 1,410,650.0 932,830.0 619,092.0Net Loans 2,514,020.0 2,113,990.0 1,562,600.0 964,100.0Property/Plant/Equipment,Total - Gross
79,376.0 69,541.9 62,844.5 57,817.7
Accumulated Depreciation,Total
(32,592.5) (26,140.4) (21,415.8) (16,035.8)
Property/Plant/Equipment,Total - Net
46,783.5 43,401.5 41,428.7 41,781.9
Other Long Term Assets 23,595.5 14,234.0 -- --Other Assets, Total 224,331.0 175,234.0 145,574.0 95,661.9Total Assets 4,862,480.0 3,949,920.0 2,772,300.0 1,784,340.0
Accounts Payable 121,525.0 105,832.0 -- --Total Deposits 2,769,830.0 2,486,140.0 1,724,510.0 1,011,090.0Other Bearing Liabilities,Total
-- -- -- --
Long Term Debt 845,660.0 616,595.0 449,999.0 383,690.0Capital Lease Obligations -- -- -- --Total Long Term Debt 845,660.0 616,595.0 449,999.0 383,690.0Total Debt 845,660.0 616,595.0 449,999.0 383,690.0Deferred Income Tax 6,315.0 6,574.9 -- --Minority Interest 7,311.9 5,095.6 2,749.4 1,524.8Other Liabilities, Total 661,113.0 486,538.0 369,119.0 261,793.0Total Liabilities 4,411,760.0 3,706,770.0 2,546,380.0 1,658,090.0
Redeemable PreferredStock, Total 3,500.0 3,500.0 -- --
Common Stock, Total 11,126.8 8,993.4 12,398.3 10,867.8Additional Paid-In Capital 320,914.0 127,189.0 -- --Retained Earnings(Accumulated Deficit)
116,441.0 99,117.5 213,519.0 115,374.0
Unrealized Gain (Loss) 979.3 4,867.7 -- --Other Equity, Total (2,238.1) (516.8) -- --Total Equity 450,722.0 243,150.0 225,918.0 126,242.0
Total Liabilities &Shareholders' Equity
4,862,480.0 3,949,920.0 2,772,300.0 1,784,340.0
Total Common Shares
Outstanding
1,112.69 899.27 889.82 616.39
14 Source: Reuters
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Exhibit A3: Income Statement for ICICI Bank Limited15
In Millions of Rupee
(except per share items)
2008
2008-03-31
2007
2007-03-31
2006
2006-03-31
2005
2005-03-31
Interest Income, Bank 340,950.0 240,025.0 151,358.0 98,337.6Total Interest Expense 257,670.0 176,757.0 101,015.0 68,043.8Net Interest Income 83,279.8 63,268.3 50,343.5 30,293.8
Loan Loss Provision 27,723.9 22,082.2 8,117.2 (889.9)Net Interest Inc. After LoanLoss Prov.
55,555.9 41,186.0 42,226.3 31,183.6
Non-Interest Income 257,858.0 173,305.0 94,796.9 70,976.3Non-Interest Expense (271,164.0) (180,516.0) (106,035.0) (78,375.7)Net Income Before Taxes 42,249.5 33,974.8 30,988.2 23,784.2
Provision for Income Taxes 11,096.8 7,640.8 6,998.0 5,683.8Net Income After Taxes 31,152.6 26,334.0 23,990.2 18,100.4
Minority Interest 2,829.7 1,272.3 210.7 422.9Net Income Before Extra.Items
33,982.3 27,606.3 24,200.9 18,523.3
Net Income 33,982.3 27,606.3 24,200.9 18,523.3Basic Weighted AverageShares
1,055.59 892.82 781.69 727.73
Basic EPS 32.193 30.920 30.960 25.454Diluted Weighted AverageShares
1,062.10 897.74 789.96 733.72
Diluted EPS 31.995 30.751 30.635 25.246DPS - Common StockPrimary Issue
11.000 10.000 8.500 8.500
Gross Dividends - CommonStock 12,239.6 9,085.4 7,563.3 6,329.6
Total Special Items 1,071.5 603.4 298.8 338.8Normalized Income BeforeTaxes
43,321.0 34,578.2 31,287.0 24,123.0
Effect of Special Items onIncome Taxes
281.4 135.7 67.5 81.0
Inc Tax Ex Impact of SpItems
11,378.3 7,776.5 7,065.5 5,764.8
Normalized Income AfterTaxes
31,942.7 26,801.7 24,221.6 18,358.3
Normalized Inc. Avail to
Com.
34,772.3 28,074.0 24,432.3 18,781.1
Basic Normalized EPS 32.941 31.444 31.256 25.808
Exhibit A4: Bond Issuance activity of ICICI Bank16
Dates of Description Amount Date of Rating at the
15 Source: Reuters. Earnings for 2005, 2006 and 2007 have been restated by the company.16 Company filings over the 5 years preceding the issue; summarized in offering prospectus
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closure,DeemedAllotment,despatch
Allotted
Redemption time of Issue
Jan 2003 -Jan27,2003;Feb 26, 2003;Ap 1, 2003
Public Issue of UnsecuredRedeemable Bonds in the nature ofDebentures aggregating Rs. 4.00billion with a right to retain
oversubscription upto Rs. 4.00 billion
11,220 mn(INR)
Tax SavingI. Feb 26, 2006II Jun 26, 2006III Feb 26, 2008
IV Jun 26, 2008
ICRA LAAACARE AAA
Feb 2003 -Mar 4, 2003;Apr 3, 2003;May 5, 2003
Public Issue of UnsecuredRedeemable Bonds in the nature ofDebentures aggregating Rs. 4.00billion with a right to retainoversubscription upto Rs. 4.00 billion
7,400 mn(INR)
Tax SavingI Apr 3, 2006II Aug 3, 2006III Apr 3, 2008IV Aug 3, 2008Regular IncomeApr 3, 2010
ICRA LAAACARE AAA
Mar 2003 -Mar 31, 2003;Apr 30, 2003;May 22, 2003
Public Issue of UnsecuredRedeemable Bonds in the nature ofDebentures aggregating Rs. 4.00billion with a right to retainoversubscription upto Rs. 4.00 billion
4,810 mn(INR)
Tax SavingI Apr 30, 2006II Aug 30, 2006III Apr 30, 2008IV Aug 30, 2008Regular IncomeApr 30, 2010
ICRA LAAACARE AAA
Aug 2003 -
Sep 9, 2003;Oct 9, 2003;Nov 3, 2003
Public Issue of Unsecured
Redeemable Bonds in the nature ofDebentures aggregating Rs. 3.00billion with a right to retainoversubscription upto Rs. 3.00 billion
3,430 mn
(INR)Tax Saving
I Oct 9, 2006II Feb 9, 2007III Oct 9, 2008IV Feb 9, 2009Regular IncomeOct 9, 2010
ICRA LAAA
CARE AAA
Oct 2003;Oct 22, 2003;NA
4.75% Fixed Rate Notes 300 mn(USD)
Oct 22, 2008 Moodys Baa3S&P BB
Oct 2003 -Nov 15, 2003;Dec 15, 2003;Jan 14, 2004
Public Issue of UnsecuredRedeemable Bonds in the nature ofDebentures aggregating Rs. 4.00billion with a right to retainoversubscription upto Rs. 4.00 billion
4,860 mn(INR)
Tax SavingI Dec 15, 2006II Jun 15, 2007III Dec 15, 2008IV Jun 15, 2009Regular Income
Dec 15, 2010
ICRA LAAACARE AAA
Dec 2003 -Jan 6, 2004;Feb 5, 2004;Mar 13, 2004
Public Issue of UnsecuredRedeemable Bonds in the nature ofDebentures aggregating Rs. 1.00billion with a right to retainoversubscription upto Rs. 1.00 billion
5,230 mn(INR)
Tax SavingI Feb 5, 2007II Aug 5, 2007III Feb 5, 2009IV Aug 5, 2009
ICRA LAAACARE AAA
Aug 2004;Aug 18, 2004;NA
5.00% Fixed Rate Notes 300 mn(USD)
Aug 18, 2009 Moodys Baa3S&P BB+
Jan 2005 -Feb 9, 2005;Mar 11, 2005;Apr 7, 2005
Public Issue of UnsecuredRedeemable Bonds in the nature ofDebentures aggregating Rs. 6.00billion with a right to retainoversubscription upto Rs. 6.00 billion
7,750 mn(INR)
Tax SavingI Mar 11, 2010II Mar 11, 2012Regular IncomeI Mar 11, 2010II Mar 11, 2012III Mar 11, 2015
Childrens GrowthI Mar 11, 2010II Mar 11, 2012
ICRA LAAACARE AAA
Feb 2005 -Mar 9, 2005;Apr 8, 2005;May 10, 2005
Public Issue of UnsecuredRedeemable Bonds in the nature ofDebentures aggregating Rs. 4.00billion with a right to retainoversubscription upto Rs. 4.00 billion
5,290 mn(INR)
Tax SavingI Apr 8, 2010II Apr 8, 2012Regular IncomeI Apr 8, 2010II Apr 8, 2012III Apr 8, 2015Childrens GrowthI Apr 8, 2010
ICRA LAAACARE AAA
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II Apr 8, 2012Mar 2005 -Mar 31, 2005;Apr 30, 2005;May 27, 2005
Public Issue of UnsecuredRedeemable Bonds in the nature ofDebentures aggregating Rs. 3.50billion with a right to retainoversubscription upto Rs. 3.50 billion
3,240 mn(INR)
Tax SavingI Apr 30, 2010II Apr 30, 2012Regular IncomeI Apr 30, 2010II Apr 30, 2012III Apr 30, 2015
Childrens GrowthI Apr 30, 2010II Apr 30, 2012
ICRA LAAACARE AAA
Nov 2005;Nov 16, 2004;NA
5.75% Fixed Rate Notes 500 mn(USD)
Nov 16, 2010 Moodys Baa3S&P BB+
Aug 2006;Aug 17, 2006;NA
7.25 perpetual non-cumulativesubordinated debt securities
340 mn(USD)
Perpetual; first call31 Oct 2016,coupon datesthereafter
Moodys Baa2S&P BB+
Oct 2006;Oct 20, 2006;NA
5.875% Fixed Rate Notes 400 mn(USD)
Oct 20, 2011 Moodys Baa2S&P BB+
Nov 2006;Nov 22, 2006;NA
5.875% Fixed Rate Notes 100 mn(USD)
Oct 20, 2011 Moodys Baa2S&P BB+
Jan 2007;Jan 12, 2007;NA
6.375% Fixed Rate Notes 750 mn(USD) 15 years call, firstcall 30 Apr 2017,
coupon datesthereafter
Moodys Baa2S&P BB-
Jan 2007;Jan 12, 2007;NA
5.75% Fixed Rate Notes 750 mn(USD)
Jan 12, 2012 Moodys Baa2S&P BB+
Jan 2007;Jan 12, 2007;NA
Floating Rate Notes 500 mn(USD)
Jan 12, 2012 Moodys Baa2S&P BB+
Mar 2007;Mar 29, 2007;NA
Floating Rate Notes 500 mn(EUR)
Mar 29, 2009 Moodys Baa2S&P BBB-
Apr 2007;Apr 29, 2007;
NA
Floating Rate Notes 50 mn(EUR)
Mar 29, 2009 Moodys Baa2S&P BBB-
May 2007;May 4, 2007;NA
Floating Rate Notes 50 mn(EUR)
Mar 29, 2009 Moodys Baa2S&P BBB-
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Exhibit A5: Equity Issuance activity of ICICI Bank17
Public Issue of Equity Shares (2005)
Public Issue of 97,155,388 Equity Shares of Rs. 10/- each at a price of Rs. 525/- per share for cash aggregatingRs. 50,000 million (the Issue) with a green shoe option of 14,285,714 Equity Shares of Rs.10/- each at a price
of Rs. 525/- per share for cash aggregating Rs. 7,500 million closing 6 Dec 2005.
No. of shares allotted Nature of payment Issue Price per share Date of allotment66,275,828 to QualifiedInstitutional Bidders andNon-Institutional Bidders
Fully paid-up 525 December 16, 2005
1,511,494 to QualifiedInstitutional Bidders andNon-Institutional Bidders
Fully paid-up 525 December 20, 2005
12,988,820 to ExistingRetail Shareholders andRetail Bidders
Fully paid-up 498.75 (After discount of5% on the issue price )
December 16, 2005
15,905,240 to ExistingRetail Shareholders andRetail Bidders
Partly paid-up (Rs.150on application, 348.75on allotment)
498.75 (After discount of5% on the issue price )
December 16, 2005
14,285,714 (Green Shoeoption)
Fully paid-up 525 December 16, 2005
American Depositary Shares Issue (2005)
18,618,730 American Depositary Shares (ADSs), each representing two Equity Shares issued at US$ 26.75 perADS aggregating US$ 433,087,850 with an over allotment option of 2,428,530 ADSs, each representing twoEquity Shares issued at US$ 26.75 per ADS aggregating US$ 64,963,178 closing 6 Dec 2005.18
Public Issue of Equity Shares (2004)
Public Issue of 108,928,571 Equity Shares of Rs.10/- each at a price of Rs.280/- for cash aggregating Rs. 30.50bn with a green shoe option of 16,071,429 Equity Shares of Rs. 10/- each at a price of Rs. 280/- for cashaggregating Rs. 4.50 bn.
Closing Date : April 7, 2004Date of Allotment : April 21, 2004
Exercise of Green Shoe OptionDate of Allotment : May 24, 2004
We had sponsored an American Depositary Shares (ADS) which opened for participation on March 7, 2005and closed on March 11, 2005. In terms of the Offering, 20,685,750 ADSs representing 41,371,500 EquityShares had been sold at a price of US$ 21.1 per ADS. The gross proceeds from the ADS Offering wereapproximately US$ 436.7 million (Rs.19.10 billion). The net consideration per share (after deduction of expensesin connection with the offering) was Rs. 453.16.
17 Company filings over the 5 years preceding the issue; summarized in offering prospectus18 ADSs are securities that trade in US markets but represent a share in a company listed overseas. The NYSE /SEC impose requirements for firms seeking to list on US exchanges.For no arbitrage, local shares would have to trade at 26.75*exchange rate /2 = 535 at an exchange rate of 40; theactual exchange rate may have been different. ADS typically trade at a premium to local shares, due toinstitutional restrictions on conversion.
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Exhibit A6: Issue Prospectus
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Exhibit A7: ASX Press Release on Partly Paid Securities
AD09-57 ASIC and ASX act to protect retail investors of partly paidsecurities19
Monday 6 April 2009
ASIC and the Australian Securities Exchange (ASX) have agreed that ASX will implement changes toits market rules relating to partly paid securities and installment receipts Partly Paid Securities.
The proposed amendments are aimed at improving disclosure for retail investors to ensure they areadequately aware of potential liabilities when making investment decisions.
ASIC is aware that a number of securities quoted on the ASX are partly paid securities with futureobligations to contribute further capital. Therefore ASIC believes that the enhanced investor protectionembodied in this new measure helps address current market concerns.
The specific operating rule changes agreed to are:
1. A new definition of Partly Paid Security is to be included in the Definitions section of themarket rules.
2. A new requirement for market participants and retail clients to enter into a Partly Paid SecurityClient Agreement prior to the retail client buying Partly Paid Securities for the first time.
The new market rules do not apply to no liability (NL) companies, as NL companies do not have acontractual right to recover calls on the unpaid issue price of their shares; the shareholder has theoption of paying the call or forfeiting the shares.
ASIC and ASX have been in direct contact with several market participants to ensure that they have
contacted their clients with current orders to buy Partly Paid Securities and communicated theirpotential obligations to them.
Changes to the ASX market rules are subject to Ministerial approval and that approval was receivedtoday. The new rules are effective from 1 May 2009.
19Source:http://www.asic.gov.au/asic/asic.nsf/byheadline/AD0957+ASIC+and+ASX+act+to+protect+retail+investors+of+partly+paid+securities?openDocument
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Exhibit A8: Historical Data
Date Partly Pai Fully Paid Total Trad Approx USD turno
14-Aug-07 484.5 878.65 398400 3,895,077
16-Aug-07 436.7 832.15 175506 1,533,958
17-Aug-07 433.2 824.7 60574 524,086
20-Aug-07 478.05 872.35 68729 650,108
21-Aug-07 435.1 829.05 32648 292,866
22-Aug-07 454.05 846.1 44339 393,81023-Aug-07 435.3 824.95 39137 353,031
24-Aug-07 440.8 833.8 15285 134,266
27-Aug-07 484.2 883.55 48821 461,456
28-Aug-07 467.15 862.9 20174 189,458
29-Aug-07 464.45 857.1 13692 125,654
30-Aug-07 470.35 873.05 14590 136,700
31-Aug-07 484.65 888.4 43261 418,715
3-Sep-07 502.6 907.9 48244 481,861
4-Sep-07 503.45 908.6 36338 367,174
5-Sep-07 507.5 915.4 56534 573,990
6-Sep-07 511.55 920.9 31849 323,898
7-Sep-07 510.9 920.05 57704 593,128
10-Sep-07 503.05 910.9 27517 277,190
11-Sep-07 495.75 901.55 24669 246,478
12-Sep-07 483.5 885.35 22602 220,962
13-Sep-07 485.15 884.05 32002 313,312
14-Sep-07 499.2 906.3 76195 769,249
17-Sep-07 491.6 895.15 17098 170,385
18-Sep-07 512.4 924.55 66075 672,168
19-Sep-07 551.35 973.55 248741 2,692,47220-Sep-07 543.1 967.1 42387 462,349
21-Sep-07 548.35 966.05 78193 854,806
24-Sep-07 563.1 996.3 90857 1,017,780
25-Sep-07 570.3 993.05 131617 1,492,642
26-Sep-07 596.6 1020 178969 2,113,803
27-Sep-07 598.6 1028.25 124177 1,489,776
28-Sep-07 629.3 1062.4 171578 2,121,802
1-Oct-07 622.6 1057.8 66540 824,763
3-Oct-07 645.5 1086.55 177527 2,288,465
4-Oct-07 624.2 1068 96372 1,190,329
5-Oct-07 606.5 1036.4 163681 2,026,534
8-Oct-07 588.35 1021.2 52914 618,374
9-Oct-07 616.6 1045.65 52354 630,468
10-Oct-07 634.15 1070.55 94525 1,188,709
11-Oct-07 653.7 1091.25 55901 721,693
12-Oct-07 620.65 1055 51390 646,116
15-Oct-07 658.25 1097.45 72916 945,443
16-Oct-07 716.1 1159.65 211141 2,963,617
17-Oct-07 670.35 1117.1 136672 1,799,697
18-Oct-07 597 1036.5 155690 1,991,15119-Oct-07 586.6 1022.8 123504 1,448,677
22-Oct-07 625.1 1061.35 70293 866,080
23-Oct-07 666 1102 57670 758,095
24-Oct-07 663 1099.9 44752 596,884
25-Oct-07 701.85 1144.65 126214 1,747,509
26-Oct-07 743 1187.5 133003 1,932,640
29-Oct-07 795.15 1240.65 96104 1,521,538
30-Oct-07 801.3 1240.2 143971 2,326,543
31-Oct-07 820.55 1254.05 128504 2,099,421
1-Nov-07 846.95 1298.3 195920 3,301,761
2-Nov-07 891.65 1333.4 217453 3,681,740
5-Nov-07 842.7 1269.85 50004 854,788
6-Nov-07 822.15 1241.8 48955 816,736
7-Nov-07 793.85 1200.8 71712 1,151,078
8-Nov-07 754.2 1169.05 34175 517,300
9-Nov-07 731.25 1144.45 5511 81,510
12-Nov-07 730.15 1145.35 56421 788,122
13-Nov-07 750.95 1173.7 36116 530,248
14-Nov-07 838.4 1278.55 101745 1,652,074
15-Nov-07 822.55 1241.65 32248 530,976
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TataMotorsDifferentialVotingRights
IntroductionIn 2008, Tata Motors, Indias largest automobile manufacturer, sought to raise additional capital
through a rights offering. Tata Motors was part of one of Indias largest business groups, the
Tata Group of companies, which held a one-third stake in Tata Motors at the time the case waswritten. Tata Sons, the promoter of Tata group companies, is a closely held company, two thirds
of which is held by philanthropic trusts endowed by members of the Tata family. Established in
1945, Tata Motors was Indias leading manufacturer of commercial vehicles and had steadily
expanded its share in the passenger vehicles segment. Throughout its history, the company
emphasized the use of pioneering technologies, a strong R&D focus, a commitment to safety
and environmental standards, and its Indian roots. Indias strong economic growth through the
first decade of the 21st century had led to a strong demand for commercial vehicles, and made
passenger cars affordable to a broader section of society.Along with its dominant stature in the domestic market, Tata Motors also sought to obtain an
international footprint in commercial vehicles. In 2004, it acquired South Koreas second largest
truck manufacturer, Daewoo Commercial Vehicles Company, which became a major South
Korean exporter of commercial vehicles. It also acquired a 21% stake in a Spanish bus
manufacturer, Hispano Carrocera, and formed joint ventures with Marcopolo, a Brazilian coach
manufacturer to sell buses; and with Thonburi Automotive, an assembly plant in Thailand to
produce its Xenon line of pickup trucks.
Over the past two decades, Tata Motors had also grown its presence in the passenger carsegment to become Indias third largest passenger car manufacturer. Starting with cars which
were essentially modifications of its commercial vehicle designs, Tata Motors developed Indias
first fully indigenous car, the Tata Indica. On 18 Dec 2007, Tata Motors bid USD 2.05 billion to
acquire the iconic Jaguar and Land Rover brands from Ford Motors. And on 10 Jan 2008, Mr.
Ratan Tata, the Tata Motors chairman, unveiled the Tata Nano, a widely anticipated Peoples
Car that would set new standards of affordability by retailing for INR 100,000 (USD 2,500).20
Fundingof
the
Acquisition
After negotiations between Ford and Tata, the deal for the acquisition of Jaguar and Land Rover
(JLR) was struck on 26 Mar 2008 for approximately USD 2.3 billion ( INR 9,200 crore )21 all of
which was in cash. As part of the deal, Ford committed to continue supplying automotive
components and engineering support after the transaction, as well as customer financing for a
20 Throughout this case, an exchange rate of 40 Indian rupees to the US dollar has been assumed.21 A crore is a unit equivalent to 10 million
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transitional period of 12 months. To fund this acquisition, Tata Motors took a 15 month USD 3
billion bridge loan from a syndicate of banks led by Citigroup and J P Morgan. This excess
amount over the agreed acquisition price was meant to cover engine and component supplies,
working capital requirements, and unforeseen contingencies.
The bridge loan was an expensive way to fund the acquisition, but Tata Motors regarded theacquisition as strategic they did not want to risk the possibility that the deal would not go
through while they were lining up cheaper sources of financing. Tata Motors intended the bridge
loan to be a short term affair, and retire this by raising longer term debt, stake sales in
subsidiaries, and through a global rights issue. Also, at the time of acquisition, Tata Motors was
of the view that JLR would be able to generate its working capital internally, as Land Rover was
recording high sales, and Jaguar sales were also improving. The deal was viewed neutrally by the
market.
Since the bridge loan for only short term, it would need to be substituted with another long termsource of financing later. One of the options for raising long term funds for a conglomerate
holding company like Tata Sons would be to sell some of its stake in a subsidiary company. In
early April 2008, Tata Motors was reported to be making plans to sell stakes in some of its to
gather funds to purchase JLR, and to raise over JPY 100 billion (USD 983 million at then rates)
by listing depositary receipts on the Tokyo Stock Exchange.
On 29 May 2008, Tata Motors announced plans to raise INR72 billion ($1.68 billion) through
three separate rights issues, which would expand the company's equity capital by about 30%-
35%. On completion of the three rights issues, the Company also planned to raise $500 million-$600 million through an issue of securities in the overseas markets. Shares of Tata Motors
Limited surged down on concerns over equity dilution.
Along with a falling share price, Tata Motors was also faced protests that suspended work in the
state of West Bengal, where farmers in Singur were unwilling to give up their land to create a
space to build a factory for producing the widely awaited Nano cars. Tata Motors was eventually
forced to pull out of the Singur project in October 2008.
On 20 Aug 2008, Tata Motors announced that it had scrapped its planned INR 30 billion ($686
million) convertible preference share issue due to weak stock markets and would instead raisefunds by selling some investments, but that its sale of rights shares worth INR 42 billion would
proceed as planned.
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DetailsoftheRightsOfferingOn 2 Sep 2008, Tata Motors Limited announced a fast track rights issue, which it intended to
complete by the end of September.22 Under the terms of the rights offer document dated 18
Sep 2008, existing shareholders as on the record date ( 16 Sep 2008 ) would, for every six
ordinary shares held, be able to subscribe for:
1. One ordinary share at a price of Rs 340. This represented a 20% discount to the closingshare price of 429.80.
2. One A ordinary share at a price of Rs 305
The A ordinary share would pay a higher dividend but have a lower voting share than the
ordinary shares A shareholders would be entitled to an extra dividend of INR 0.50 per share,
and to one vote for every 10 shares held. Such instruments would likely appeal to retail investors
who held stocks for purely economic reasons and would therefore value the 5% higher
dividend23, but were generally not concerned about control rights. For the company, it would
allow Tata Motors to widen its equity capital base with a much lower dilution of the control
enjoyed by Tata Sons. While different classes of shares were quite common in some markets like
Europe, this was the first time shares with differential voting rights were issued in India. If fully
subscribed, the rights issue24 would have represented a 33.33% increase in the equity capital of
the form, and an 18.33% increase in voting shares.
Table 3: Tata Motors Shares Outstanding if Rights Issue Fully Subscribed
Shares outstanding Before the issue After the issue Sales proceeds
Ordinary shares 385,656,979 449,933,143 21.85 bn INR
A shares 0 64,276,164 19.60 bn INR
This issue would open on 29 Sep, 2008 and close on Oct 20, 2008. Tata Motors also entered into
an underwriting agreement with JM Financial, a bookrunner, to underwrite the A share issue for
a maximum amount of INR 13.27 billion (43.5 million A shares). Under the terms of this
agreement, JM Financial would be responsible for fulfilling any shortfall in demand at a price of
Rs 305 per ordinary share.
Post- IssuePerformanceAs events unfolded during the global financial crisis, share prices fell sharply through September
2008. Lehman Brothers, a bulge-bracket American investment bank, filed for bankruptcy on 15
22 Business Line, 2008.23 On a par value of Rs 10 per ordinary share24 Rights will be only exercised by investors if the market price is higher than the subscription price (they are inthe money ). A modification of the Black Scholes formula can be used to price rights. ( Exhibit 8 )
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September 2008, and share prices crashed globally as panic gripped global markets. Tata Motors
lost 40% of its value to hit a 52 week low, and the public shareholders did not exercise their
rights. Nonetheless, the promoter group invested more than INR 30 billion to pick up the
unsubscribed portion of the rights issue, raising their stake from 33% to 42%. The underwriter,
JM Financial Consultants, which was also the lead manager, subscribed to A shares worth INR 3billion.25
Tata Motors raised INR 10 billion of debt from Life Insurance Corp. of India in November at
an 11% interest rate, to refinance loans that funded its purchase of Jaguar and Land Rover
brands. In January 2009, it raised 4 billion INR through commercial paper issuance. In May
2009, it successfully raised INR 4.2 billion by issuing secured non-convertible debt, as it
continued discussions with the U K Government on financing plans for JLR. It also renegotiated
the terms of its bridge loan to extend this by 18 months. And in Oct 2009, Tata Motors Limited
raised USD 750 million through issuing global depositary shares (GDSs) and convertible notes.The A shares listed on 5 Nov 2008, and its subsequent trading pattern in presented in Exhibit 9.
25http://www.blonnet.com/2008/11/01/stories/2008110151670300.htm
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EXHIBIT B: TATA MOTORSExhibit B1: Balance Sheet
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Exhibit B2: Income Statement
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Exhibit B3: Cash Flow Statement
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Exhibit B4: Terms of bridge loan (summarized)
Arrangers: including the Bank of Tokyo-Mitsubishi UFJ Limited, Citigroup Global Markets Asia Limited,ING Bank N.V., Singapore Branch, J.P. Morgan Securities (Asia Pacific) Limited, Mizuho Corporate BankLimited, Standard Chartered Bank, State Bank of India and BNP Paribas, Singapore Branch.
1) Borrower: JaguarLandRover Limited, a limited liability company incorporated in England, which is100% directly owned by TML Holdings Pte Limited, a Singaporean limited liability company, whichis, in turn, 100% directly owned by TML.2) Support: Guarantee from TML.3) Facility Agent: Citicorp International Limited.4) Obligors: JaguarLandRover Limited, TML Holdings Pte Limited and TML.5) Amount: US$ 3,000 million.6) Purpose: JaguarLandRover Limited has agreed to apply all amounts borrowed by it under the facilityonly towards:- partially financing the acquisition;
- to the extent stipulated, the on-loan to Jaguar Land Rover to be applied towards Jaguar Land
Rovers working capital needs and/or the capitalisation of the Jaguar Land Rover;- acquisition costs; and
- any other costs incurred by the JaguarLandRover Limited in relation to the acquisition including
any contingency requirement of Jaguar Land Rover.7) Rate of Interest: The rate of interest for loan for each interest period is the percentage rate per annumwhich is the aggregate of the applicable margin, LIBOR and mandatory cost, if any. The applicablemargin is 0.85% for the first 6 months, 1.2% for next 3 months, and 1.5% thereafter until the maturitydate.8) Maturity Date: The date falling, 364 days from and including the first drawdown date, i.e., June 2,2008.9) Repayment: The aggregate loans are to be repaid in full on the maturity date.10) Voluntary Prepayment: JaguarLandRover Limited may prepay the whole or any part of the loans (ifin part, being an amount that reduces the amount of the loan by a minimum amount of US$ 25,000,000and an integral multiple of US$ 10,000,000 or the remaining amount of the loan), if it gives theFacility Agent not less than 5 business days prior notice in the case of a prepayment on the last day ofan interest period or 8 business days prior notice, otherwise.11) Mandatory Prepayment: From June 2, 2008 until the maturity date, the loans shall immediately be
prepaid from an amount equal to the mandatory prepayment proceeds.- Prior to submission of a refinancing plan to the Facility Agent, mandatory prepayment proceeds
include proceeds from disposals of certain property, plant and equipment, issuance of shares,termination proceeds in excess of US$ 10 million in aggregate in relation to hedging agreements,permitted facility refinancing financial indebtedness and certain types of insurance claimsreceived. In relation to the aforementioned mandatory prepayments, US$ 32.4 million has beencontributed by JaguarLandRover Limited towards a mandatory prepayment account with theFacility Agent to be applied towards the prepayment of the Short Term Bridge Loan.
- Subsequent to submission of a refinancing plan to the Facility Agent, such mandatory prepaymentproceeds include (a) proceeds of any refinancing option under the Companys refinancing plan, (b)any issuance of shares including by way of a rights issue and (c) any permitted facility refinancingfinancial indebtedness. For details on the Companys plans to refinance the Short Term BridgeLoan see Managements Discussion and Analysis of Financial Condition and Results ofOperations Financing of the Jaguar Land Rover Acquisition on page 135 of this Letter of Offer.
12) Guarantees/charges or security: TML irrevocably and unconditionally:- guarantees to each financing party punctual performance by the other obligors of all the other
obligors obligations under the finance documents;
- undertakes with each lender that whenever either of the obligors do not pay any amount when dueunder or in connection with any finance document, TML shall immediately on demand pay thatamount as if it was the principal obligor;
- TMLs maximum liability shall be limited to a total aggregate amount of US$ 3,000 million.13) Negative pledge: No obligor shall create or permit to subsist any security over any of its assets. Noobligor shall:
- sell transfer or otherwise dispose of any of its assets on terms whereby they are or may be leased
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to or re-acquired by an obligor or any other obligor;- sell transfer or otherwise dispose of any of its receivables on recourse terms;
- enter into or permit to subsist any title retention agreement;
- enter into or permit to subsist any arrangement under which money or the benefit of a bank or
other account may be applied set off or made subject to a combination of accounts;- enter into or permit to subsist any other preferential arrangement having a similar effect.
in circumstances where the arrangement or transaction is entered into primarily as a method of raising
Financial Indebtedness or of financing the acquisition of an asset.14) Other covenants/ conditions: Compliance of the following to be ensured:- No obligor may incur or permit to be outstanding any financial indebtedness other than permitted
financial indebtedness.
- TML shall at all times own 100% of the total issued share capital in TML Holdings Pte Limited
and shall control each of TML Holdings Pte Limited, JaguarLandRover Limited and companiesand subsidiaries forming part of Jaguar Land Rover.
- TML Holdings Pte Limited shall at all times own 100% of JaguarLandRover Limited and
JaguarLandRover Limited shall at all times after the acquisition, own directly or indirectly not lessthan 76% of the total issued share capital of each of the companies and subsidiaries forming partof Jaguar Land Rover.15) Default events and interest: Events of default include:- obligor does not pay on the date any amount payable pursuant to the finance document;
- an obligor does not comply with the terms in relation to negative pledge;
- any representation made by an obligor in the finance documents or any other documents deliveredby or on behalf of any obligor under or in connection with the finance documents, is misleadingand if capable of remedy not remedied within 20 days of the earlier of the facility agent giving28notice to the borrower or any obligor becoming aware of the failure to comply;
- any financial indebtedness of any obligor or material subsidiary is not paid when due or within
any original grace period;- the value of the assets of any obligor or material subsidiary is less than its liabilities;
- the initiation of any legal proceeding for winding up, dissolution, administration, judicial
management of any obligor or any material subsidiary;- all or any material part of the share capital of any obligor or material subsidiary is seized,
nationalized, expropriated or compulsorily purchased by any governmental agency or state ownedcorporations, (or an order is made to that effect);- Tata Sons Limited ceases to own and control a minimum shareholding of not less than 26 % of
TMLs total issues share capital;- it is or becomes unlawful for an obligor to perform any of its obligations under any transaction
document;- any obligor or material subsidiary suspends or ceases to carry on all or a material part of its
business or of the business of the obligors and material subsidiaries taken as a whole;
- any event or circumstance occurs which has a material adverse effect.
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Exhibit B5: Shareholding Pattern at the time of issue
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Exhibit B6: Offer Document
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Exhibit B7: Daily Share Prices
Date Close Price
16-Sep-08 398.8517-Sep-08 417.8
18-Sep-08 416.05
19-Sep-08 423.3
22-Sep-08 415.3
23-Sep-08 393.7
24-Sep-08 387.5
25-Sep-08 384
26-Sep-08 374.55
29-Sep-08 354.6
30-Sep-08 343.9
1-Oct-08 339.65
3-Oct-08 330.5
6-Oct-08 3147-Oct-08 316.6
8-Oct-08 299.95
10-Oct-08 292.35
13-Oct-08 299.3
14-Oct-08 299.45
15-Oct-08 282.5
16-Oct-08 251
17-Oct-08 243.45
20-Oct-08 244
21-Oct-08 247.75
0
2
00
4
00
6
00
8
00
10
00
12
00
2/1/2005
6/1/2005
10/1/2005
2/1/2006
6/1/2006
10/1/2006
2/1/2007
6/1/2007
10/1/2007
2/1/2008
6/1/2008
10/1/2008
2/1/2009
6/1/2009
10/1/2009
2/1/2010
OpenPrice
High
Price
Low
Price
ClosePrice
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Exhibit B8: Pricing Rights26
26 Lauterbach and Schultz, 1990.
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Exhibit B9: Differential Voting Rights Price History(INR)
-400
-200
0
200
400
600
800
1000
11/5/2008
12/5/2008
1/5/2009
2/5/2009
3/5/2009
4/5/2009
5/5/2009
6/5/2009
7/5/2009
8/5/2009
9/5/2009
10/5/2009
11/5/2009
12/5/2009
1/5/2010
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
A share Ordinary Share absolute spread relat ive spread
Volumes
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
11/5/2008
12/5/2008
1/5/2009
2/5/2009
3/5/2009
4/5/2009
5/5/2009
6/5/2009
7/5/2009
8/5/2009
9/5/2009
10/5/2009
11/5/2009
12/5/2009
1/5/2010
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RanbaxyAcquisitionbyDaiichiSankyo
IntroductionIn 2008, Ranbaxy was Indias largest pharmaceutical company. The company operated mainly as
a generic drug manufacturer and marketer. Ranbaxy markets its products in more than 125
countries, with offices in 49 countries and manufacturing locations in 11 countries.
Ranbaxy was started in 1937 as a pharmaceutical drugs distributor. It was incorporated in 1967
and has since been a closely held company under the control of the founding family. The Singh
family owned 34.8% of the company and Dr. Malvinder Singh held the position of Chairman
and CEO of Ranbaxy.
Established in 2005 as a result of merger between two century old Japanese pharmaceutical
companies - Sankyo Co. Ltd. and Daiichi Pharmaceutical Co. Ltd. - Daiichi Sankyo is Japans
third largest pharmaceutical company. The company manufactures and markets its branded
drugs in Japan, US and Europe.
On June 11, 2008; Ranbaxy and Daiichi Sankyo announced an agreement whereby Daiichi
Sankyo would acquire majority control of Ranbaxy and the Singh family would be fully divested
from its ownership in Ranbaxy. The agreed transaction comprised of the sale of its entire
holding in Ranbaxy by the Singh family to Daiichi Sankyo at a price of INR 737 per share (the all
cash offer was made in local currency INR, which thus removed the exchange rate risk between
the deal announcement and consummation). As per the Indian takeover code, Daiichi Sakyo
would have to make a public offer to the public shareholders for 20% of the total equity base at
a price equal to or greater than INR 737 per share. The offer represented 31.4% premium over
Ranbaxys closing price prior to announcement and a 39.7% premium over the one week average
stock price prior to the deal announcement.
Post announcement, the deal faced significant uncertainty owing to adverse developments in
Ranbaxys business and the resulting price decline. Exhibit C1 shows the timeline of events
starting from deal announcement and Figure 3 the share price movement of the target and the
bidder.
ExecutionofArbitrageAs discussed previously, the stock price of the target does not jump instantly to the offer price
due mainly to a non-zero probability of deal falling through. However, in this case, the structure
of the deal introduces a new complication in setting up an arbitrage position. Since the public
participation in the deal is limited to only 20% of total shares in Ranbaxy, hence the arbitrageurs
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ex-ante expected price at which the position can be exited upon deal consummation will depend
on the expected tender ratio and expected stock price after the open offer closes.
Looking at Ranbaxys stock price movement, we can see a run up in prices prior to deal
announcement on June 11, 2008, which suggests insider purchases in anticipation of
announcement. For this reason when analyzing the stock price impact of material news such asM&A, we take the pre-announcement price as average of last one week prices. In this case, in
order to start the analysis the arbitrageur can make the initial assumption that the stock price
after the open offer will revert back to the lowest price in the last 5 trading days prior to
announcement (which in this case is INR 506.9). In this case, if we make the worst case
assumption that all the public shareholders will want t tender in the open offer:
Expected weighted average exit price =
737*(20%/65.18%) + 506.9*(45.18%/65.18%) = 577.5
Since this is below the closing price of INR 561 on announcement date, based on the aboveassumptions, there is a potential to set up a profitable arbitrage trade by going long the stock in
spot market.
However, as a result of the global credit and liquidity crisis, the Indian stock market too has been
into a bear phase during 2008, adding to that Ranbaxy stock was trading near its 3 year high price
during this time. Hence, there is a very real chance that if the deal falls through, Ranbaxy stock
could fall much below INR 506.9 in absence of the possibility of the transaction supporting the
high prices. For this reason, we can also do a stress testing of our hypothesis to see at what post
deal market price will an arbitrage position set up on deal announcement will becomeunprofitable, for this:
561 = 737*(20%/65.18%) + x*(45.18%/65.18%) => x = 483.09
Hence, as long as the arbitrageur can infer from available information that the post deal stock
price will not go below INR 483.09, he can set up a long position in stock which can provide
positive returns even if all the public shareholders decide to tender their holding. The arbitrageur
needs to see the price history of the stock (Figure 5) and make conjectures using available
information as to the possibility of stock price going below this.
UnderstandingFuturesMovementMonitoring futures market data can be quite useful in understanding markets assessment of the
deal. Theoretically speaking, futures pricing incorporates the present value of corporate actions
such as dividend payments.
Ft = [S PV(CACt)] * ert
Where,
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Ft = Current price of futures maturing at time t
S = Current stock price
R = risk free rate of interest
CACt = Corporate action between present and time t
When there is uncertainty about the corporate action, as in case of closing of open offer, theappropriate variable is the expected corporate action between present and time t. Hence,
Ft = [S PV{E(CACt)}] * ert
Hence, if we look at differences in futures prices for two different expiries (e.g. 1-month and 2-
month futures), the trend in this difference can give valuable insights into the markets
expectations.
D = Ft2 F = S*ert2 S*ert1 + [E(CACt2)] - [E(CACt1)]
The expected trend in D in the absence of any corporate action would be an almost stable small
positive value. However (as shown in Figure 4) keeping t1 and t2 constant and looking atmovement of D, we can see that the expected trend is deviated from in August 2008, where it
becomes a large negative difference.
This gives a clear indication where average market is placing the bets. The market expectation as
revealed here is for the deal closure to occur in August and hence the futures prices for August
end expiry are lower than for the previous month futures.
Figure 3: Historical Stock Price Movement of Ranbaxy
0
1000
2000
3000
4000
5000
6000
7000
0
100
200
300
400
500
600
700
01/01/2007 01/01/2008 01/01/2009 01/01/2010
Ranbaxy NIFTY
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Figure 4: Difference between 1 and 2 month Futures Prices for Ranbaxy
Figure 5: Stock Price Movement - Rabaxy and Daiichi Sankyo
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
5.0%
160
140
120
100
80
60
40
20
0
20
27
Dec
07
27
Jan
08
27
Feb
08
27
Mar08
27
Apr08
27
May
08
27
Jun
08
27
Jul08
27
Aug
08
27
Sep
08
27
Oct08
27
Nov
08
27
Dec
08
27
Jan
09
FuturesPriceDifference RelativetoSpot
0
500
1000
1500
2000
2500
3000
3500
4000
0
100
200
300
400
500
600
700
Ranbaxy Daiichi
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Figure 6: 1 Month Futures Price Movement and Key Develpments for Ranbaxy
EXHIBIT C: RANBAXY
0
10000
20000
30000
40000
50000
60000
70000
0
100
200
300
400
500
600
700
OpenInterest Price Volumes
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
0
100
200
300
400
500
600
700
OpenInterest Price Volumes
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Exhibit C1: Key developments during the deal period
Announcement
DateDevelopment
11-06-2008 Newspaper reports about Daiichi making a bid for Ranbaxy
12-06-2008 News reports claiming Glaxo also looked at Ranbaxy earlier
13-06-2008 News reports claiming Pfizer may make counter offer for Ranbaxy
16-06-2008Announcement for Daiichi's open offer for Ranbaxy shares to start on
August 8, 2008
18-06-2008 Ranbaxy settles with Pfizer, delays generic lipitor in US markets
25-06-2008Ranbaxy Laboratories Limited Receives USFDA Approval For
Valganciclovir Hydrochloride Tablets
01-07-2008FDA Refuses Approval For Ranbaxy Laboratories Limited's
Manufacturing Unit
04-07-2008Newspaper reports state that Pfizer is Likely To Top Daiichi Offer For
Ranbaxy Laboratories Ltd By 20%
14-07-2008
News regarding long standing US probe to investigate if Ranbaxy has
violated federal laws that have resulted in its introduction of adulterated
and misbranded drugs in the United States
17-07-2008
Daiichi Sankyo Signs Agreement regarding Acquisition of Voting Rightin Ranbaxy Laboratories Limited (agreement on June 11, 2008 to
acquire more than 50.1% voting right in Ranbaxy through issues of new
shares and share warrants conditional on agreement during the
extraordinary meeting of shareholders scheduled for July 15, 2008)
21-07-2008 Dr. Reddy Quarterly results worse than expected
22-07-2008 UK court rejects fraud case against Ranbaxy
28-07-2008 Ranbaxy Launches generic ulcer drug in US
29-07-2008 Ranbaxy suffers quarterly loss due to currency impact
31-07-2008 Open offer delayed pending Indian regulatory approval
05-08-2008 Announcement for Open offer to start from Aug 16, to close on Sept 4
06-08-2008 Indian Government approves Ranbaxy Daiichi deal
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