Background information: -
I have decided to do my commentary on Ranbaxy selling 50.1% of its stakes to the third Japanese giant drug maker Daichii Sankyo. This topic caught my interest as it astonished me to see India's top pharmaceutical company giving away its stake and allowing a foreign company to enter the Indian market through a takeover and control its functioning throughout the globe. In recent years Ranbaxy had been struggling with patenting and compound adulteration issues with the US FDA and had an image of "trespassers of intellectual property rights." - By Accenture.com.
My commentary is based on following supporting documents:-
- Was the takeover a so called "strategic deal" according to the Ex CEO Malvinder Singh?
- Was the option of takeover a best option for the CEO to rescue its company?
- A highlight on the annual report 2004-08 of Ranbaxy as well as Daichii Sankyo.
- A highlight on the reason of Ranbaxy selling its stakes to daichii sankyo.
After the research of various documents on Ranbaxy I have done a
Despite showing progress till 2005-06 the company's market value has gone down due to its own weakness which went unnoticed. We can say that their so called strategy "off- patented" drugs that gave them high short term gain and helped in achieving their objective of becoming a "billion dollar company" was also one of their important weakness as they got involved in many patenting cases (one of the major case was with Pfizer). After losing its market share from value of Rs. 723 to its value of CY08 of Rs.235.84.-reference the company could not help becoming highly geared (overborrowing). Consequently the Daichii buy out would help Ranbaxy to get a debt free status and provide necessary flexibility and financial strength that would help in organic and inorganic growth opportunities.
LEWIN'S FORCE FIELD ANALYSIS
This analysis was developed by Kurt Lewin in 1951. He argued that successful businesses tend to be constantly adapting and changing, and improvements in businesses organizations are not results of one-off changes but a small adjustment to the forces can result in many small changes and improvements. The buyout of Ranbaxy means a new office of Daichii sankyo controlling it hence the previous committee and staff needs to adapt to the change.
Takeover of Ranbaxy means introduction of the new management at the top.
Any buyout requires the company to undergo numerous changes in its production, marketing, employment, research and much more. Probably, the driving forces led Ranbaxy to sell out its stakes to one of its rivals - Daichii sankyo. Ranbaxy was also suffering from many financial debt cases, legal issues with FDA and several patent cases with its competitors. Post takeover the company could become free of all these legal hurdles. This deal would also open up Japanese markets for Ranbaxy and offer reasonable potential for the new generic company to establish its presence in Japan. But this takeover could also lead to employee redundancies. The stakeholder conflict could worsen, as many Japanese investors termed this buyout as 'bold and out of character' deal as Daichii was entering into a generic business. There is also a threat of diseconomies of scale as the firm grows larger the scale operations also grow large leading to a long and slow channel of communication , affecting effective decision- making and optimum production levels. (culture clash)
ACCOUNTS (Rs in millions)
1. Profitability ratio: -
Gross profit margin: - gross profit 100
Therefore company's gross profits for 2006-2008:-
2007 - 23.58%
2008 - -12.75%
It is a bad signal for the company as its gross profit has dipped, reducing ability to pay business overheads and expenses. The company will have to work upon raising its revenue (using marketing strategies, altering the selling price of elastic and non-elastic products) and reducing it cost such as the material, labour, wastes etc.
Net profit margin : - net profit 100
Therefore company's net profits for 2006-2008: -
2007 - 18.51%
2008 - -36.13%
However Ranbaxy's net profit margin for CY08 year is reduced twice that of 2007, the difference between GPM and NPM for both years are different. Ratio for CY07 is positive while that for CY08 is negative indicating a difficult overhead year for the company and having a negative net profit margin of such a big amount may lead to company's bankruptcy by next year if any other alternative is not thought of. The company selling high volume products should be worried that their NMP is in negative.
2. Liquidity ratio: -
Current ratio: - current assets 100
2007 - 9/5 = 1.8:1
2008 - 121/100 = 1.2:1
The liquidity ratio for both years seems to be good as any current asset value between1.5 - 2 is followed by the company as safety margin since it may not be possible to sell off assets as quickly without losing some value. Also the company has sufficient working capital required for day to day functioning of business.
3. Efficiency ratio: -
Return on capital employed: - Net profit 100
2007 - 30.51%
2008 - -43.56%
The decrease (negative) in the ROCE is a serious problem for the company as the company will have to pay to shareholders from its fund and the loss has almost occurred for about 70%.
Debtor days: - debtors 365
2007 - 77.01 days
2008 - 83.45 days
A good credit period is 30 - 60 days. Here the company debtor days increased in 2008 showing an increase in the number of credits given this year. This can cause liquidity problems.
4. Gearing ratio: -
Gearing: - loan capital 100
2007 - 138.07%
2008 - 105.20%
The dip in the company's gearing ratio in 2008 is a good sign. However the company is still highly geared with large loan commitment and faces financial difficulties. Further in this downturn period there is possibility of decrease in cash inflow from its sales.
5. Shareholders ratio: -
Earnings per share: - net profit after interest and tax
Number of ordinary shares
2007 - Rs 17.89 per share. (negative) report says 11.31after share split
2008 - Rs 19.66 per share. (negative) report says 27.29 after share split
The negative in both the years show that shareholders are receiving less dividend from the payout which has a negative impact on the company's shareholders and also the value of the company's shares are decreasing drastically.
As mentioned in many private audit reports once the deal would be done the "driving force" of the company the CEO and MD Malvinder Singh would leave the Ranbaxy family which did happen in April 2009. From the accounts data of 2008 and 2007, the data stands positive for 2008, the year which the company had completed its takeover by December but the shares of the year 2008 have dipped down further as the shareholders have feared the economic downturn and the buyout stakes. Ranbaxy in 2007-08 suffered a big loss by getting involving into data -falsification scandal with US FDA. I think that this deal can't be called a "strategic deal" as the Singh family themselves sold their 34% shares at Rs. 737 at 31% premium on the current market price and earned a whopping $2.2bn but this takeover also helped the company to become debt free and released it from all scandals and cases it was involved in. There could be other option for Ranbaxy could have thought over: -
Such as mergers, which they already have been doing in countries like US to spread their business.
They could have found a way to keep their working capital flowing properly as they shouldn't have seen the motive of profit in year 2007-08 as the full globe was facing a economic downturn and there was hardly any profit for any organization or the company during this period of recession.
 Ibid p125
 Ibid p98
 Ibid p368
 Ibid p142
 Ibid p115
 Ibid p230
 Ibid p420
 Ibid p420
 Ibid p421
 Ibid p423
 Ibid p423
 Ibid p362
 Ibid p425
 Ibid p425,426
 Ibid p426
 Ibid p430
 Ibid p428
 Ibid p428
 Ibid p125
 Ibid p362