A winning merger June 29, 2008

For some years now I have been on the board of Ranbaxy and have watched with admiration as the company transformed itself into India’s first real multinational. I have seen it inspire a dozen other companies and helped create a world class generic drugs industry that is feared by the Western giants for aggressively challenging their patents and admired for lowering the cost of medicines around the world. How then was I to respond to the announcement by Ranbaxy’s CEO, Malvinder Singh that he wanted to sell his family’s stake for Rs 10,000 crores to a Japanese company, Daiichi Sankyo? The family was equally shocked. A CEO’s ability to keep months of negotiations secret in a country afflicted by verbal diarrhoea speaks to the company’s character.

My initial reaction was one of dismay—how could one of India’s finest companies become a mere Japanese subsidiary? A company that had acquired 14 companies in 30 months was now itself about to be acquired. Slowly I realised, however, this momentous deal would make the merged company much stronger and create greater value to the Indian nation.

In a world where the large, drug-discovery companies are struggling with expiring patents; where rising health care costs have pushed countries to favour quality, affordable generic drugs; where intense competition between generic drug makers has dramatically lowered profit margins; the logical solution is for the discovery and generic companies to merge. This is why the drug discoverer, Daiichi Sankyo, has valued the generics Ranbaxy at $8.5 billion when its stock market value was only $5 billion and is paying 35 times its future earnings. However, it will only be able unlock Ranbaxy’s value if it does not gobble it up like most mergers, but leaves it alone, as Roche, the Swiss company, did with Genentech.

But how could selling an Indian company create wealth for India? Companies create wealth for nations when they create jobs, give returns to shareholders, and pay taxes to governments. If Ranbaxy had not been sold, it would have continued to generate steady returns. By joining hands with a larger, innovative Japanese concern, it will produce more and better products, be able to better fight patents, and provide Japanese skills in process, quality and teamwork to its employees. Daiichi Ranbaxy will potentially create more jobs, more returns to both shareholders, and more taxes to both governments. And when the family invests its Rs 10,000 crores in its other businesses-- Fortis hospitals, Religare finance --it will create more ‘Ranbaxys’ and more wealth for India.

Compare Malvinder Singh’s decision to sell at the right time to the sentimental, insecure reaction of Escorts and DCM families in the 1980s. When Swaraj Paul bid for these companies, our pre-reform government stopped him. Most companies of the two groups went downhill after that as the next generation was neither hungry nor capable. The families lost and so too did the nation. In Ranbaxy’s case, the family put the business interest before their own. Thus, Daiichi wants Malvinder Singh to stay on as CEO.

The Ranbaxy affair shows how the Indian public has also matured. Ten years ago our political class would have shed tears, waved the flag and stopped this deal. The 2008 Pew Survey of 24,000 people across 24 major nations concludes that Indians are now amongst the most confident people. Nine in ten Indians favour foreign trade and six in ten welcome foreigners buying up Indian companies. We have behaved far better than the French when Laxmi Mittal bought Arcelor. Now let’s apply this lesson and sell off our obsolete, bleeding public sector navratnas as well.