MERGER AND ACQUISITION IN PHARMACEUTICAL INDUSTRY: A CASE STUDY OF DR. REDDY'S AND BIOCON LTD

Abstract

Business combinations come in different forms. A distinction can be made between acquisitions and mergers. In the context of M&A, an acquisition is the purchase of some portion of one company by another. An acquisition might refer to the purchase of assets from another company, the purchase of a definable segment of another entity, such as a subsidiary, or the purchase of an entire company, in which case the acquisition would be known as a merger. A merger represents the absorption of one company by another. That is, one of the companies remains and the other ceases to exist as a separate entity. Typically, the smaller of the two entities is merged into the larger, but that is not always the case. Mergers can be classified by the form of integration. In a statutory merger, one of the companies ceases to exist as an identifiable entity and all its assets and liabilities become part of the purchasing company. In a subsidiary merger, the company being purchased becomes a subsidiary of the purchaser, which is often done in cases where the company being purchased has a strong brand or good image among consumers that the acquiring company wants to retain. A consolidation is similar to a statutory merger except that in a consolidation, both companies terminate their previous legal existence and become part of a newly formed company. A consolidation is common in mergers where both companies are approximately the same size. The parties to a merger are often identified as the target company and the acquiring company. The company that is being acquired is the target company, or simply the target. The company acquiring the target is called the acquiring company, or the acquirer. We will use this terminology throughout the reading. In practice, many of the terms used to describe various types of transactions are used loosely such that the distinctions between them are blurred. For example, the term “consolidation” is often applied to transactions where the entities are about the same size, even if the transaction is technically a statutory merger. Similarly, mergers are often described more generally as takeovers, although that term is often reserved to describe hostile transactions, which are attempts to acquire a company against the wishes of its managers and board of directors. A friendly transaction, in contrast, describes a potential business combination that is endorsed by the managers of both companies, although that is certainly no guarantee that the merger will ultimately occur. An additional way that mergers are classified is based on the relatedness of the merging companies’ business activities. Considered this way, there are three basic types of mergers: horizontal, vertical, and conglomerate. A horizontal merger is one in which the merging companies are in the same kind of business, usually as competitors. One of the great motivators behind horizontal mergers is the pursuit of economies of scale, which are savings achieved through the consolidation of operations and elimination of duplicate resources. Another common reason for horizontal mergers is to increase market power, because the merger results in a reduction of the number of industry competitors and an increase in the size of the acquiring company. In a vertical merger, the acquirer buys another company in the same production chain, for example, a supplier or a distributor. In addition to cost savings, a vertical merger may provide greater control over the production process in terms of quality or procurement of resources or greater control over the distribution of the acquirer’s finished goods. If the acquirer purchases a target that is ahead of it in the value chain (a supplier), it is called backward integration. An example of backward integration is if a steel manufacturer purchases an iron ore mining company. When an acquirer purchases a company that is further down the value chain (a distributor), it is called forward integration. An example of forward integration is Merck & Co.’s 1993 acquisition of Medco Containment Services, a marketer of discount prescription medicines. The merger brought together the production and distribution of pharmaceuticals into one integrated company. When an acquirer purchases another company that is unrelated to its core business, it may be called a conglomerate merger. General Electric is an example of a conglomerate, having purchased companies in a wide range of industries, including media, finance, home appliances, aircraft parts, and medical equipment. Conglomerate mergers were particularly popular from the 1960s through the 1980s. The concept of company-level diversification was commonly used as a rationale for inter-industry mergers during this period. By investing in companies from a variety of industries, companies hoped to reduce the volatility of the conglomerate’s total cash flows.