They Choose. They Bought. They sailed through or failed to?
Mergers and Acquisitions in Healthcare Industry
The baggage of “uncertainty” is looming over the healthcare industry giving rise to “Mergers and Acquisitions (M & As)”. The wrath of financial weakness, increasing competition, inability of consolidation and incompetence of raising funds are a few reasons for the “uncertainty” in the Healthcare industry. Acquisition involves acquiring of all the assets of one company by another while a Merger involves creation of a new entity from assets of two companies. Sometimes acquisitions are labeled "mergers" because "being acquired" carries a negative connotation; a merger suggests mutuality.
2012 will be horrendous year for the Pharma companies all over the world as they would be facing a major problem of patent cliff (expiry to legal protection of top selling drugs). Thus, all the top companies will look for acquisitions in the domestic generic market in India which has grown robustly at 15% in FY2011. Examples of horizontal acquisition include the $3.6 billion acquisition of the promoters’ stake in India’s largest drug maker Ranbaxy Laboratories Ltd in 2008 by Japan’s Daiichi Sankyo Co. Also, US drug and nutrition firm Abbott Laboratories paid $3.72 billion to acquire Piramal Healthcare Ltd’s domestic drug formulation business. Similarly smaller Hospitals are facing stiff competition from the private players and corporate honchos. Smaller Hospitals enhance opportunities for consolidation and savings, strengthen their financial assets, improve financial opportunity for investors and venture capitalist, think of diversification and finally think of reform in healthcare when M&A takes place. Examples include Fortis Healthcare acquiring10 hospitals from the Wockhardt for Rs 909 crore. Similar are the cases with Biotechnology firms being acquired or being invested into by Pharma Giants. As also there are diagnostic laboratories being acquired by a Hospital. Examples include Fortis having invested its stakes into SRL labs. These are examples of vertical acquisitions. India being a low cost destination for R n D and with the success of Pharma Companies in getting ANDA Approvals recently, many Pharma Giants and Clinical Research Organisations (CROs) over the world are expanding by investing in Indian Markets through Mergers and Acquisitions.
Are mergers and acquisitions a success or a failure? The answer is that results are mixed. The reasons for failure include the company which was acquired being overpriced due to overestimation of its assets. Examples include Abbott Laboratories paying 9 times the value of the current assets of the Piramal to acquire it. Mergers may also be termed as incompatible marriages when the employees suffer a culture shock by different values, traditions, priorities between the two organizations. Warner Hindustan and Park Davis merger was a cultural failure with Warner Hindustan having values of Task driven and Park Davis more people Driven. But a deal can be successful if it avoids the pitfalls that can undercut an acquisition after the deal closes. The companies need to define the deal clearly to see the deals creating values for the shareholders and also set up a high growth trajectory.
Healthcare deals can be complex, but when they're done right, an acquisition can help a company face the headwinds of increasing regulatory hurdles, price pressures and rising competition. The relief from market pressures can be temporary, but a successful M&A strategy buys time for Companies to focus on the real issue: how to kick-start the profit engine again.
Neeraj Puro
MHA-HO (2011-2013)
