Valuation of the merger

Discounted Cash Flow methodology has been used to value Ranbaxy’s stock in June of 2008. The following assumptions have been made:

Sales would grow at 12% for the next 10 years which has been projected by McKinsey for the Indian Pharmaceutical Industry. Sales will slow down to 8% for the next 5 years. To take into account the losses caused due to the FDA against Ranbaxy, the growth rates for 08’ and 09’ have been lowered to 10%.

This was done because Ranbaxy had made other arrangements via its US subsidiary OHM Labs.

Non Operating Profit after Tax Margin was maintained at 14% for 10 years and then it was lowered down to 10%

Since the company is trying to decrease their working capital, it is assumed that they would drop it down to 25%

Long term Assets to Sales ratio will fall down to 45%

Discounted Cash Flow Valuation – Rs. 254.6

FTF Value – Rs 106

Investment in Associates – Rs. 5.03

Total – Rs. 365.63

Along with these assumptions, we come to the value of Rs. 254.6 but this does not take into consideration the strong FTF which Ranbaxy had. It is valued at Rs. 106/share. We also have to adjust the Investment in Associates wherever the information is available.

Therefore, the effective price should have been Rs. 356.63

Daiichi paid an acquisition price of INR 737 per share, almost 100% over the intrinsic value. It would take a lot of time for Daiichi to enjoy the real benefits of the acquisition.

Valuation of Ranbaxy

Assets and Liabilities Value Attributed (Rs. Cr)

Book Value of Assets and Liabilities 3470

Inventories 88

Tangible Assets (Land) 440

Intangible Assets (Leasehold Land) 260

Intangible Assets (Increase in Current Products etc. to fair value) 1805

In process R&D expenses 304

Deferred Tax Liability -881

Minority Interest -1981

Goodwill 17995

Total Consideration 21500

Goodwill in USD $ 4.01 Billion

Total Consideration (in USD) $ 4.9 Billion

Source: Ranbaxy