APRIL 2014 ISSUE 02 2

SNC TIMES
IN PREPARING FOR BATTLE IVE ALWAYS FOUND THAT PLANS ARE USELESS, BUT PLANNING IS ESSENTIAL. -DWIGHT EISENHOWER

Greetings fellow thinkers! This months edition is a powerful capsule of analysis and discourse on areas as varied as the pharmaceutical industry and the automobile sector. In the March edition, our analysis on the Sector in Focus: The Pharmaceutical industry cited how Mergers and Acquisitions would be a major growth driver for the industry. Almost prophetically, we saw a major acquisition in the Pharma sector last month covered in The Sun-Ranbaxy Deal. This months Sector in Focus is the Automobile industry. The article Poison Pills covers a defensive strategy against hostile acquisitions. We hope the article on Profitability Framework gives a valuable insight into analyzing the revenue of a company. As always, we believe mistakes in History teach us as much as, if not more than, the success stories. JC Penneys Failure has been analyzed in this weeks Strategies That Went Wrong. Until our next rendezvous, keep those grey cells working!

From the Editors,

Finding a Cure: The Sun Ranbaxy Deal

CONTENTS
Sector in Focus: The Automobile Industry Strategies That Went Wrong: The JC Penney Failure Poison Pills Profitability Framework The Sun-Ranbaxy Deal

CONSULENZA
-The Strategy and Consulting Club of IIM Rohtak

SECTOR IN FOCUS: THE AUTOMOBILE INDUSTRY

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Sector Overview The automobile industry is one of Indias major sectors, accounting for 22% of the countrys manufacturing GDP. The Indian auto industry, comprising passenger cars, two-wheelers, threewheelers and commercial vehicles, is the seventh-largest in the world with an annual production of 17.5 million vehicles, of which 2.3 million are exported. Two-wheelers dominate the Indian market; more than 75% of the vehicles sold are two wheelers. Policy and Promotion The Indian government encourages foreign investment in the automobile sector and allows 100% FDI under the automatic route. It is a fully deli censed industry and free imports of automotive components are allowed. Besides offering a liberal FDI regime, the government has made successive policy changes that allow for stronger growth in the automotive sector. Major among these are: Automotive Mission Plan: The plan also aims to double the contribution of the automotive sector to the countrys GDP by taking its turnover to USD 145 billion and providing additional employmen t to 25 million people by 2016. National Automotive Testing and R&D Infrastructure Project: This is a USD 388.5 million initiative of the Government of India aimed at creating a state-of-art and dedicated testing, validation and R&D infrastructure across the country. Sector Outlook According to the Society of Indian Automobile Manufacturers (SIAM), the passenger vehicle segment is expected to grow to nine million units and the two-wheeler segment to 30 million units by 2020. SIAM estimates that car sales in India will grow to five million vehicles by 2015 and to nine million by 2020. In fact, by 2050, Indian roads will top the world in terms of car volumes, running a total of 611 million vehicles. Besides the growing market, there are several other advantages for the Indian auto sector: Structural advantages: Over half the countrys population is in the working -age group and the economy has shown strong growth over most part of the last decade. These factors, in turn, translate into beneficial spill overs for the Indian automobile sector: Indian banks provide easy finance schemes for the segment The country has low-cost, high-skilled manpower with the second-largest pool of engineering talent in the world Auto components: India has a strong auto components industry which accounts for about 2% of the countrys national income and is growing annually at 20%. The country has emerged as an outsourcing hub for international companies such as Ford, General Motors Daimler Chrysler etc. Steel: India is the fifth-largest producer of steel in the world and among the lowest-cost ones as well. It is slated to become the second-largest steel producer by 2015. Useful Links: www.acmainfo.com; www.siamindia.com; www.atmaindia.org

STRATEGIES THAT WEN T WRONG: THE JC PENNEY FAILURE

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JCPenny is a chain of American mid-range department stores based in Plano, Texas. The company operates 1107 department stores in all 50 U.S States and Peurto Rico. In the fall of 2011 Ron Johnson was appointed not just as CEO of JC Penney, but as the savior responsible for breathing new life into one of the dowdiest dinosaurs in American retail. Seventeen months later, he was out of the job. In fact Johnson was the same person who was responsible for making Target hip and turning the Apple store into a monster success story. So what did Johnson do that was too bad? Following are the reasons: 1. He misread what shoppers want: In early 2012, Johnson announced a major overhaul of the way JC Penney does business, with a new fair and square everyday low pricing scheme to replace the fake prices used commonly in the past. But not everyone hated those fake prices and thats where Johnson got it wrong. There were a cert ain part of the customers that loved that and they were their core customers. Sales collapsed through early 2012, and by the summer, even Johnson acknowledged the stores had made a big mistake. 2. He did not test ideas in advance: Johnson didnt ask the customers what they want. When Johnson floated plans for the chains radical makeover, he was asked about the possi bility of trying the new pricing strategies on a limited test basis. Johnson reportedly shot down the idea, responding, We didnt test at Apple. 3. He alienated core customers: As Johnson removed their beloved coupons and sales and increasingly focused on making JC Penney a hip destination shopping experience complete with boutique stores within the larger store, many of the chains oldest and most loyal customers understandably felt like they were no longer JC Penneys target market. The return of sales hasnt proved to bring about a return of these shoppers. 4. He totally misread the JC Penny brand: Johnson thought that people would show up in stores because they were fun places to hang out and that they would buy things listed at fullbut-fair price. But JC Penny was not the apple store. The idea that people would show up at JC Penny to hang out and to purchase items at full price was delusional.

POISON PILLS

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A DEFENSIVE STRATEGY AGAINST HOSTILE ACQUISITIONS

Acquisitions happen for a variety of reasons. A company may want to increase its market share, acquire IP to enter new markets and launch new products (diversify), take advantage of economies of scale, or simply with intent to kill competition. We can have, besides friendly and hostile acquisitions, reverse and back flip acquisitions also. Hostile acquisitions are that in which a company proceeds to acquire a target company, opposing the wishes of the latters management, or sometimes bidding for the shares of the company without taking consent of the board. Such a move would naturally be resisted by the target companys board, which may resort to various techniques to thwart it, out of which one is called poison pill strategy. It works by making the target firms stock uneconomical to buy and thus, make it difficult to acquire. Briefly put, there are 2 variants of this version: 1. Flip-in plan In this variant ,the company issues shares at a substantial discount to the market price to the existing shareholders (not to the potential acquirer) ,thus resulting in profits for the existing shareholders and diluting the stake held by the potential acquirer . In another version, the company repurchases the stock at a substantial premium to the market value, thus increasing the lower benchmark price that must be bid for a share. 2. Flip-over plan In this variant, the common stockholders receive a right to purchase the acquirers shares at a discount post a possible acquisition .The rights are usually one for each share held ,and have an expiration date ,but with no voting power .Again ,this threatens to dilute the acquirers stake post acquisition ,making the acquisition less viable. Poison pills although a potent defensive strategy, have seen a decline in the last 10 years. As far as India goes, the regulations are biased towards the acquirer .For example, there is a Takeover code issued by SEBI that does not allow a potential target company to issue new shares in an offer period (it can offer only unissued shares). It also cannot issue shares at an arbitrary discounted price the minimum issue price must be determined w.r.t. market price of the shares at the date of issue, and it has to be approved by the shareholders. However, it is a known fact that India has seen more of friendly acquisitions, rather than hostile ones. Suns acquisition of Ranbaxy being a case in point, India is yet to fully see an application of this obscure defensive strategy!

PROFITABILITY FRAMEWORK

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Many of the cases presented during the interview may deal with issues of declining profitability. This is a very helpful framework in laying out your thoughts in an organized fashion and systematically tackling such issues. The Profitability Framework starts off by stating that profit is simply a function of revenue and costs. When a company is facing declining profitability, either revenue has decreased, costs have increased, or both. The idea here is to understand which side of the equation is pulling profitability down and how to go about rectifying the problem. On the revenue side, a number of factors have been listed that can have an impact on revenue. This list can be three times as large, depending on the case. However, do not provide a laundry list of issues that you think might impact revenue. Whatever you write down must be of significance. Having said that, you should try to list a few more factors under revenue than you are willing to cover. The reason being that interviewers would like to see you acknowledge that although these factors can have an impact, you have the ability to prioritize as to what is most important!

On the cost side, you need to see if costs have increased, causing profitability to go down. It is always a good idea to understand what type of cost has increased. Your interviewer will expect you to provide specific ways on improving costs for the company. When you use the Profitability Framework, make sure that you walk through it first with your interviewer before you begin the analysis. Explain why you are using this framework and the structure of it. Provide the road map before you start driving.

THE SUN-RANBAXY DEAL

APRIL 2014 ISSUE 02

Sun Pharmaceutical Industries announced that it would acquire troubled rival Ranbaxy Laboratories in a $4-billion deal including transfer of Ranbaxys $800 million debt to Sun Write captions for the selected photos. Pharmas accounts. This merged entity will be the largest pharmaceutical firm in India, with combined revenue of about $4.2 billion and the fifth-largest specialty generics company in the world. As per the agreement, Ranbaxy shareholders will get 0.8 share of Sun Pharma for each WriteRanbaxy captions for the selected photos. share of Ranbaxy, representing an implied value of INR 457 for each share. Daiichi, who share would decrease to 9% after the merger would have the right to nominate one director to Sun Pharmas board post completion of merger. Under mergers and acquisitions rule, the companies have to seek approval from CCI and since both players have a significant presence in several relevant markets, the CCI would have its hands full in assessing the dominance of the combined entity in all those markets. With the baggage of regulatory issues, the biggest challenge for Sun Pharma will be to restore and regain trust and confidence of the regulators, especially in the US. Four of Ranbaxy s plants are banned by USFDA and is under an ongoing consent decree. The merger won't have too many cultural and integration issues since both companies are Indian. What we have to watch out for are other HR issues such as rationalisation of manpower. While the merger will pump up the on ground presence of Sun Pharma in India to an enviable extent - a combined strength of 9000 medical representatives - this will lead to the biggest operational challenge. The combined entity will have 47 manufacturing facilities across 5 continents. These diverse numbers of plants would mean increase oversight & could be a regulatory nightmare. Ranbaxy has got a lot of ANDA's (Abbreviated New Drug Application) approved for marketing in USA. Their problem is to find an API plant because main source of API was from Toansa. If Sun Pharma fills this gap, Ranbaxy can begin its export to the USA. So, Sun Pharma has got into this deal at the right time and the deal has an upside for all the shareholders. The only sad development is that brand Ranbaxy will see a sunset clause when the merger takes place. It was and still is considered to be India's flagship pharmaceuticals company. It is India's first blue-blooded MNC with global footprints.

The biggest challenge for Sun Pharma will be to restore and regain the trust and confidence of the regulators, especially in the US.