Value creation and daiichi sankyos indian acquisition

case study

Module A - Team 5
Mahda Sumayyah
Jeongsang Yu
Mahesh Kulkarni
Joyce Ogunlade
Rafael Carceller Zazo

Cultural Challenges of Integration:

Value Creation And Daiichi Sankyos Indian Acquisition

Mod A Team 5

Cultural Challenges of Integration: Value Creation and Daiichi Sankyos Indian

Acquisition
Historically, about 75% of international mergers fail (Strategic Direction.2006, p.25-28).
International mergers struggle to succeed not because of the business itself but because of a
failure to synergize geographical, structural, and cultural differences. Below is a critical analysis
of how the above factors as well as other issues played a role in Daiichi Sankyos acquisition of
the Indian generic pharmaceutical company, Ranbaxy.
First, it is important to execute a SWOT ANALYSIS to evaluate the strengths, weaknesses,
opportunities and threats of the acquisition. Then we will be able to identify and analyze the
internal(S&W) and external (O&T) factors that can have an impact on the viability of the
acquisition and provide an outline for the strategic decision-making. In the SWOT analysis is
included potential events during the pre-acquisition and post-acquisition.
The biggest strengths from Ranbaxy are strong market in generics, big scale production,
alliances with important Pharmaceutical companies, marketing and business developing in big
markets (USA, Europe, Brazil, Japan, etc.), low cost manpower, and strong experience to get
permission for distribution drugs in potential countries. For Daiichi Sankyo, the strengths before
merge are high R&D potential, 3rd largest company in the Pharmaceutical sector in Japan, top 20
world sales and big potential in the creation of blockbuster drugs. After the acquisition, the is the
possibility of creation of hybrid model, diversification of the assets of the companies, synergies
in generics and innovator drugs, optimizing resources, synergies in Know-How of the companies
and potential increase of exportations.
The weaknesses of the acquisition were poor strategic planning, products duplication,
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loss of the main directors from Ranbaxy, low credibility, legalization problems from Ranbaxy in
major markets, financial problems for Daiichi Sankyo, the fact that 40% of the patents Daiichi
Sankyo would expire in 2012, and difficulties in cultural integration.
The opportunities that would the acquisition provided were the production of new generic
drugs in big scale, introducing in new potential markets (globalization), reduction requirements
for approval generic drugs by the governments and possibility to increase sales in emerging
countries with the hybrid model. Lastly, the threats arose where competitors started to have the
same model (generics+innovators drugs), the expiration and reduction of drugs patents terms,
reduction of expenses in drugs by countries and difficulties for approval for the drug
commercialization by the different Sanitary Agencies (Appendix 1). In addition to a SWOT
analysis, a critical look into the histories of the two organizations will also provide insight into
what may have caused disparity between the two organizations.
Daiichi Sankyo was formed by a merger in 2005 between Daiichi Pharmaceuticals and
Sankyo Co Ltd, both established Japanese firms, each with more than 100 years history. Because
each company has their own history of more than 100 years respectively, they must have
established different cultures from each other in many ways. Ranbaxy was set up in 1961 as an
India-based distributer of vitamins and anti-tuberculosis drugs for a Japanese drug manufacture.
Bhai Mohan Singh took over Ranbaxy in 1996 and his son Parvinder Singh joined him in the late
1960s. By early 1990s, Ranbaxy was Indias largest generic medicine company with annual sales
of about US$200 million and distribution network spanning more than 50 countries. Exports
contributed 40 percent of its total annual sales. Ranbaxy was ranked among the Top 10 generic
companies in the world and was the only Indian company in the Top 100 Pharmaceutical
companies across the globe (Www.asiacase.com, p.3). As mentioned above, Daiichi Sankyo was
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a merged company with two different company cultures and values, and this merged company
merged with another different firm that was even in a different field. Therefore, there must have
been confusion after a merge.
Also, at Ranbaxy, the acquisition was followed quickly by several leadership changes.
Chairman/CEO Malvinder Singh, the grandson of Ranbaxys founder, resigned in May 2009;
Atul Sobti who took over as CEO, resigned the following year citing differences with the
Japanese company on the running of Ranbaxy. Then in early 2011, Ranbaxys President and
Chief Financial Officer, Omesh Sethi also left the company (Www.asiacase.com, p.3). With the
fact that many changes of leadership occurred after the merge, we can speculate that there was
the cross-cultural challenges of integrating the two businesses.
It was stated by Atul Sobti that the reason for his leaving was due to the difference of
company future course with Daiichi Sankyo. Daiichi Sankyos primary focus was to enter the
global generic drug market while at the same time introduce innovative drugs to Indian market.
Ranbaxy, on the other hand, had immediate priority to resolve the issue that were surrounding
their drug ban by United States Food and Drug Administration and AIP issue. Ranbaxy and
Daiichi Sankyo were facing different company orientations at the early stages of their
acquisition. It seemed that both Daiichi Sankyo and Ranbaxy did not bring the issue of their
company orientation to the table when they first merged. Hofstede demonstrated that there are
different cultural dimensions that impact the organizational behavior of the company (Hofstede,
Geert, 2001). One of the cultural dimensions that best explains the above situation is Long-term
versus Short-term Orientation (Dean B., McFarlin & Paul D., Sweeney, 2013, p.47).
Also, Hofstede spoke about uncertainty avoidance as a cultural dimension that affects the
ways organizations behave (Hopkins, Bryan, 2009, p. 40). The turnover in Ranbaxy C-level may
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possibly be explained by uncertainty avoidance. Both cultures, Japanese and Indian, have
differing levels of how they deal with future uncertainty. According to research, Indians
generally have a very low rating in uncertainty avoidance. Japanese, on the other hand, show the
highest level of uncertainty avoidance. India post the lowest rating in uncertainty avoidance. On
the other hand, Japan is the highest in this rating. In addition to the cultural and ethical
implications, it is important to review the efforts each company made to structurally during the
acquisition.
Daiichi Sankyo was the third largest Innovator pharmaceutical (Www.asiacase.com, p.3)
company in Japan and Ranbaxy emerged as Indias largest generic drug manufacturing company
by 1990, which was due to the vision of CEO, Parvinder Singh, who took advantage of India
Patent Act of 1970 that ended the product patent protection in the country. Ranbaxy also had the
advantage of being a low cost manufacturer and due to which it spread the distribution network
among emerging markets in 50 countries with annual sales mounting to US$200 in 1990s.
I On the other hand, in Japan, during the year 2000 the government regulated the guidelines on
drug reimbursements to control the health costs due to which the profits of innovator drug
companies soar. Also, the government set a target of increasing market share of generic drug use
to 30% by 2012, which is an increase of around 18% of the earlier target of 2007.Hence to
maintain profits and future growth, Daiichi Sankyo was looking for the acquisition of generic
drug manufacturer to enter into emerging markets. Ranbaxy was the best choice for acquisition
for following reasons: Largest generic drug manufacturer in India operating on low cost basis;
Established export network in US and European markets like Irelands, France and Spain; Daiichi
Sankyo entered into this acquisition with the vision to become a Global Pharma Innovator by
2015. For Ranbaxy it was the advantage to utilize the innovation of Daiichi Sankyo, free itself
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from debt, and entry into Japanese market. The deal made both the companies 15th largest
Pharma Company in the world (Www.asiacase.com, p.3).
I As a result of the acquisition, the EPS for Daiichi Sankyo was doubled, however, without
increase in gross profit. Also current liabilities were increased to 161% compared to Current
Assets that was increased by 15.8% (www.slideshare.net, slide 24). In Sep 2008, US FDA
implemented a ban on drugs manufactured by two of Ranbaxys plants and also in Feb 2009
invoked AIP against Ranbaxys Paonta Sahib Facility in India. This made Ranbaxys share price
plummet to 1/5th in Mar 2009. Daiichi Sankyo still went ahead with the acquisition in Nov 2008
considering the ban by US FDA as a risk factor that can be resolved. However Daiichi also
booked a valuation loss of US$3.9 billion in Dec 2009 (www.www.asiacase.com, p.12). The
other causes were not receiving the approval from SEBI to waive of +1% ceiling for this block
deal (www.slideshare.net, slide 29).
Up until its acquisition of controlling shares in Ranbaxy, Daiichi Sankyo focused solely on
operating as a Japanese company. The company did not effectively prepare to integrate the two
geographic cultures and therefore, its efforts to manage cultural diversity between the two
companies was minimal. Daiichi Sankyo set up a team to spearhead its integration efforts,
however, the team was comprised of two Japanese members and one Indian member. Secondly,
the person selected as Director of Quality Control was also a former member of Daiichi Sankyo
(Www.www.asiacase.com, p.6). Because the countries operated under two very different
geographical cultures and constraints, in order for the integration to be successful, Daiichi
Sankyo needed to make more significant effort to unite the two cultures together.
An alternative approach for Daiichi Sankyo could be to ensure the team created to head the
integration efforts consists of two Japanese and two Indians. By comprising the team of an even
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number of Japanese and an even number of Indians, it would eliminate the dominance of
Japanese officials and provide an avenue for both cultures to equally participate. Additionally,
because of what Daiichi Sankyo wants to accomplish in the Indian market, it has to understand
business from the perspective of Ranbaxy personnel, people who have hands on experience
working in India and under the regulatory constraints it regularly endures.
Daiichi Sankyos goal must also be to understand the work customs of Ranbaxy. Because of
the geographical advantages of patent protection and financial capability, Japanese workers were
able to innovate while Indians workers were trained to emulate. To manage the diverse cultures,
Daiichi Sankyo must continue to allow Ranbaxy personnel to operate the way they had
traditionally operated in India.
Considering the aforementioned analysis, there are a number of structural, cultural, and ethnic
implications of bringing Daiichi Sankyo and Ranbaxy together. A more successful Hybrid model
would aim, not at bringing both companies under one umbrella, but to allow both companies
more liberty to continue most of its operations separately. Some of the changes of to the Hybrid
model that would provide a more successful integration are:
In terms of Specialization, they need to have VP and CFO respectively for each business
to avoid confusion from a merge and keep their own traditional trait.
In terms of Centralization, quality and Safety Management Supply Chain Management
are operated as hybrid model as they can reduce logistics cost with this system and both
need to follow FDA.
(See Appendix 2)
In conclusion, Daiichi Sankyo should have applied proper due diligence prior to their
acquisition of Ranbaxy. Daiichi Sankyo and Ranbaxy has wide cultural difference that impacted
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the overall success of the merger. In terms of organization structure, the acquired company has to
create a new Hybrid Business Model.

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References
Geok, Wee Beng, Chua, Wilfred (2012), Cultural Challenges of Integration: Value Creation and
Daiichi Sankyos Indian Acquisition, Www.asiacase.com
Routray, Nihar (2012), Acquisition of Ranbaxy by Daiichi, Www.slideshare.net
Strategic Direction (Vol. 22 Issue 1) (2006), p. 25-28
Hofstede, Geert (2nd Eds.) (2008), Cultures Consequences: Comparing Values, Behavior,
Institutions and Organizations across Nations, p. 83
Hopkins, Bryan (2009), Cultural Differences & Improving Performance: How Values & Beliefs
Influence Organizational Performance, p. 40
McFarlin, Dean B., Sweeney, Paul D. (2013), International Organizational Behavior:
Transcending Borders & Cultures, p. 47

Appendix 1
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INTERNAL
EXTERNAL
ANALYSISANALYSIS

WEAKNESS
-R directives left company reducing information and synergies
-Lack of planning in the hybrid business model
- D&S difficult financial situation after the acquisition
-D&S 40% patents expire 2012
-Difficulties in the cultural issues of integration
-Decrease of the rate of discovery new profits moleculars

NEGATIVES

-R
sa
US
-Ex
-R
-Re
-In
ma
-A
co
-U
his
-D
(e.
-Re
sa

SWO

STRENGTH

-R Largest Indian generic drug company

-R strong market in generics
-R Big experience in scale production
-R effective technology in reverse engineering for generics
-R Alliances with Top Pharma companies, strong world market
- R Low cost manpower
-R Strong experience legalization drugs distribution in other countries. High
rating to get the approval 457/526
-R Marketing and business developing in big markets ( USA, Europe, Brazil,
Japan, etc.)
-R Pre-Knowledge of Japanese market
-D&S 3rd largest innovator drug Co. in Japan and presence in 21 countries.
Top20 world sales
-D&S experience in merger progress(but same country)
-D&S Large potential in creation of blockbuster drugs
-D&S Research collaboration with important laboratories
-Synergies companies business generic+innovator drug market
-Merger result covered 4 markets new prescriptions drugs, generics, OTC
drugs and vaccines
-Creation in 2009 a Synergy Office for integration of the companies
- Diversification of the assets of the companies in different countries

POSITIVES

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Appendix 2

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