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Mergers and Acquisitions in India's Pharmaceutical Sector

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DOI: 10.1080/19186444.2014.11658383

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 Transnational Corporations Review Volume 6 Number 1 March 2014
www.tnc-online.net info@tnc-online.net                                                    86-100
 
 

Mergers and Acquisitions in India’s Pharmaceutical Sector

Shaista Sami

Abstract: A Merger and Acquisitions referred as an arrangement whereby the assets, liabilities and
business of two companies become vested in or under the control of one company. Mergers and
Acquisitions often referred to as M&A is a tool for expanding ones business or get around different laws
or regulations such as tax laws or monopoly regulations (Ross, Wester field and Jaffe (2002). This paper
aims to examine the impact of Mergers and Acquisitions on the financial performance of the companies
involved in Mergers and Acquisitions in pharmaceutical industry. For this purpose, a case study of
GlaxoSmithKline is chosen. The pre and post-merger performances in terms of variables like Sales, Net
Earnings, Debt Equity Ratio, and Return on Equity Ratio of the company are analyzed by applying
independent sample t test as a main statistical tool.

Keywords: M&A, pharmaceutical industry, Glaxo Smith Kline, horizontal/vertical merger

1. Introduction
Mergers and Acquisitions (M&A) have become tremendous source within the field of strategic change.
The numbers of M&A’s are growing in almost every business area in Europe, US and around the world
(Eisner, Haugland, Johansson, 1999). M&A have played an important role in the transformation of the
industrial sector of India since the Second World War Period. The economic and political conditions
during the Second World War and post-war periods (including several years after independence) gave rise
to a spate of M&As. The inflationary situation during the wartime enabled many Indian businessmen to
amass income by way of high profits and dividends and black money (Karand Soni, 2008). Mergers and
acquisitions (M&As) have been a very important market entry strategy as well as expansion strategy. This
present era is known as competition era. In this era companies, to avoid the competition, go for merger,
and enjoy sometimes monopoly. Corporate India is waking up to the new millennium imperative of
mergers and acquisitions in a desperate search for a panacea for facing the global competition (Ransariya,
2010). With the passing of time in order to achieve faster growth in a corporate business, the companies
started to explore and exploit various means of business activities, mergers and acquisitions were one of
such alternatives (Komal, 2011). Mergers and acquisitions often result in a number of social benefits.
Mergers can bring better management or technical skill to bear on underused assets. They also can
produce economies of scale and scope that reduce costs, improve quality, and increase output. Due to
above mentioned reasons Mergers and Acquisitions took place in various sectors like Steel industry,
Banking sector, Pharmaceutical sector etc.

Mergers and acquisition in pharmaceutical industry refers to the aspects of corporate strategy corporate
finance and management dealing with the buying, selling, dividing and combining of different companies

86 
 Shaista Sami

and similar entities that can help an enterprise grow rapidly in its sector or location of origin or a new field
or new location without creating a subsidiary other child entity or using a joint venture it offers
tremendous opportunities for drug manufacturers. Indian pharmaceutical industry (IPI) has carved out a
unique place on the global map, not only as a manufacturer of generic drugs but also of new formulations,
with growing emphasis on research and development and new drug discovery. The annual turnover of the
Indian pharmaceutical industry is over US $ 12.26 billion, globally it ranks 3rd in terms of volume with a
share of 10 percent in the world pharmaceutical market in 2010-2011. In terms of value, it ranks at the14th.
The Indian pharmaceutical market is expected to reach US$ 20 billion by 2015, growing at a compound
annual growth rate (CAGR) of 11.7 per cent during 2005– 2015 and establish its presence among the
world’s leading 10 markets. In this paper, the term IPI refers to firms of Indian origin (FIOs) in
Pharmaceutical industry, even if some of them are acquired or majority owned by shareholders abroad (e.g.
Ranbaxy) (Rani, N. et al 2011). The Indian pharmaceutical sector is highly fragmented with more than
20,000 registered units. It has expanded drastically in the last two decade.

The pharmaceutical and chemical industry in India is an extremely fragmented market with severe price
competition and government price control. The pharmaceuticals industry in India meets around 70%
international journals of pharmaceutical research and development. The first large M&A according to deal
value that took place in the pharmaceutical industry was the consolidation in July 1989 when
Philadelphia-based SmithKline Beckman was acquired by British Beecham Group to form SmithKline
Beecham. This was a merger with a total deal value of US$8.9 billion that set a trend for future massive
mergers in the industry. It was also a huge transatlantic merger which combined the two world-leading
pharmaceutical powers United States and Europe, to unite in the search for generic drugs that could help
us fight the diseases around the world (GSK, 2005).

1.1. Definitions and conceptual framework

A merger is a combination of two companies where one corporation is completely absorbed by another
corporation. The less important company losses its identity and becomes part of the more important
corporation, which retains its identity. A merger extinguishes the merged corporation and the surviving
corporation assumes all the right, privileges, and liabilities of the merged corporation (Ransariya, 2010).
According to P.S. Sudarsanam, opines acquisition resembles more of an arm’s length deal, with one firm
purchasing the assets of share of another and with the acquired firm’s shareholders ceasing to be the
owners of that firm.1According to the Oxford Dictionary ‘merger’ as a ‘combination’ carrying a sense of
coalescing or uniting two or more things together. In the corporate context it means uniting or combining
two undertakings together.2

A merger is just one type of acquisition. One company can acquire another in several other ways including
purchasing some or all of the company’s assets or buying up its outstanding share of stock. Mergers or
Acquisitions result in the combination of two or more companies into one where the merging entities lose
their identities. No fresh investment is made through this process. However an exchange of shares takes
place between the entities involved in such a process. Generally the company that survives is the buyer
which retains its identity and the seller company is extinguished (Komal, 2011).

                                                            
1
Sudarsanam,P.S.(1997).Essence ofMergers and Acquisitions.
2
Oxford Dictionary, 2003, Pg.564.

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 Mergers and Acquisitions in India’s Pharmaceutical Sector

1.2. Types of mergers

The Mergers have been broadly categorized into four types:

• Horizontal Mergers: “A horizontal merger takes place between companies involved in the
similar kind of business with about the same customers and suppliers, and is therefore a move
inside the similar economic surroundings. As such, it may not add considerably to the flexibility
and constancy of the firm. It has huge appeal because it happens in a business area that the
acquirer understands. Since they decrease the figure of rival firms in an industry and focus big
shares of the market in fewer hands, they are more likely to be subject to scrutiny by the
Monopolies Commission (Jones, 1982).”

• Vertical Mergers: “Vertical mergers concern two corporations operating at successive stages of
manufacture so that one supplies or is supplied by the other. It usually gives better continuity of
supply and may also get better the flow of making and reduce stockholding and handling stocks. If
a market has arrived at diffusion level, it may there the only avenue for expansion, short of
diversification (Jones, 1982).” This refers to the mergers and acquisition resulting in backward
integration or forward integration. The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished products, implements it
production plan as per objectives and economies on working capital investment.

• Conglomerate Merger: “Conglomerate Mergers involve the coming jointly of the firms in
dissimilar businesses. The firms are not likely to have any normal trading interests and the only tie
may be centralized provision of certain particular managerial services, finance and management
control (Jones. 1982)”.These mergers involve firms engaged in unrelated type of business
activities, i.e. the business of two companies are not related to each other horizontally, or
vertically. Conglomerate mergers are unification of different kinds of business under one flagship
company.

• Concentric Merger: “Diversification may not engage moving into totally diverse businesses, as
does the conglomerate merger. Instead, the firm may expand its activities at the same time as
keeping a measure of unity with existing activities. This may be done by acquiring different
technology which can be marketed to present customer types (concentric marketing) or by
acquiring new customers for the existing technology (concentric technology) (Jones, 1982)”.

1.3. Motives behind mergers and acquisitions

• Economies of scale: Arise when increase in the volume of production leads to a reduction in the
cost of production per unit. This is because, with merger, fixed costs are distributed over a large
volume of production causing the unit cost of production to decline. Economies of scale may also
arise from other indivisibilities such as production facilities, management functions and
management resources and systems.

• Diversification: Mergers and acquisitions are motivated with the objective to diversify the
activities so as to avoid putting all the eggs in one basket and obtain advantage of

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 Shaista Sami

joining the resources for enhanced debt financing and better serviceability to
shareholders. Such amalgamations result in creating conglomeratic undertakings.

• Synergy: Implies a situation where the combined firm is more valuable than the sum of the
individual combining firms. It refers to benefits other than those related to economies of scale.
Operating economies are one form of synergy benefits. But apart from operating economies,
synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D
and market coverage capacity due to the complementarily of resources and skills and a widened
horizon of opportunities.

• Financial tax benefits: The pharmaceutical companies as limited profit margins due to it
governing legal framework. Mergers and acquisitions may lead to financial efficiencies. Earning
diversification within firms may lessen the variation in their profitability, reducing the risk of
bankruptcy and its attendant costs. A lot of tax benefits are available and companies are taking the
advantage of that.

• Greater value generation: Companies go for Mergers and Acquisition from the idea that, the
joint company will be able to generate more value than the separate firms. When a company buys
out another, it expects that the newly generated share holder value will be higher than the value of
the sum of the shares of the two separate companies.

• Consolidate their market shares: The market share of a firm correspond to the proportion of
production volume or the turnover the firm possess in a given sector of a global market in relation
to the rest of companies concerned. If the company which is suffering from various problems in
the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a
company, which has a strong market presence, buys out the weak firm, then a more competitive
and cost efficient company can be generated.

• Resource transfer: Resource are unevenly distributed across firms and the interaction of target
and acquiring firm resources can create value through either overcoming information or
combining scarce resource.

A survey among Indian corporate managers in 2006 by Grant Thornton found that M&A’s are a
significant form of business strategy today for Indian corporate. The five main objectives behind any
M&A’s transaction, for corporate today were found to be:3

• 33% for improving revenues and profitability.

• 28% for faster growth in scale and quicker time to market.
• 22% for acquisitions of new technology or competence.
• 11% for eliminate competition and increase market share.
• 6% for tax shields and investment savings.

                                                            
3
Grant Thornton India, (2006)The M&A and private equity scenario.

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 Mergers and Acquisitions in India’s Pharmaceutical Sector

2. Review of literature

Bahl, S. (2012) dealt with the factors responsible for the failure of mergers and acquisitions in companies
and efforts have been made to highlight the competitive edge of Indian Industry in global scenario. In this
study both primary and secondary data has been used and analyzed by Garrett’s ranking technique.
Gautam, S. (2011) dealt with the concepts of mergers and acquisitions in pharmaceutical sector. In this
paper she studies the position of Indian pharmaceutical industries as well as international companies. She
also focuses on the mergers and acquisitions which took place in the past ten years and the motive behind
the M&A’s and reasons of failure of M & A’s in pharmaceutical sectors. Rani, N. et al (2011) in this paper
they examines the short-run abnormal returns to India based mergers and acquisitions focusing on the
pharmaceutical industry during 2001-2007. The mergers and acquisitions database for this study is
constructed from monthly review of mergers and acquisitions by CMIE and 76 samples selected. They
found that there were positive abnormal returns to shareholders of Indian Pharmaceutical companies on
their acquisitions of foreign targets.

Ransariya, S.N. (2010) investigated the financial performance of before and after the five years of merger.
The sample selected of 10 mergers and acquisitions that took place in Indian corporate sectors have
analyzed by using profitability ratios, liquidity ratios, and t-test applied for testing the hypothesis. The
result showed that overall effect of M&A’s on financial performance did not statistically significant, hence
the financial performance has not been improved in all selected companies after the merger. Sinha, N. et al
(2010) in this paper they examined the impact of M&A’s on the financial efficiency of the selected
institutions in India. They analyzed changes in the efficiency of the companies during pre and post-merger
periods by using wilcoxon signed rank test. The result of the study indicates that M&A’s cases in India
show a significant correlation between financial performance in the long run and the acquiring firms were
able to generate value.

Kar, R. N. and Soni, A. (2008) in this study they dealt only on acquiring firms and selected 15 listed
companies spreading a time period from 1991 to 2001.They used regression analysis to investigate the
trend of M&As and taken 84 data points for selected companies. They observed that Book value and
turnover of the companies increased after the merger but profit increased in starting years and after that it
declined. Mantravadi, P. and Reddy, A. V. (2008) analyzed the impact of mergers on operating
performance of acquiring corporate in different industries based on pre-merger and post-merger financial
ratios .The sample size undertaken is small to generalize the results. Also the study has ignored the impact
of differences in accounting methods of different firms.

Kawahara, R. and Takeda, F. (2007) examined how M&A affect corporate performance for three years
after their implementation. The corporate performance of 162 M &A’s that took place in Japan from 2001-
03 is analyzed by using Wilcoxon signed rank test. They find that overall effects of M&A on corporate
performance are statistically insignificant, compared to the corporate performance of other companies
within the same industry with similar pre-acquisition period.

Stalstedt, E. and Eriksson, J. (2006) examined the pharmaceutical industry and with some key
acquisitions. They dealt with the long term effect of share prices after the merger of the pharmaceutical
companies. They used the secondary data of 48 months before and after the merger. They follow the

90 
 Shaista Sami

quantitative research and data used from different data bases. In this thesis authors found that abnormal
returns were achieved in three out of six cases against indices. Beena, S. (2006) analyzed the nature,
structure and effectiveness of mergers and acquisitions in the case of pharmaceutical sector. She examined
the performance of merging and non-merging firms and used four measures of profitability such as:-Gross
profit margin, Net profit margin, Returns on capital employed and Returns on net worth. She found that
overall performance of the merging firms is far better during the post-merger period as compared to the
non-merging firms and their own pre-merger period performance.

Danzon, P. M. et al. (2004) in this study they dealt with the determinants of M&As activity in the
Pharmaceutical industry and the effects of mergers using propensity scores to control for merger end
oginity. They extracted 383 samples from different database and used various variables to measures firms
expected excess capacity such as Tobin’s Q, the lagged percentage change in sales and the percentage
change in operating expenses. They observed that mergers are not effective solution for large firms and
neither mergers nor propensity scores have any effect on subsequent growth of entire value. Pawaskar, V.
(2001) investigated the impact of mergers and acquisitions on corporate performance. The sample selected
of 36 cases of mergers that took place in between 1992 to 1995 and analyzed the pre and post-merger
operating performance by using regression analysis. Analysis of regression showed that there is no
increase in the post- merger profit. In this study he found that there is no significant difference in the
financial performance of the two firms involved in merger.

After reviewing the literature, it was found that different research studies have been done in the area of
Mergers and Acquisitions in various sectors. Several studies have been conducted in Pharmaceutical
sector covering aspects like marketing, accounting trends, policies and share prices of companies. The
overall performance of different companies has also been carried out and less work was done on human
and financial aspects in detail. Keeping in view the research gap, this study has been focused on financial
aspects before and after the merger. The present study is an in depth study to examine the Sales, Net
earnings, Debt Equity and Return on Equity ratios of Glaxo Smith Kline.

3. Research objectives and methodology

Objectives of the Study are to analyze whether the Mergers and Acquisitions led to a profitable situation;
calculate the effect of Mergers on Financial performance before and after the merger; analyze the sales
growth before and after the merger; examine the net earnings before and after the merger; find out the
impact of merger on company’s debt equity ratio, and analyze the effects of merger on equity
shareholder’s.

The study is designed for the purpose of analyzing the financial position of Glaxo Smith Kline before and
after the Merger. The research methodology used for the study is quantitative in nature. This methodology
is helpful in the analysis of financial statements of a company’s so that it comes to know that their M&A
is successful or not. The intention of use of quantitative method is that it is helpful in drawing the tables,
graphs, and figures upon which the performance of a company can be measured.
The present study is based on secondary data which includes published and unpublished sources like
articles, research papers, annual reports of concerned companies, thesis etc. Keeping in view the
objectives of the study following financial parameters namely Sales growth, Profitability, Debt equity

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 Mergers and Acquisitions in India’s Pharmaceutical Sector

ratio, Return on equity ratio have been compared. On the basis of above mentioned parameters Pre merger
(3 years before) and Post merger (after 3 years) financial position of GlaxoSmithKline has been compared.
For the study the year of merger (2000) is taken as 0 and it is not considered in evaluation. The statistical
technique used in this study is Independent t-test and data analysis was carried out with the help of SPSS.

Hypotheses Developed
• H01: There is no significant difference between the pre and post-merger Sales of
GlaxoSmithKline.
• H02: There is no significant difference between the pre and post-merger Net earnings of
GlaxoSmithKline.
• H03: There is no significant difference between the pre and post-merger Debt Equity Ratio of
GlaxoSmithKline.
• H04: There is no significant difference between the pre and post-merger Return on Equity Ratio
of GlaxoSmithKline.

4. Case study of Glaxo Smith Kline

Glaxo Wellcome (GW):

Glaxo originates in New Zealand, where it was founded in1873 by Joseph Nathan and starts off by
producing dried milk in New Zealand and exporting it to London, and later on starts up its business in
London. In the 60s, Glaxo discovers skin disease treatments and asthma medicines. Glaxo acquires Meyer
Laboratories Inc. and find a way into the American market. A few years later, Glaxo would develop and
launch one of the world’s top-selling medicines.

In 1995, Glaxo and Wellcome merged to form Glaxo Wellcome. The merger was considered the largest in
UK corporate history at that point of time. Wellcome owned 40% stake in brand of Glaxo like Zantac and
Zovirax for which Glaxo struggled to find a replacement due to patent expiry in US. Following the merger,
Glaxo Wellcome made acquisition of California based Affymax, a leader in the field of combinatorial
chemistry.4They are now able to improve research and widen their portfolio including several important
medicines that helps treating epilepsy, blood pressure and AIDS. Glaxo Wellcome is formed, and with a
big portfolio and leading research in respiratory treatment they become an increasingly important and
powerful corporation in the pharmaceutical industry. Following are the main products of Glaxo Wellcome:

• Sereventand Ventolin for the treatment of asthma.

• Imigran /Imitrex used for severe migraine cluster headache.
• Dermovate, Betnovate and Cutivate for the treatment of skin diseases.
• Combivir, Ziagen, Agenerase for the treatment of HIV.
• Zofran is used to prevent nausea and vomiting.
• Zinnat, Fortum and Zinacef used in hospital based inject able antibiotics markets.
• Zantac is used for the treatment of various gastric acid related disorders.

                                                            
4
http://www.gsk.com/about/history.htm

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 Shaista Sami

Smith Kline Beecham: (SKB)

Smith Kline’s history goes back a long time and is formed through several mergers during the years, and
especially through Beecham Group’s acquisition of SmithKline Beckman in 1989. Up until the merger
between the two big companies, Beecham had their research and top medicines in the allergy field.
Through the merger a portfolio containing allergy medicines, skin care treatments and different important
vaccines. After the merger in 1989 the research produced medicines that are still fundaments for today’s
research and was, through more minor acquisitions, in 1994 the third largest over-the-counter medicines
company in the world. SKB principally operates in two industry segments, pharmaceutical and consumer
health care products. The industry sectors are organized by products and services which include
pharmaceuticals (prescription medicine, vaccines, R&D and disease management programmes) also
consumer healthcare (oral care, OTC medicine and Nutritional healthcare).5Main products are as follows:

• Amoxil, Augmentin, Bactroban and Famvir are used for the treatment of infections.
• Avandia, for the treatment of diabetes and lung diseases.
• Vaccines –SKB is one of the world leaders in vaccines that work to protect people from many
diseases.
• Baycol, Dyazide and Coreg are used for heart diseases.
• Vitamins and Tonics –supplements to support a balance diet.
• Smoking Cessation –medicine to help people to quit smoking.

Glaxo Smith Kline: (GSK)

Glaxo Wellcome plc and SmithKline Beecham pie have merged under an arrangement, which became
effective on 27th December 2000 to form a new Company called GlaxoSmithKline plc. The new
Company is well placed to respond to the healthcare challenges of twenty-first century with market
leadership in major therapeutic categories. In India, the Company and Glaxo India Ltd. are now affiliates
of GlaxoSmithKline plc. In the1999 Annual reports of both companies, GW and SKB addressed to
shareholders with great hope and growth promises. According to the merger update of GW and SKB
published in annual report of 1999, the shareholder of both companies upon completion of merger will be
given the share capital of GSK according to following ratio,

• GW Shareholder will hold – 58.75%

• SKB Shareholder will hold - 41.25%

In case of shares held as American Depository shares (ADSs) evidence by American Depository Receipts
(ADRs), each GW ADS equals two ordinary shares of GW and each SKB ADS equals five ordinary
shares of SKB while; each GSK ADS represents two GSK ordinary shares.6 Accordingly, GW and SKB
ADRs holders will receive the GSK’s Ads by following ratio,

• 1 GW ADS = 1 GSK ADS

• 1 SKB ADS = 1.138 GSK ADS

                                                            
5
SKB Annual report 1999.
6
GSK Annual report 2000.

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 Mergers and Acquisitions in India’s Pharmaceutical Sector

GSK plc shares were traded on London stock Exchange and GSK ADSs commenced trading on the New
York Stock Exchange on 27 December 2000.GlaxoSmithKline is a UK based second largest
pharmaceutical and healthcare company in the world Headquartered in the UK and having listing on both
New York stock exchange and London stock exchange. GSK is one of the industry leaders, with an
estimated seven per cent of the world's pharmaceutical market; GSK is the only pharmaceutical company
researching both medicines and vaccines for the World Health Organization’s three priority diseases
HIV/AIDS, tuberculosis and malaria. New products of GlaxoSmithKline:7

• Altargo – it is used to treat bacterial infections affecting small areas of skin.

• Volibris (Ambrisentan tablets) is indicated for the treatment of pulmonary arterial hypertension.
• Seretide Evohaler – it is used for the treatment of asthma and Chronic Obstructive Pulmonary
Disease (COPD).
• Hycamtin - is indicated for the treatment of relapsed small cell lung cancer (SCLC).
• Lamictal -is an antiepileptic drug indicated for the treatment of partial and generalized tonic-
clonic seizures in children (more than 2 years of age) and adults. It is also used in bipolar disorder
for preventing mood episodes like depression and mania.

Besides, branded generics that were launched include Ictacetam (Levetiracetam) for epilepsy, Zimivir for
herpes, Uricostat (Febuxostat) for gout, IV-Fer (Iron Sucrose Injection) for iron deficiency and fixed-dose
combination of Metformin sustained release and Glimepiride for type 2 diabetes mellitus.

Factors behind the Success of GSK Merger

• Strategic Plan: The deal must be designed around strategic objectives so that search criteria for
the ideal merger target can be defined. GSK adopted the strategic planning before going for
merger, after considering the company’s underlying business objectives and the interests of the
shareholders. For achieving that the company laid down clear business strategies and key criteria
for the selection of the targets.

• Due diligence: After identifying the target, GSK conducted a thorough due diligence exercise of
the target covering its financial statements, strategies, business plans, resources and operations of
the entity to ensure the compatibility of the target company. In traditional focus due diligence was
given on financial dimensions of the merger but the human capital should not be neglected. In
GSK it is important that the due diligence exercise also cover target company culture, leadership,
organization structure, compensation plans, and career development approaches of the employees.

• Integration team: It is critical to have a dedicated integration team to lead the two organizations
through the merger while rest of the management team can focus on business as usual. The
integration team should be multi-functional and should be rapidly formed once the company has
publicly announced the merger. GSK has an integration team to coordinate the multifaceted
activities towards the achievement of goals.

                                                            
7
GSK Annual report 2012.

94 
 Shaista Sami

• Integration planning: Having done the deal the integration process needs to run smoothly for the
merger to take place and to reap the benefits from the synergy. Thus prior planning should be
made even before the completion of the merger with clear timelines and milestones to ensure the
successful implementation of the deal. In case of GlaxoSmithKline the representatives from both
entities assemble together to thrash out the strategic issues which include finalizing a common
strategy for the new organization, consolidating compensation plans, corporate policies, retention
of customers, adopting the best practices from the merged entities and developing a common work
culture for the resultant entity.

• Evaluation of the Merger: The final phase requires reviewing the performance of the new entity
to ensure that the objectives of the merger have been achieved or not. The performance of the
GSK is assessed against the original objectives determined in planning stage. Thus the success of
the merger is assessed in terms of growth in market share, enhanced brand strength, product
expansion, gain in market share and access to new technologies.

Data analysis
Table 1. Pre and post merger sales (Amount in £ million)
Year Glaxo Wellcome SmithKline Beecham Glaxo Smithkline

1997 7,980 7,795 15,775

1998 7,983 8,082 16,065
1999 8,490 8,381 16,871
2001 20,489
2002 21,212
2003 21,441

Source: Compiled and Calculated from Annual financial Reports of Glaxo Wellcome, Smith Kline Beecham and
Glaxo Smith Kline

Figure 1. Comparison of sales – Pre and post merger

25,000

20,000

15,000 GlaxoWellcome
10,000 SmithKline Beecham
5,000 GlaxoSmithkline

0
1997 1998 1999 2001 2002 2003
.
Source: Self compilation on the bases of table 1.

Table 1 shows the Sales of Glaxo Wellcome (GW), Smith Kline Beecham (SKB) and combined sales of
both companies from year 1997 to 1999. It also shows GlaxoSmithKline (GSK) sales before and after the

95
 Mergers and Acquisitions in India’s Pharmaceutical Sector

merger. In the Figure 1 GW sales shows an increase of growth 6.40% from year 1997 to 1999. The SKB
sales represent an increase of 7.52% in pre-merger years. After merger the GSK performance of three
years (2001 to 2003) has been compared with the combined performance of both companies from year
1997 to 1999. In post-merger years the graph shows an increasing trend in the sales of GSK.

Table 2. Preand post merger net earnings (Amount in £ million)

Year Glaxo Wellcome SmithKline Beecham Glaxo Smithkline

1997 1,850 1,079 2,929

1998 1,836 606 2,442
1999 1,811 1,053 2,864
2001 3,059
2002 3,915
2003 4,484

Source: Same as table 1.

Table 2 shows the Net earnings of Glaxo Wellcome (GW), Smith Kline Beecham (SKB) and combined
Net earnings of both companies from year 1997 to 1999. It also shows GlaxoSmithKline (GSK) Net
earnings before and after the merger. Figure 2 shows the pre and post-merger comparison of Net earnings.
The growth rate of Net earnings was not sufficient in case of GW and it declined in 1998 and 1999. There
was a huge decline in the earnings of SKB in 1998 but it increased in 1999. Hence there was a lack of
stability in the earnings of both companies in pre-merger years. After merger GSK growth trend shows
constant stability in the Net earnings which indicates better growth of the company.

Figure 2. Comparison of net earnings – Pre and post merger

5,000
4,000
3,000 GlaxoWellcome
2,000 SmithKline Beecham
1,000 GlaxoSmithkline
0
1997 1998 1999 2001 2002 2003
.
Source: Self Compilation on the basis of table 2.

Table 3. Pre and post merger debt equity ratio (Amount in £ million)
Smith Kline Beecham
GlaxoWellcome GlaxoSmithKline
Year
Share Share Total Share Ratio
Total Total
holder’s Ratio holder’s Ratio Debt holder’s
Debt Debt Equity
Equity Equity
1997 6547 1843 3.55 5636 1791 3.14 12183 3634 3.35
1998 6578 2702 2.43 6222 1747 3.56 12800 4449 2.87
1999 7234 3142 2.30 5176 2327 2.22 12410 5469 2.27

96 
 Sh
haista Sami

2001 13538 77517 1.800

2002 14939 6
6581 2.277
2003 15510 7
7720 2.000

Source: Saame as table 1

Figure 3. Debt equitty ratio – Pre and

a post mergger

4
3.5
3
2.5
GlaxoW
Wellcome Ratio
2
SmithKlineBeecham Ratio
1.5
GlaxoSm
mithKline Ratio
o
1
0.5
0
1997
1 1998 1999
1 2001 2002
2 2003

Source: Seelf compilation

n on the basis of
o table 3.

Table 3 represents
r Deebt Equity ratio of Glaxxo Wellcome (GW), Smith Kline Beeecham (SKB B) and
combined Debt Equity y ratio of bothh companies from year 19997 to 1999. It also showss GlaxoSmithhKline
(GSK) Deebt Equity ratio before andd after the merrger. Figure3 shows GW during
d the yeaar 1997 has highest
h
debt equitty ratio in com
mparison of other
o years. Inn case of SKB
B in year 1998 has highestt Debt Equityy ratio.
As compaare the pre an nd post-mergeer ratios we can
c see that GSK
G has more volatile Debt Equity raatio. It
ranges froom 1.80 to 2.00.
2 It has seen
s from 20001 to 2003, GSK has staable Debt eqquity ratio whhile it
decrease in 2003.

Table 4．Pre and post-merger

p reeturn on equitty ratio (Amou
unt in £ million)

Glaxo Wellcome
W Smith Kline
S Glaxo Smith Kline
K
Beecham
Year R
Ratio Ratio Ratiio
Share Sharee Sh
hare
Net Nett Net
holder’s holder’s hollder’s
Income Incom
me In
ncome
Equity Equityy Eq
quity

1997 1850 1843 1.00 10779 1791 0.60 2929 36634 0.811

1998 1836 2702 0.68 6066 1747 0.35 2442 44449 0.555

1999 1811 3142 0.58 10553 2327 0.45 2864 54469 0.522

2001 3059 75517 0.411

2002 3915 65581 0.599
2003 4484 77720 0.588
Source: Saame as table 1.

97
 Mergers and
d Acquisitionss in India’s Ph
harmaceutica
al Sector

Figure 4. Return on equity ratio – prre and post-merger

0.8
GlaxoW
Wellcome Ratioo
0.6
SmithK
KlineBeecham Ratio
R
0.4
GlaxoSm
mithKline Ratiio
0.2

0
1997 1998 1999 2001 2002 2003

Source: Seelf Compilation

n on the basis of
o table 4.

Table 4 shows
s Return
n on Equity ratio of Glaxxo Wellcomee (GW), Smiith Kline Beecham (SKB B) and
combined Return on Equity ratiio of both companies from f year 1997
1 to 19999. It also showss
GlaxoSmiithKline (GSK) Return on o Equity raatio before annd after the merger. Figgure 4 depictts the
comparisoon of pre an nd post- mergger in terms of Return on o Equity rattio and in 19997 GW hass ratio
percentagee of 1 which is declined inn the followinng years wherreas SKB hass unstable ratiio. In the folloowing
chart after merger GS SK shows a balanced
b m .54 to .58 which indicates a
trennd and ratioss ranges from
positive siign for investors.

Testing of
o hypothesees:
Table 5. Test of signifiicant differencce in the mean
n scores of pree and post-meerger
Mean Std. Deviaation t
t-value S
Sig.

Sales P
Pre 1
16237.00 567.888379 -
-11.041 .000
P
Post 2
21047.33 496.990274
Net Earnings P
Pre 2745.00 264.441067 -6.404 .003
P
Post 4184.33 285.771023
Debt Equiity ratio P
Pre 2.8300 .554111 2.367 .077
P
Post 2.0233 .223587
Return on
n Equity Ratio
o P
Pre .6233 .115373 .910 .414
P
Post .5267 .110116

Source: Seelf compilation

n on the basis of
o table 1, 2, 3 and
a 4.

5. Conccluding rem
marks
In order too determine the
t significannce differencee in the Sales,, Net earninggs, Debt Equitty ratio and Return
R
on Equityy ratio of Glax
xo Smith Klinne before andd after the meerger indepenndent sample t test has been run.

98 
 Shaista Sami

In terms of Sales this has been found from the results of t-test t= -11.041 and significance .000, which
leads to the conclusion that the difference is statistically significant therefore, H01 (Null hypothesis) is
rejected. The result shows improvement in sales after merger. The company performance in terms of Net
Earnings has been improved after the merger with t-value -6.404 and significance .003 hence significance
difference has been observed. Therefore H02 (Null hypothesis) is rejected. The company performance in
relation to Debt Equity ratio has not been improved after the merger with t-value 2.367 and
significance .077 which leads to the conclusion that there is no significant difference between pre and
post-merger Debt Equity ratio. Hence H03 (Null hypothesis) is accepted. Return on Equity ratio of
company has not been improved after the merger with t- value .910 and significance .414 which leads to
the conclusion that there is no significant difference between pre and post-merger Return on Equity ratio,
Hence no significant difference has been observed. Therefore H04 (Null hypothesis) is accepted.

M&A’s have become an important medium to expand business and compete on global scale. It is also
important in building the company profile and prestige. The study examined that mergers and acquisitions
led to a profitable situation or not. Keeping in view the objectives of the study a comparison between pre
and post-merger performance in terms of Sales, Net earnings, Debt equity ratio and Return on Equity ratio
has been done. Researcher applies independent t-test for analyzing pre and post-merger performance of
GlaxoSmithKline. The result shows that company performance improved in terms of Sales and Net
earnings but there was no change in Debt Equity and Return on Equity ratio. Improvement in ratios has
not been found because of early years of mergers it may be expected that improvement will be seen in
further years.

References

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Economics and Management, 1(7), October 2012.
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Performance, working paper no.8144. Available at: http://mpra.ub.uni-muenchen.de/8144.
Danzon, P. M., A. Epstein and S. Nicholson (2004). Mergers and Acquisitions in the Pharmaceutical and Biotech
Industries, NBER Working Paper No. 10536.
Eisner, S., D. Haglund and S. Johansson (1999). Attitudes in Mergers: A Study about Attitudes Influencing the
Integration Process in a Merger, Master Thesis, Gothenburg University.
Gautam, S. (2011). Merger and Acquisition Scenario in Pharmaceutical Industry. Retrieved
fromhttp://research.ijcaonline.org/iccia/number4/iccia1026.pdf
Kar, R. N. and Soni, (2008). A Mergers And Acquisitions In India: A Strategic Impact Analysis For The Corporate
Enterprises In The Post Liberalisation Period.
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University. Retrieved from: http://shodhganga.inflibnet.ac.in/handle/10603/7210
Mantravedi P. and A. V. Reddy (2008). Post-Merger Performance of Acquiring Firms from Different Industries in
India, International Research Journal of Finance and Economics, 22, 192-204.
Mariyam, M. (2010). A study of mergers and acquisitions of Indian Steel Industry since liberalization, Ph.D. Thesis
submitted, Aligarh Muslim University.

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 Mergers and
d Acquisitionss in India’s Ph
harmaceutica
al Sector

Mehmood, F. (2012). Gro owth by Mergeer-A long-term

m analysis of Gllaxo Smith Kliine. Retrieved from
f
https://ggupea.ub.gu.see/handle/2077/228309
Pawaskar, V. (2001). Effe
fect of Mergerss on Corporate Performance inn India, Vikalppa, 26(1):19-322, January – March.
M
Rani, N., S.
S S. Yadav and o Mergers andd Acquisitions on Shareholdeer’s Wealth in Short-
d P. K. Jain (22011). Impact of
Run: AnA Empirical Study
S of Indiaan Pharmaceutical Industry,, Internationall Journal of Global
G Businesss and
Compettitiveness, 6(1)):40-52.
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Thesis submitted, Sau
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www.abebooks.com/Corporatte-Finance-6th--Ross-Westerfi
field-Jaffe/14188141708/bd
Ryo K. andd T. Fumiko (22007). Mergers and Acquisittions and Corpporate Performaance in Japan, The Icfai Jourrnal of
Mergerrs and Acquisittions, 4(3), 36-445.
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Investiggation of Selecct Financial Secctor Organizattions in India, International
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Stalstedt, S. M and Accquisitions – Abnormal
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Selected web pages

www.moneeycontrol.com//annualreport/ssmithklinebeecchampharmaceuuticals(india)/ddirectors-reporrt/SBP
www.gskinndia.com/docs//annualReportss/AnnualReporrtfortheyearendded31stDec20003.pdf
www.gsk-iindia.com/docss/annualreportss/Financial%200Results%2020002.pdf
www.gsk-iindia.com/docss/annualreportss/Financial%200Results%2020001.pdf
www.gsk-iindia.com/docss/annualreportss/Financial%200Results%2020000.pdf
www.gsk-iindia.com/docss/annualreportss/Financial%200Results%2019999.pdf
www.gsk-iindia.com/docss/annualreportss/Financial%200Results%2019998.pdf

About the
e Author
Shaaista Sami is pursuing ressearch on the e topic “Merggers and Acq quisitions in Indian
Phaarmaceutical Sector
S – A ca
ase of Glaxo anda Smithklin ne” in Departmment of Comm merce,
Alig
garh Muslim University,
U Inddia. She has qualified Na ational Eligibility Test cond
ducted
by University
U Grrant Commisssion in June 2013, Decem mber and June 2012. She has
commpleted her Masters
M and Bachelors
B in Commerce
C and also Bach helors in Education
from
m Dr. Bhimra ao Ambedka ar University,, Agra. She attended va arious worksshops,
semminars, nation
nal and international conferences. Along g with that, she
s also acts as an
Invig
gilator severa
al times in varrious Nationaal Level Entrance Tests conducted by Aligarh
A
Muslim Un
niversity.

Contact Information

Shaista Sa
ami, Researc
ch Scholar, De
epartment of Commerce, AMU,
A Aligarh, India.
Email:sam
mi.shaista437@gmail.com.

100 

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