Any Indian investment banker worth his salt will tell you hostile takeovers never happen in the country. And yet, the financial crisis three years ago germinated the seeds for quite a few such takeover targets. On hindsight, none of them materialised, but generated some interesting case studies.
If the Chennai-based pharma company Orchid Chemicals & Pharmaceuticals is put under the scanner, it appears like a fascinating story of a seemingly failed hostile takeover bid by a company whose promoters sold out their business weeks after an aggressive posturing towards other smaller firms. Even more quirky end result was that the potential acquirer barely managed to take out the money invested after two years while a ‘white knight’ is slowly part exiting with gains.
Let us rewind to early 2008 when markets were clearly going downhill and Orchid’s shares were drummed down like many other firms due to margin calls. Ranbaxy had triggered street expectations of a hostile takeover of Orchid when it slowly hiked its stake in the company through a subsidiary to a little less than 15 per cent – the trigger point for making an open offer for a listed firm. This was soon after Orchid promoters’ holding got diluted due to margin calls to less than 16 per cent as of March, 2008.
Privately held vaccine-maker Serum Institute of the Poonawalla Group also entered the fray which, some considered, a rescue plan to avoid management takeover by Ranbaxy.
Thereafter, Ranbaxy and Orchid had jointly announced that the two intend to co-operate through a business alliance involving multiple geographies and therapies for both finished dosage formulations and active pharmaceutical ingredients. Ranbaxy had stated that it did not plan to take over the management of Orchid and had been holding on to its stake all through this time.
Post-takeover of Ranbaxy by Daiichi Sankyo, no fresh moves were made to acquire more shares of Orchid. Ranbaxy sold some 5 lakh shares of Orchid at a price of Rs 222 per share in December, 2009, with estimated returns of 15-16 per cent in the partial stake sale in its one-and-a-half-year-old investments.
Ranbaxy exited Orchid completely during August-September last year. According to estimates, Ranbaxy just about managed to take out its initial investment of around Rs 190 crore or around $44 million, as much of the shares were acquired when the street already had got a sniff of a potential takeover in 2008 and prices had climbed up. Its average cost of purchase of shares was just around the same as the price at which it exited last year.
In the meantime, K Raghavendra Rao, the IIM-A passout promoter of Orchid Chemicals, also raised his holdings in the company to around 30 per cent (as of March 31, 2011), even as a large part of this remains pledged with financial institutions.
Serum Institute and other firms of the Poonawalla Group held on to their holding and race-horse enthusiast Cyrus Poonawalla actually bought more shares in Orchid Chemicals in September, 2009. The group held around 9 per cent stake till the end of 2010, but has started selling parts of it.
In the last quarter, flagship firm Serum Institute sold over half of its holding even as other group firms maintained their holding. Serum sold shares around 0.7 per cent on Wednesday, again indicating that the group is slowly pulling out of Orchid. Given the price at which shares were sold and the estimated price at which they were acquired, the Poonawalla Group has apparently made part exit with around 20-30 per cent returns on its three-year-old investment.
Valued Investors On Board
The company attracted veteran value investor and academic Mankekars to pick around 2.4 per cent in the firm a few months ago while ace Dalal Street investor Rakesh Jhunjhunwala, along with his wife, had picked over 3.5 per cent in Orchid. This ensures a new level of investor confidence in the management that has almost lost control of the company only three years ago.