Withdrawal symptoms

Ranbaxy sale shows risk in Japanese M&A adventures

Daiichi Sankyo has just reminded corporate Japan of the dangers of overseas adventures. The drugmaker is handing control of its ailing Indian affiliate Ranbaxy to local rival Sun Pharmaceutical in a $3.2-billion deal. The investment has lost almost 40 per cent of its value in six years.

It's a timely reality check. When Daiichi bought 64 percent of Ranbaxy in 2008, it was in the vanguard of Japanese corporations expanding abroad, especially in emerging markets. Since then the Indian drugmaker has suffered one setback after another. US regulators have banned products from four of its Indian plants, while the company admitted to lying about safety standards and paid a $500 million fine. The problems are still mounting: on Monday, Ranbaxy said it had received a subpoena from authorities in the US state of New Jersey.

Ceding control to India's Sun Pharma is probably the best option in the circumstances. Nevertheless, it's a painful financial blow. The all-share deal values Daiichi's stake at around Rs 12,300 crore ($2.04 billion), 38 per cent less than what it paid six years ago. The destruction of value is even more dramatic when measured in US dollars. Daiichi has indemnified Sun Pharma against any costs arising from Ranbaxy's latest subpoena, which means the bill could still rise further. And while Daiichi does get a nine per cent equity stake in the combined Indian company, recovering its original investment requires a dramatic revival.

Sun Pharma should have a better chance of getting a grip on Ranbaxy, though it is hardly getting a steal. The valuation of about two times 2013 revenue is punchy for a business that has lost money in seven of the past 12 quarters. Projected cost savings and revenue synergies of $250 million a year look modest. The real potential lies in persuading US regulators that Ranbaxy is under better supervision.

Investors, meanwhile, will hope that others learn their lessons. Japanese companies are eager to expand abroad, spending a combined $348 billion on cross-border acquisitions since 2008. Ranbaxy should serve as a powerful reminder of what can go wrong.