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The time seems ripe for mergers - Views on News from Equitymaster
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  • Mar 13, 2009

    The time seems ripe for mergers

    Mergers zoom in the global pharma space
    The global pharma industry in the past few months has been on a consolidation overdrive. The biggest of the biggest deals took place when Pfizer announced that it was acquiring Wyeth for a staggering US$ 60 bn. Just a couple of days back, the US based company Merck acquired Schering Plough and yesterday, Roche was successful in buying out it the remaining stake in the biotech company Genentech. So what has compelled Big Pharma to go in for big ticket acquisitions especially when the global economy is in a downturn and credit is scarce? There are myriad reasons for these moves.

    One is obviously the pipeline of drugs that the acquiring company will have access to. Thus, the acquisitions will not only enable Pfizer, Merck and Roche to augment their product portfolio and thereby minimize the risk of patent expiration of some of their existing drugs but will also enable them to have a presence in a new field. The latter especially holds true for Pfizer and Roche. By acquiring Wyeth, Pfizer can now boast of a presence in vaccines while Roche will have access to biotech drugs. The second reason is that global pharma companies have strong cash balances as a result of which they have been able to purchase companies even when the global economy is contracting and money is not readily available. But, while these acquisitions have sent out some signals that the health of the pharma industry is not overly affected, these companies will still have a tough task on their hands when it comes to digesting these purchases. At the end of the day, as is the case with any acquisition, successful integration is what will generate strong returns for shareholders.

    India's 'inefficient' use of savings
    While the global financial crisis has not spared even India in terms of slowdown in growth, the country is still better off than most of its developed peers, which have already plunged into recession. The fact that it is not as heavily reliant on exports as some of its Asian peers has also helped to a great extent. Add to this the fact that the Indian economy is not as overstretched as the Eastern European countries on foreign capital and it certainly seems that India is attracting the envy of many countries. As reported in the Economist, India's gross saving rate was around 38% of GDP in the past fiscal year. This speaks volumes of the country's prudence as compared to the US, where most Americans were heavily leveraged.

    But as the magazine further goes on to add, India does not mobilize its savings well. It says, "Households account for almost two-thirds of it. But they put more than half of their spare funds into physical assets, such as homes, rather than the financial system. Of the remainder, 11% is held in cash and 55% is deposited in the banks, which are now lending almost a third of their deposits to the government." Maybe in some sense, that is a blessing in disguise. Leaving aside the fact that the financial crisis has firmly gripped every country in its clasp including India, it is precisely the latter's prudence which has prevented its banking system to fall prey to the ills that have plagued banks in the US and Europe. And the lower investment in the financial system means that India has more headroom to increase investments in this sector especially if they are used to haul up the country's considerably rickety infrastructure.



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