We will quickly look into the economics of the Abbott Labs and Piramal Healthcare transaction that has generated this massive balance sheet for Piramal.
We will look into two slides that was presented during the deal closing. The domestic formulation business was sold was approx. 9.0x EV/sales and 30 times EV/Ebitda. The diagnostic business was sold was 3 times EV/sales and 16x EV/Ebitda. The elephant in the room is the domestic formulation business which was valued at $3.8B.
As the second chart shows below, the deal was one of the richest in the industry.
Usually, 75% of M&A fails because of overpaying. There are various academic studies that point to that. We will not address it here. Here is a case of a very shrewd seller, selling the business at a very expensive price. Just to make sure that the economics of this is understood well, in the words of Ajay Piramal.
Link
How do you view your role as a leader — is it being a savvy investor or is it more of a turn-around specialist?
I have an obligation to my shareholders, to create maximum value for whatever they have invested and that’s what my job is and that’s what I am here to deliver. I don’t carry an egoistic or emotional attachment to the businesses. We did a calculation to justify the value that Abbott paid — I would have had to grow the business for 15 years at 20% CAGR with an operating margin in excess of 35%. Now that’s not possible and therefore, the choice was should I leave aside my ego that it is my business and I created it, or should I do what is in the best interest of shareholders. If you look at like that, that’s what a leader ought to do, in my view. Job of a leader is to act like a trustee
For the entire presentation, please see below (From Piramal's site on Oct 22nd, 2010 --- ( Link))
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