Monday, June 30, 2008

Et tu Sanjiv Kaul...?

Oops...I mangled the Bard! For good reason though, so he should forgive.
It seems Ranbaxy-Daiichi Sankyo deal has stirred up the PE nest. I quote Sanjiv Kaul, MD, Chrys Capital from BS

“The Ranbaxy-Daiichi deal is expected to make PE firms review their positions on investments in acquisition-prone industries like pharmaceuticals. PE companies invest in a company if they feel that its promoter can deliver goods. If the promoter changes, then its a different ball game. If such acquisitions are going to be a trend, a precondition factoring in such reverse-acquisition possibilities will have to be factored while making an investment decision."

My first reaction was why did Sanjiv - of all the people, find it so surprising. After all, he has moved to Chrys Capital after spending over a couple decades at Ranbaxy. I’ll explain why it stumped me.

PE term sheets ordinarily have clear clauses that protect the rights of PE investors. Tag along rights that effectively force the majority shareholder to include the holdings of the minority holder in the negotiations for likely exits on identical terms. Drag along rights that help a majority shareholder drag a minority shareholder also into a deal where the acquirer insists on a 100% buyout. Besides there are different forms of anti-dilution clauses (Ratchet clauses) where the founders agree to compensate the PE investors by topping up their stake so sacrificed, if any, as and when a new investor is allowed in.

Even in Ranbaxy deal, SEBI (SAST) Regulations don’t permit Daiichi to acquire more than 5% in Ranbaxy in a year. There are continuous disclosures to be made and especially if a PE firm is an investor, it has an automatic right to get notified, assuming that it doesn’t have ROFR. But these are all standard clauses and the fears at best, according to me, sound childish. Still if it is true, it speaks volumes about the quality of PE managers – but certainly not of the caliber of Sanjiv Kaul.

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