Sun and Taro squabble over merger agreement

Taro Pharmaceutical Industries and Sun Pharmaceutical Industries have become embroiled in an increasingly bitter row over a merger agreement between the two companies (see p. 19). Taro’s Board of Directors was first to act, announcing that it had unanimously voted to terminate the 18th May 2007 merger agreement with Sun, as the agreement provided for a termination from either party after 31st December 2007. Sun responded by refuting this claim, and noting its scepticism of Taro’s ability to turn itself around after its financial crisis early in 2007; Sun has also reacted angrily to suggestions that Taro may sell its Irish operations, as these were to play a key part in its post-merger operations.

Taro noted on 29th May that the merger is no longer in the best interests of the company. Its management board felt that the deal did not reflect the ‘dramatic operational and financial turnaround’ that the company has achieved since last year. The firm also felt that the operational constraints in the agreement were interfering with the company's ability to manage its business for the benefit of all of its stakeholders, and that, but for some of these constraints, Taro's profitability and cash resources could have been higher at present.

Sensing Taro’s reluctance to go ahead with the merger deal, Sun upped its offer per share from US$7.75 to US$10.25. After Taro went public over the matter, Sun questioned how the Israeli firm could afford not to make the deal, noting that if Sun had not injected US$60 million into the company in the last year, Taro would have virtually negative cash. The Indian firm also commented that it made every effort to fulfil its obligations under the agreement, and that Taro had ignored its attempts to discuss an increase in the merger consideration.

Taro’s termination of the deal is surprising, given the financial struggles that beset it before Sun agreed to refinance US$224 million of its net debt last year. It had suffered a turbulent time prior to the Sun deal: finance reporting problems led to the firm having to restate its financial results for 2003 and 2004, a move which eventually contributed to the resignation of its Senior Vice President and Chief Financial Officer and its delisting from the NASDAQ Global Select Market. The financial reporting problems and lower than expected results for 2006 led to concerns over Taro’s loans, leaving it with little other choice than to accept Sun’s offer. Whether Taro has accomplished enough in the last year to gain the upper hand in its dealings against Sun it remains to be seen. Either way, the fallout could hit both companies hard when the full financial ramifications are understood.

Jonathan Way - Editor, World Generic Markets