[Malvinder Singh, former co-owner of Ranbaxy Laboratories. He and his brother Shivinder Singh were ordered by a Singapore arbitration tribunal to pay $385 million to Daiichi Sankyo. Photograph by World Economic Forum under Creative Commons]
7 business lessons from the failed Daiichi – Ranbaxy deal
The Daiichi – Ranbaxy deal has once again grabbed headlines. Malvinder and Shivinder Singh, the former owners of Ranbaxy Laboratories, were ordered by a Singapore arbitration tribunal to pay $385 million to Japanese pharma company Daiichi Sankyo, which had bought the firm in 2008. Daiichi has accused the brothers of misrepresenting the problems facing Ranbaxy when it acquired the firm.
In 2008, Daiichi had bought the Singh brothers’ 34.82% stake for $2.4 billion. The total deal value was $4.6 billion. Problems emerged soon after the acquisition, when Ranbaxy’s plants came under scrutiny by the US Food and Drug Administration (FDA). In 2014, Sun Pharma acquired Ranbaxy.
This failed business deal offers many valuable lessons. Here are seven that stood out for me.
1. Trust but verify: Trust is important while doing a deal, but blind trust can cause great embarrassment, if not irreparable damage.
In 2013, Daiichi agreed to pay $500 million to resolve a lawsuit and the federal charges that the company sold improperly manufactured drugs.
Daiichi took legal recourse to recover this amount and after years of investigation it has succeeded in getting a favourable order passed. But the ordeal must have left it exhausted and distracted it from pursuing its purpose.
What can companies do to avoid such a minefield? Follow the Russian maxim, trust but verify. Accept all the information and claims in good faith, but put in honest efforts to verify them. Go beyond the Excel-based financial audit. Carrying out physical inspections of assets. Speak to stakeholders and industry veterans who know the company, business and industry to get insight into the company’s ethical and moral standard while doing business.
2. Do not fall in love with your target, it will impair your rational judgment: It appears that Daiichi fell in love with Ranbaxy. This marriage seemed to have been made in heaven, at least on paper. Both entities brought complementary skills to the table: Ranbaxy brought an understanding of the fast-growing (non-proprietary) generic drugs business, a deep understanding of low-cost research, manufacturing facilities and expertise to capitalize on the fast- growing generics sector in Japan. Daiichi brought the mindset and stringent systems and processes of an innovative global drug company.
So what went askew?
Daiichi ostensibly suffered from three behavioural sciences syndromes while negotiating the deal: selective hearing (a bias where people hear that which they desire), confirmation bias (a tendency to search for and interpret information in such a way that it confirms one’s perception), and illusion of attention (people are confident that they notice everything that takes place in front of them. But in reality they see what they are focusing on).
Hence, Daiichi could have selectively looked at data which supported its hypothesis, while erroneously believing that it had taken on board all data points to make a considered decision.
3. Choose a partner wisely: India is a complex country and choosing the right partner to enter the market can make the difference between success and failure. Along with complementary skills, ensure that there is alignment in culture, with similar values and business intent guiding decision making.
Take Starbucks’s entry into India. Its chief executive Howard Schultz wisely waited for the right partner before venturing into India. During this time, the firm held talks with Jubilant FoodWorks and Future Group, among others. It finally tied up with the Tatas.
Tata’s and Starbucks’s purpose/mission statements and values seem similar and the chances of them having a similar business intent seem high, with few conflicts. They both also bring complementary skills to the table. The Tata’s coffee plantation would supply the raw material and the group’s real estate expertise would be handy for housing the stores; Starbucks brings its brand equity and expertise in selling coffee as an experience.
4. Be careful in defining the purpose of your business: Like Jonathan Trevor and Barry Varcoe say in their article ‘A Simple Way to Test Your Company’s Strategic Alignment’ in the Harvard Business Review, a company should be careful in deciding its purpose—what the business is trying to achieve. Because its strategy—how the business will achieve its purpose—gets conceptualized and defined guided by its purpose. After that the organization’s capabilities—human, financial and management systems and processes—are put in place to execute the strategy effectively.
Getting back to Ranbaxy, in the years leading to the sale to Daiichi, its purpose seems to have been maximizing profit (i.e., maximize valuation), with the intention of flipping the asset.
Of course Ranbaxy succeed in achieving its purpose, but at the cost of the credibility and reputation of its promoters.
5. Fit for purpose: In 2013, after inspecting Ranbaxy’s factory in Punjab, the US FDA banned import of drugs manufactured there, citing quality concerns. It declared the factory was not ‘fit for purpose’ for the American market, because it did not conform to prescribed manufacturing standards—which Ranbaxy had undertaken to comply with when it applied for licence to sell in the US. Earlier in 2008 the agency had halted import of 30 different drugs from two of Ranbaxy’s plants in India.
Why this gap in compliance?
A partial answer may reside in the thinking that prevails among many generic drug manufacturers that the FDA specifications are over specified and extremely stringent. This is the platinum standard, so to speak, and many believe that even with a silver standard, the drugs would be effective.
However, the American agencies would not agree to lower standards and would disallow them from selling in the US, which is a large and profitable market.
Hence, many generic drug companies agree to comply on paper, but do not back it with necessary investment in plant and machinery, people, robust systems and processes and record keeping. If they did, it would have an impact on profitability.
But that’s not a path to building an enduring business. Delivering what is promised, and investing to enable this, is the way. The business lessons are simple:
- Quality cannot be injected into a product. It has to be built into it. Take Apple. Its products are manufactured in China. But the factories are designed to meet Apple’s own quality standards.
- If the purpose is to only make money, it will eventually sully the reputation of the business.
6. Knock-on effect: Companies should take on board the unintended consequences of their business decisions.
Did Ranbaxy consider the impact of its decisions on the reputation of generic pharmaceutical companies, Indian businesses in general and the Indian government’s efforts to attract foreign direct investment (FDI)?
Due to the knock-on effect, foreign businesses may pronounce generic pharma companies, including Indian businesses, guilty till proved innocent; their claims would be viewed with jaundiced eyes, vigorously challenged and microscopically scrutinized. They may insist upon carrying out forensic due diligence before finalizing a deal. And a claw back clause, which ensures that money or benefits distributed are taken back as a result of special circumstances, would form an integral part of a deal to protect them from any unexpected liability.
7. Sunk cost fallacy: Daiichi recovered from the ill effects of this deal by not succumbing to the sunk cost fallacy of protecting past investments rather than future benefits.
Many blue chip companies including Kodak and Nokia have been victims of this fallacy. To protect their past investments, both companies ignored initiatives to introduce digital cameras and smartphones, respectively. As events later showed, it was digital cameras and smartphones that dislodged Kodak and Nokia from their preeminent position.
Daiichi had sunk in $4.6 billion in a cash deal to buy Ranbaxy. When it realized that the deal was not a prudent decision, it did not commit additional money to redeem or justify the investment.
In April 2014, it sold Ranbaxy to Sun Pharma, India’s largest drug maker, for $3.2 billion. As a part of the deal, Daiichi got 8.9 % stake in the new Sun Pharma. It later sold its shares in the new company for $3.6 billion and retreated from the Indian market. Viewed purely from a financial perspective, it recovered almost all its investment, but not the opportunity cost of capital.
The Donald Trump phenomena: The power of persuasion and countering divisive leaders
[Donald Trump speaking at CPAC 2015 in Washington, DC by Gage Skidmore under Creative Commons]
After November 8, when the US presidential elections will be held, Donald Trump may well emerge as the world’s most powerful man, even though many see him as a highly divisive person.
Trump may well be an extreme example of a leader who uses every trick in the book to polarize people and win. In business and in other facets of life, the chances are that you may come up against a Trump-like leader. What do you do then? How do you combat them and prevent them from negatively influencing the organizational agenda?
In a nutshell, you can do that by being a professional yourself, avoiding emotional confrontations and delivering results that do the talking.
But before that, it is important to first understand exactly how they, like Trump, manage to manoeuvre themselves into a winning position.
Also, regardless of our opinion about Trump, the fact that he has come thus far in the presidential campaign offers valuable lessons on the power of effective strategy and the power of persuasion in moulding public opinion.
Let me make it clear here that I do not support Trump’s style of functioning. My limited intent is to present his strategies and techniques so that we may understand the Trump phenomena—and maybe learn how to tackle it if we encounter it.
Building brand Trump
As a businessman, Trump was single-mindedly devoted to promoting brand Trump by garnering mindshare and making it valuable—whether it was through his hit reality TV show, The Apprentice, or by attaching his name to various businesses. “Many of the businesses he comes in contact with end up with his last name on them, often in large, gilded capital letters,” The Washington Post reported. “Of the 515 companies that Trump has a part in running, 268 bear his last name, according to a filing with the Federal Election Commission. Yet not all of the buildings emblazoned with Trump’s last name are owned by him; for many properties, he merely licenses his name to other developers.”
Since he owns the brand, the more valuable it became, the richer he became, catapulting him into the billionaire’s list.
When he decided to contest the presidential elections, his strategy was to gain voters’ mindshare and turbocharge his campaign. Here are the contours of that strategy:
1. Understanding voters’ pain point: Trump’s vote bank compromises less affluent, white Americans who are sensing that the American dream is eluding them. It hurts them more because for all practical purposes they had won the genetic lottery—born white in America, which entitled them to enjoy the fruits of the American dream. In their perception, two major global events seem to have led to fewer jobs at lower wages, pushing the dream beyond reach: Globalization encouraged outsourcing of manufacturing activities; immigrants gobbled up a large share of the remaining jobs at extremely competitive salaries, thus bringing down the wage plateau for all (even though that view is disputed).
Trump’s promise is to restore their entitlement by “making America great again”.
2. Plans are nothing. Planning is everything: Trump has been planning to run for the presidential elections since long. In 1988, he confessed on The Oprah Winfrey Show that he would run for president under one condition—if America gets really, really bad, which according to Trump it apparently has. In 2012 he registered a trademark for his slogan, “Make America Great Again.”
3. Appeal to voters’ emotions: He does that by appealing to their self-interest through his trademarked slogan. He reminds them that by voting for him they are actually voting for themselves. He then gives them “rational” reasons to vote for him.
Meanwhile, other candidates share policies they would implement, which appeals to the rational and analytical part of voters’ brains, and not their emotions.
4. Make promise believable: Research indicates that when a brand advertises using paid media (TV, press etc.), the believability of the message is merely between 24% – 62 %. But when real people speak about the brand, the believability jumps to 70%. And if known people speak about it, the believability is 90%. While most presidential candidates have been burning money by advertising on paid media, Trump is levering “earned media”—social media, buzz, PR. Hence his message is more believable and his cost is negligible.
5. Demonstrate promise: Trump “demonstrates” that he can deliver on the promise by offering a logic which may appear flawed and fragile to many, but seems to be working: he tells voters that he made himself great by becoming a billionaire many times over and he can do for them what he did for himself.
6. Authenticity: Voters feel Trump is more likely to deliver on his promise because of the manner in which he speaks, answers questions and takes stands on issues, no matter how controversial. He appears to genuinely believe in what he is saying. In sharp contrast, other candidates come across as rehearsed.
7. Embed principles of behavioural sciences into the campaign: This way, he is able to get voters to behave the way he wants without them realizing it.
- Likability Principle—people are more likely to be influenced by people they like. His core voter base likes him because he appeals to their emotions.
- Confirmation bias—people tend to interpret information in a way that confirms their preconceptions. His voters want America, and therefore themselves, to be great. Trump’s promises resonate with their desire.
- Mirror Neuron Effect. They empathize with Trump because they want to be like him (rich).
- Framing Effect—people react differently to a particular choice depending how it is presented. Trump has framed the question “Do you want to make America great again?” in a manner that the answer can only be a yes.
- Cognitive Dissonance—people will attempt to consistently subscribe to a view that is consistent with theirs. Trump’s trademarked slogan is in consonance with voters’ thinking.
- Contagion Effect—people get influenced by others’ moods/behaviours. Trump has positioned himself as a billionaire (read great). By voting for him, they can expect part of the greatness to rub off on them.
Why the flaws escape notice
Trump has changed the rules on many relevant dimensions, leaving his opponents perplexed.
He has positioned himself as an expert who uses logic to buttress his arguments and backs them up with evidence. Though an analysis by Politifact indicates that 77% of his facts are proving to be inaccurate.
He gets away with that because
- People hear what they want to hear: They do not have time to cross-check facts, particularly when the content resonates with them.
- Diffuse the question by answering it with a question: Trump said he will build a wall between the US and Mexico. When he was pointedly asked how he will get the resources to build it, he answered by throwing a question back: How did the Chinese build miles and miles of the Great Wall of China that too so long back? And then he answered the revised question: If they could do it then, why can’t it be done now? The original question remained unanswered.
- Cherry-pick evidence: Trump, follows biased sample fallacy to cherry pick evidence to back his claim. His threat to build the wall at the Mexican border has made him extremely unpopular with Hispanic voters. So in one of his rallies he got a Hispanic woman to accompany him on stage. She raved about what a great President Trump would make. He looked at her and then at the crowd and his facial expression subtly asked: Do you think Hispanics have a problem with me? In that moment, Trump had demolished as myth that Hispanics don’t favour him.
- Us versus them. Trump has made this campaign an us versus them fight by presenting himself as someone who wants to make America great again. Anyone who opposes him is labelled anti-America.
So how do you counter this strategy?
In our professional careers and social engagements we sometimes come across people who use similar strategies to divide. How do you neutralize that? Let me share a personal experience.
I had joined as president of a packaged consumer goods company and for the first eight months, my predecessor was to work with me so that I could gain complete understanding and control of my new responsibilities. Unfortunately, he felt threatened and began to behave in a counterproductive manner.
Here’s how I handled it:
- Do not get into a direct confrontation: Figuratively speaking, such people tend to “roll in the mud” and I too would end up in the mud and emerge a loser.
- Do not react to his provocations, but respond to situations created by him: If I had reacted, it would have made me appear defensive and at a disadvantage. Plus I would have inadvertently allowed my emotions to get the better of me. Instead, I decided to respond in a thoughtful, reasoned manner, based on logic and facts and not emotions.
- Change the rules of the game on relevant dimensions: A cursory analysis indicated to me that my predecessor was behaving in an extremely unprofessional manner. Instead of focusing his energy on making the business stronger, he was focused on strengthening his relationship with members of the family that controlled the company. I played to my strength—which is to present myself as an extremely confident and competent professional. I arrived early and well-prepared for all meetings and responded to questions with logic, facts and insights. In addition, I implement a business strategy that got the business moving at a faster clip. As results started trickling in, I was able to position myself in the mind of key stakeholders as an extremely competent professional. The contrast was apparent to all.
- Let results do the talking: Key stakeholders are smart enough to see who is delivering on the ground and who is merely currying favour. In a short period of time I was able to win respect by showing results.