While Sun Pharmaceutical Industries' decision to acquire Ranbaxy Laboratories Ltd (RBL) appears to have taken the market by surprise, investor response to the decision appears to be lukewarm, with both stocks moving in opposite directions.

The swap ratio announced -- 8 shares of Sun Pharma for every 10 shares of Ranbaxy -- gives a modest benefit to new investors in Ranbaxy as at the current price they would pay about 5 per cent less for getting Sun Pharma shares under the merger plan than buying the same quantity directly from the market.

Shares of Sun Pharma are up by ₹9.10 to ₹580.90, with a high trading volume of 68.77 lakh shares on the NSE. The stock, opening at ₹580, touched a high of ₹594.80 before retreating a bit. Ranbaxy, which has had a tumultuous year as a fallout of various regulatory issues in the US market, opened at ₹460 today on the NSE and touched a high of ₹468.20 before falling to ₹438.15, a loss of ₹21.40, with a trading volume of 78.46 lakh shares.

The swap ratio of eight shares of Sun Pharma for every 10 shares of Ranbaxy works to the advantage of new entrants into RBL as they would have fork out about 5 per cent less for getting Sun Pharma stock under the merger plan compared to buying the same quantity of stock from the market.

For instance, for any new investor 100 shares of Ranbaxy would cost about ₹43,800 at the current ruling price, for which they would get 80 shares of Sun Pharma under the merger plan. However, purchase of 80 shares of Sun Pharma at current prices would cost about ₹46,500. Hence, Ranbaxy investors would gain about ₹2,700 from their purchase now, at least notionally. But this is a modest profit and since the merger would take about six-nine months to be completed because of regulatory approvals, investors may look for price correction in both stocks to make an investment decision, which explains the market response to the merger plan.

(This article was published on April 7, 2014)
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