Takeover speculation had swirled around Piramal, with media reports citing Sanofi-Aventis , Pfizer Inc , and GlaxoSmithKline as possible buyers.
Abbott said it will pay $2.12 billion up-front and make annual payments of $400 million for four years from 2011 for Piramal's healthcare solutions business. U.S.-based Abbott said it will have the largest market share in India, at 7 percent.
Global demand for drugs from Indian manufacturers such as Ranbaxy Laboratories and Dr Reddy's Laboratories , the top two players by sales, and Cipla , is booming as governments battle rising healthcare costs.
Emerging markets, where cheaper generic medicines form the bedrock of sales, are the new battleground for the world's top drugmakers as sales stall in Western markets.
Piramal has got good money for the business, said Sarabjit Kour Nangra, an analyst with Angel Broking in Mumbai. Now their growth will depend on how they scale up the residual business.
Shares in Mumbai-based Piramal closed 11.8 percent lower on investor disappointment after market speculation that the entire firm would be bought out at a premium and worries that the company is selling off its core business.
A big cash cow will be out, Nangra said.
Shares in Abbott India , the U.S. firm's locally listed unit, gained as much as 14.4 percent before closing 3.7 percent higher.
FOREIGN BUYERS/INDIAN SELLERS
The deal is the third-largest inbound acquisition in any sector in India, just behind Japanese drugmaker Daiichi Sankyo's <4568.T> $4.2 billion takeover of Ranbaxy in 2008 .
Since then, further pharmaceutical deals have been expected, as global majors search for growth and low-cost production of generics, as patents on major branded drugs are set to expire.
GlaxoSmithKline has frequently been rumored to be eyeing Dr Reddy's, while Cipla is cited by analysts as a takeover target.
Expensive legal battles with patent holders, higher regulatory scrutiny after charges of poor manufacturing quality, and increased competition in the generics space have compelled Indian pharmaceuticals firms to look for buyers. Disagreements over valuation have prevented more deals from getting done.
Abbott forecast sales in India of more than $2.5 billion by 2020. It is paying roughly 8.7 times sales for the Piramal unit. By comparison, Cipla trades at about 4.5 times sales.
The deal underscores Abbott's reputation as a determined but canny buyer of smaller rivals. In September it snatched the drugs unit of Belgium's Solvay for 4.5 billion euros ($5.63 billion) -- a price that disappointed Solvay investors who had been looking for more.
Industry forecaster IMS Health predicts leading emerging markets will show annual pharmaceuticals sales growth of 14 to 17 percent through 2014, against just 3 to 6 percent a year for developed markets.
Daiichi Sankyo's Ranbaxy deal demonstrates the possibilities but also the potential pitfalls that global players face when linking-up with Indian rivals.
The U.S. Food and Drug Administration said in February 2009 Ranbaxy sold misbranded or adulterated drugs in the United States, its largest market, having earlier banned imports of over 30 generic drugs from the firm.
Mumbai-based Piramal said it would consider paying a special dividend and would use deal proceeds to invest in its remaining businesses and pay down debt.
Abbott plans to fund the deal with cash on its balance sheet and said it would not change its earnings outlook for 2010.
Piramal's healthcare solutions accounted for about 55 percent of its revenue at the end of 2009. Its other businesses include third-party manufacturing and pathology laboratories.
We are not exiting this business. There is huge potential in the domestic market, but there are lots of other opportunities as well, Chairman Ajay Piramal, whose family and associates control 49 percent of the company, according to stock exchange data, told reporters.
Abbott said it was advised by Morgan Stanley, while Piramal said it did not have a financial advisor on the deal.
(Additional reporting by Brenton Cordeiro in Bangalore, Kaustubh Kulkarni in Mumbai and Ben Hirschler in London; Editing by Tony Munroe, Anshuman Daga and Jon Loades-Carter)