Defenses Against Hostile Takeover

2011

Hemanshu Roy

United Business Institutes, Belgium, Europe

MBA Finance – July 2010 Batch

Defenses Against Hostile Takeover Takeover

United Business Institutes, Belgium, Europe 2011

Hemanshu Roy MBA Finance JL2010

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Acknowledgement

The project on “Defense against Hostile Takeover” has been made and completed

under the guidance of our respected academic faculties of Jaro Education. They had

helped us in the learning about this topic and giving us valuable insight knowledge

about how the hostile takeover and defenses against it works. I would like to thank them

for their cooperation, guidance and enriching my thoughts in this field. Without their

complete guidance and support, I would not have able to complete this report on

Defense against Hostile Takeover.



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Table of Content

Sr. No Title Pg No

Acknowledgement 2 Table of Content 3 1 Introduction 4 2 Case Studies 7 3 Hostile Takeover 28 4 Aggressive Tactics of Hostile Takeover 35 5 Defenses adopted against Hostile Takeover 39

Conclusion 48 Bibliography 51



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Introduction

On Oct. 10, 2000 Arun Bajoria, a jute baron based in Calcutta, revealed that he had

bought 14% of languishing textile maker Bombay Dyeing & Manufacturing and would

seek a board seat. Just three days later on October13, Renaissance Estates, a young

New Delhi-based construction company, revealed that it had accumulated more than

5% of Gesco, a real-estate spin-off of venerable Great Eastern Shipping Co. and would

bid Rs. 27 a share for a 51% stake. Gesco's share price nearly tripled to Rs. 40 a share

in the wake of the announcement. Then, in early November, news broke that cigarette

maker and hotelier ITC Ltd. had bought 5% of East India Hotels Ltd. since the start of

the year. ITC termed the buying ''routine treasury operations.'' Aware of ITC's moves,

the Oberoi family, East India's founders, has boosted its stake to 39%, from 36%, in the

past few months.

Hostile takeovers have finally arrived in India and family run business houses are

scurrying for cover. India’s industrial scions have been shaken out of their slumber and

suddenly find themselves vulnerable against relatively new and young corporate

raiders. Although, since 1994, when the Takeover Regulations were first framed by

SEBI, no successful hostile takeover has taken place in India, in the past few years it

certainly seems to be picking up and it may not be long before inefficient management

coupled with low stock prices make them attractive preys for a hostile bidder.



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A hostile takeover primarily involves changing the control of the company against the

wishes of the incumbent management and the Board of Directors. This throws up a lot

of social, legal, and economic issues. The prominent among these are the following

which form the subject-matter of this project assignment:

Ø Whether hostile takeovers are always beneficial to the target shareholders?

Ø Whether hostile takeover has a disciplining effect on an inefficient management

or does it just destabilize the incumbent management?

Ø Do hostile takeovers always lead to efficient allocation of scarce economic

resources?

Ø What is the effect of hostile takeover on the shareholders of the acquiring

company?

Ø Whether hostile takeover has adverse consequences on non-shareholder

constituencies of the target company?

Ø Whether an active market for corporate control is desirable in India?



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The purpose of this project report is to understand the concept of hostile takeovers,

understand the implication from the perspective of not only the shareholders but also

other stakeholders in the company. The project seeks to examine if the incumbent

management should be allowed to defend the existing control structure against a

takeover bid.

Sources of Material

The secondary sources, which have been used, are articles, books and websites.

Research Questions

The questions, which have been dealt with in, this paper are:

Ø What is a takeover and how is a hostile takeover different from a friendly

takeover?

Ø What are the defenses to a hostile takeover?



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Case Studies

I. Arcelor-Mittal Takeover Case

• Mittal makes surprise €18.6 billion bid for Arcelor in January 2006

• Arcelor management announce large dividend

• Arcelor makes very positive profit report, which is later found to be inflated

• Arcelor makes rosy forecast for future performance

• Arcelor management and European politicians criticize Mittal

• Arcelor management refuses to meet with Mittal until a string of demands were

met

• Arcelor tries to get Luxembourg government to write a takeover law shutting out

Mittal

• Arcelor unions fear job cuts, reduction in social standards

• Arcelor managers fear Mittal will shift emphasis from long- to short-term goals

• Arcelor commits to buy North American steel company that will cause Mittal anti-

trust problems

o Agreement contains clause making it costly to not go through with sale

• Arcelor made €13 billion deal with Severstal of Russia, including break-up fee of

€140 million

• Arcelor, Mittal, and Severstal engage in heavy advertising, meetings with

investors and politicians

• Arcelor arranges for shareholder meeting where Severstal deal would be

approved unless 50% plus one of shareholders were present and voted it down,



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an unusually high percent. The meeting isn’t scheduled until after Severstal deal

has been nearly finalized.

• Mittal raises offer to €26.5 billion, and agreed to cede some management

control and family voting rights

o nearly double the price per Arcelor share Arcelor was trading at prior to

Mittal’s bid in January

• Arcelor’s institutional shareholders and hedge funds voice disapproval in

SeverStal deal, support Mittal deal

o Arcelor management fears shareholders will vote down share buyback

necessary for Severstal deal to go through

o Shareholders threaten to oust Arcelor management and sue Arcelor

board

• Six percent of Arcelor shareholders sued Arcelor’s board for selling for too low a

price

o Unlikely to succeed, given very high premium on Arcelor shares relative

to pre-takeover-battle price

• Arcelor-Mittal sells valuable Maryland steel mill in August 2007 to satisfy U.S.

anti-trust authorities



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Mittal’s Letter to Arcelor Shareholders, June 20, 2006

Ladies and Gentlemen,

It has been almost five months since we first made the offer to you to have Arcelor join

forces with Mittal Steel to create a European-based global champion in the steel

industry and to make, together, a quantum leap in the consolidation of our industry.

The transaction has now reached a critical phase, and we wanted to share our

perspective directly with you.

In an attempt to resist a combination with Mittal Steel, the Arcelor Board is now seeking

to merge the company with SeverStal, a steel company controlled by Alexei Mordashov

with assets principally in Russia and listed on the Moscow Stock Exchange. The Arcelor

Board claims that this is a legitimate and superior alternative to a combination with

Mittal Steel. We strongly disagree.

• We believe that the transaction with Alexei Mordashov gives him control over

Arcelor; yet, the transaction has been structured to allow him not to make an

offer for the whole company, let alone pay a control premium.

• The Arcelor Board is proposing to proceed with this significant transaction

without seeking a positive vote from shareholders; they plan to proceed unless

Arcelor shareholders holding together more than 50% of the capital vote against

it. We believe this process does not give you a proper say in this

transformational transaction for your company.



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• Lastly, the Board could use the agreements with Alexei Mordashov as a poison

pill against our bid: even if holders of more than 50% of the current capital elect

to accept our offer, the Board can take majority control away from us by issuing

new shares to Alexei Mordashov after completion of our offer.

Mittal Steel is a substantially bigger, more diversified, and more profitable company than

SeverStal. It is the number one steel producer in the world. We have better and more

diversified mining assets than SeverStal. Only the Mittal Steel – Arcelor combination

would be a truly transformational deal for the steel industry.

A combination with Mittal Steel will also deliver substantially more value to you. Based

on the weighted average value of the Mittal Steel stock since announcement of our

proposal on January 27, our offer values each Arcelor share at a premium of more than

70% over the pre-offer value of Arcelor on January 26 of €22.22, which itself was an all-

time high for the company.

The implicit valuation of the Arcelor share in the context of a transaction with SeverStal

is significantly inferior to the one which will result from a merger with Mittal Steel –

especially when one takes into account the very significant upside potential generated

from our Value Plan, and the related undervaluation of the Mittal Steel stock today. We

believe that neither the contemplated partial buy-back by Arcelor, nor the terms of the

Severstal transaction establish a value of €44 a share for Arcelor.

We firmly believe that the future of Arcelor warrants a real choice – one that has to be

made by you, the owners of the company.



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Unless there is a veto by holders of more than 50% or more of the capital on June 30,

control of the company could be transferred in a value destroying transaction.

This is a critical juncture in the life of Arcelor.

Your participation in the June 30 meeting is critical. We strongly encourage Arcelor

shareholders to exercise their veto right at this meeting and vote against the SeverStal

project.

Market reactions to defense tactics:

• Market responds especially favorably to LBO announcements, also positively to

leveraged recapitalization announcements

• Antitakeover amendments have an insignificant or slight negative effect on

shareholder value on average

• Antitakeover devices appear to reduce the probability of takeovers by only a

small amount

• Antitakeover amendments have more negative effect when:

o Low % institutional shares

o High % insider shares

o Low initial % CEO shares

o Low initial % board of director shares

o Board dominated by insiders and affiliated outsiders

o CEO also chair of board

o When inside and affiliated outside board members increased their

ownership stake as a result of antitakeover devices



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• Takeover premiums higher when target firms protected by state antitakeover

laws or poison pills

• Firms protected by state antitakeover laws have lower shareholder returns, have

worse accounting measure performance than those opting out

• Firms receiving protection from state antitakeover laws reduced debt ratios,

undertook fewer major restructuring programs (weak evidence) than firms not

receiving protection

• Voluntary spin-offs result in insignificant returns in firms which had adopted

antitakeover devices in the previous 6 months, while voluntary spin-offs by other

firms result in positive returns

• Only earliest poison pills associated with large declines in shareholder wealth

• Poison puts result in gains to bondholders, losses to shareholders

• Mixed results on impact of golden parachutes

o Alignment hypothesis

o Wealth transfer hypothesis

o Signalling hypothesis

• Reincorporations to limit director liability resulted in positive returns, while those

to establish stronger antitakeover defenses had significant negative returns



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II. India Cements’ Acquisition of Raasi Cements

Though the India Cements Limited (ICL) acquired the Hyderabad-based Raasi

Cements Ltd. (RCL) in a negotiated deal for Rs. 140 crore, the deal could be reached

only after three months long "hostile takeover" bid mounted by the ICL over RCL. Dr B

V Raju, the chief promoter agreed to sell his entire 32 per cent holding in RCL at Rs.

286 per share.

A careful study of the events that took place before the deal was reached gives an

insight into the issues involved in a hostile takeover deal. In order to thwart the hostile

takeover, Mr. Raju had challenged the SEBI's takeover code in the Andhra Pradesh

High Court arguing that the takeover code does not give the promoters any chance to

defend it. However, after an initial stay, the Andhra Pradesh High Court vacated its

earlier stay against the takeover proceedings.

When looked at the takeover bid from target shareholder’s point of view, between

October 1997 to March 1998, the RCL stock rose by a whooping 318 per cent. In

contrast, during the same period the ICL stock fell by 46.36 per cent. On the other hand

when the sale was agreed upon, the Raasi scrip crashed to Rs 181 from Rs 187 at the

closing on the BSE while India Cements’ share improved to Rs 63.15 from Rs 57.60.

The movement in RCL scrip can be explained by the fact that the shareholders of RCL

expected a high premium on their shares if the hostile bid turned out to be successful

but when it ended in a negotiated deal the share prices fell because shareholders lost

the opportunity to make some quick bucks. Though generally, the share price of the

target company should remain high even if the initial bid has failed on the expectation of



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a fresh tender offer from other bidders. But when the bid has ended in a negotiated

deal, there is no possibility of a fresh offer and expectation of a high premium is

naturally dashed pulling the share price down.

However, what explains the downward movement in the share price of ICL when the

hostile bid was on and subsequent rise in its prices when the target was acquired in a

negotiated deal? How and in what manner would the acquiring company's shareholders

(ICL in this case) benefit? This is a function of the synergies in production; marketing

and distribution expected from the takeover and the future growth strategies of the

acquirer. The possibilities of sales enhancement, greater market share, operating

economies and improved management would all decide the rewards to the acquiring

company’s shareholders in the future. The initial downtrend in the ICL stock can

probably be explained due to some apprehension in the market that the ICL may be

willing to pay too high a premium, which may not be offset by the gains that may accrue

due to synergy of operations and management between the two companies.

Now it is worthwhile to investigate into the possible reasons that may have triggered the

hostile bid by ICL against RCL.



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Depressed Stock Prices Make An Easy Prey1

1 A study done in the year 2000 of some leading Indian companies (many of them family run business houses) to find out who were the most vulnerable companies gave some revealing insights in which many old economy stalwarts find themselves in an unviable situation and it should serve as a wake-up call for the management of these companies. For decades, the families have run these companies like fiefdoms, giving scant attention to share price and returns to shareholders. Many of these companies' share prices are below their net asset values per share--sometimes drastically so. In the Table it can be seen that barring a few companies like L&T, ACC, Bharat Forge, Madras Cements, Bajaj Auto and Hindalco, the ratio of share price to book value is less than one which means that market value of these companies is lower than their book value and that makes these companies a cheap bargain. That also makes takeovers a cheap way to buy real estate, ships, factories, and dominant, if often poorly run, businesses. The low valuation of these companies, with the average price-earnings (P/E ratio) on the Indian markets ruling at 14, makes many of them potential takeover candidates and encourage predators to launch a hostile bid.

Table 1:

Name Price Market cap Market cap/ Price/ Market cap/ Promoters

(Rs) (Rs m) Sales (x) Book Value (x)

Cash (x) (%)

Crompton Greaves 22 1126 0.07 0.3 0.3 30.1

Essar Steel 6 2005 0.10 0.2 0.1 23.0

HPCL 101 34171 0.11 0.6 1.5 51.0

Voltas 27 897 0.12 0.6 0.6 28.7

Century Textiles 27 2698 0.13 0.5 0.9 46.7

Ashok Leyland 35 4168 0.18 0.4 1.1 51.0

Telco 78 19923 0.28 0.5 0.8 16.4

Sesa Goa 42 840 0.37 0.4 0.4 51.0

Grasim 172 15813 0.37 0.6 1.3 22.8

Thermax 68 1571 0.41 0.4 0.4 75.0

India Cements 37 5212 0.44 0.7 0.6 36.8

Tata Chem 34 6325 0.44 0.4 1.1 32.0

BILT 58 3501 0.45 0.4 0.9 31.1

BHEL 101 24709 0.48 0.7 1.1 68.0



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Due to general economic recession prevailing in the last 2-3 years, the demand for

cement has been very sluggish which has been reflected in the depressed stock prices

of major cement manufacturers. This has resulted in bringing down the P/E ratios of

several cement scrips to just 6 or 7. At these abysmally low prices, several cement

companies with capacities of around one million tonne can be acquired for Rs. 150-200

crore. Hence predators find it more reasonable and attractive to launch a takeover bid

rather than going in for expansion. For example, setting up a 1 million tonne plant would

roughly cost around Rs.400 crores. RCL has a capacity of 1.6 million tonnes2 and

setting up a new plant of same capacity at current prices would entail an outgo of

around Rs.550-600 crores. Therefore, it is clear that the market capitalization of most

cement stocks was way below the cost of setting up similar capacities. Compare the

M&M 161 17689 0.50 0.9 1.1 12.5

Tisco 88 32361 0.53 0.7 1.9 18.6

Tata Power 64 7513 0.55 0.4 0.4 28.1

L&T 158 39482 0.57 1.0 1.9 8.3

ACC 88 15129 0.64 1.4 2.9 19.1

GESCO 25 6600 0.69 0.6 1.5 14.1

Bharat Forge 97 3570 0.71 1.1 1.0 42.8

Madras Cements 3900 4720 0.92 1.3 3.2 30.9

Bajaj Auto 307 36742 1.19 1.1 0.9 33.8

Nalco 41 27061 1.36 0.8 6.6 87.2

Hindalco 809 60317 2.97 1.6 2.9 24.7

Source: India Infoline. Cf. Anirudha Dutta, “After Bombay Dyeing Who’s Next?” <www.indiainfoline.com/pobl/13oct00.html> 2 In 1997, Gujarat Ambuja had acquired Modi Cement with an installed capacity of 1.5 million tonne for just Rs.166 crore.



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market capitalization of both RCL and ICL before and after the takeover

announcements. The market capitalization of ICL prior to the takeover announcement in

October 1997 was Rs. 603.17 cores, which came down to Rs.371.55 crores in March

1998. In contrast, the market capitalization of RCL before the hints of takeover in

October 1997 was just Rs.94.62 crores. The subsequent developments on the takeover

front helped in bringing this upwards to Rs.230.18 crores in March 1998. The

shareholders of no other cement company had such a windfall in terms of value gained

considering that bottomlines of most players in the cement industry had been badly hit.3

Accelerated revenue generation

ICL probably also realized that takeover would help in augmenting revenues. Given that

in the normal circumstances the gestation period of a new plant is usually 30 months

before revenues trickle in, the acquisition route would streamline this gap. In a takeover,

the entire process would take around 6 to 8 months before the process is completed

and revenues are generated.

Enviable Capacity

Companies in the cement industry have been aiming at garnering large capacities to

remain competitive and ensure future survival and growth. ICL's acquisition of RCL also

reveals this trend.

3 All the figures mentioned herein have been taken from Prabhavathi Rao, “Hostile Takeovers-Sharks on the prowl”, Analyst, May 1998, Cf. <www. icfaipress.org/archives/Analyst/1998/may/cover-Hostile Takeovers Sharks on the prawl.htm>



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The cement industry in the country is in a fragmented state with 59 companies

operating with 115 plants. Nine groups make up for 65 per cent of the total capacity – a

clear indicator that the consolidation is due.4 ICL had started adding capacities through

acquisitions much before the acquisition of RCL. In 1997-98 alone, ICL had added 2.2

million tonnes of fresh capacity through acquisitions and expansions. Its capacity has

increased from 1.4 mt in 1989 to 4 mt by early 1998. ICL took over Visakha Cements

(0.9 mt) for Rs 380 crore and the public sector Yerraguntla plant (0.4 mt) for Rs.198

crore both in AP. This coincided with the going on stream of ICL's Greenfield plant (0.9

mt) at Adalvoi in Tamil Nadu. RCL has come in as a golden mine for ICL - by dint of

acquiring RCL's 2 mt plant, ICL has emerged as the second largest cement maker in

the country after ACC (10 mt capacity), tucked with a capacity of 7.5 mt and an enviable

35 per cent market share in South India - to achieve growth. Thus, comfortably for ICL,

the acquisition of RCL has led to enhancing capacity without creating new ones.

Increased market share

ICL could now cash in on its dominant position, especially in the southern market and

pursue an aggressive pricing strategy. With the takeover of RCL, ICL would be able to

enjoy the benefit of having all its plants in one region, thereby ensuring a substantial

market share in the region. Post acquisition, ICL's market share is expected to be 30.77

per cent in Tamil Nadu, 34 per cent in Kerala, 30 per cent in Karnataka and 43 per cent

in AP, raising its aggregate market share in the South to 33 per cent from the earlier

level of 14 per cent. It would be now easier for ICL to enter the cement deficit regions of

Tamil Nadu and Kerala and in consolidating its position in the southern markets. 4 Rather it has already started slowly. In 1999, the French cement major Lafarge acquired Raymond Cements.



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Another interesting factor in ICL's favour is the higher growth in demand for cement in

the south as compared to the national average. Prices in the Southern markets are

generally known for being steady in comparison to that in the North. Competition has

gathered momentum in the Southern market of late what with L&T's 1.75 mt plant's

operations on the anvil in Andhra Pradesh, Madras Cements' expansion plans and

Gujarat Ambuja's aggressive strategies of late. ICL's moves seem to be in the right

direction.

Cost Competitiveness of RCL

RCL's perhaps most important attraction is its cost effectiveness in comparison to ICL.

A look at the statistics reveals as to how RCL is highly cost competitive. For instance, its

raw material costs per ton is lower than ICL by nearly 42.16 per cent, power and fuel

costs are lower by 24 per cent, and employee cost is a merely a fraction (28.2 percent)

of ICL. RCL's only achilles’ heel seems to be its higher selling and distribution costs - 20

per cent higher than ICL. This could be attributed to its wide distribution network in

several states. In comparison, ICL's sales primarily come from Tamil Nadu and Kerala.

ICL can also hope to save on logistics per annum post acquisition scenario to the tune

of nearly Rs.20 crore. Additionally, the rationalization of various markets between ICL

and RCL and by cashing in on ICL's distribution network, the new ICL should be able to

realize around Rs.200 per tonne.

The benefits of economies of scale, the synergies of the juxtaposed operations would

help ICL in realizing stronger cash flows. This should happen thanks to ICL gaining a

greater regional foothold and market leadership.



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How the shareholders would actually benefit?

It is important to note what the shareholders should actually do during such bid offers.

Given that the offer generally would be accepted for a small portion, mandatory bid is to

offer for 20% of the equity, it would be sensible to offload the shares in the market when

the prices are ruling high on the back of takeover news, even though it may be at a

discount to the offer price because once bid is accepted share prices will revert back to

the normal pre-bid level. Consider the case of RCL. The market price of the scrip at the

time of the bid was around Rs.200, in comparison to the offer price of Rs.300. It would

not be easy for every shareholder to realize this price. Accepting a certainty of Rs 200

could be more practically appealing to some shareholders as against the uncertain Rs.

300. Balakrishnan, a shareholder evinces interest in such a situation. He explains, "If I

submit my shares under the offer and if only part is accepted, the certificate for the

balance will come back to me after three months or so. By this time, the market price

will fall back to earlier levels of under Rs 100. This is a risk to be evaluated carefully.

SEBI can help in this regard by making it compulsory to accept all offerings up to a

maximum of say 500 shares per applicant. This will offer relief to small shareholders.

For the institutions they can do a negotiated deal outside the offer, with either the

existing promoter or the raider at a higher price, which is possible given the

circumstances."



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ICL’s acquisition of RCL should help in enhancing the shareholder value of ICL

shareholders in the long run. This is because the market-share of ICL moves up after

the acquisition with the company emerging as the largest cement producer in South

India. And given the current wave of consolidation in the cement industry, the open offer

also benefits the shareholders of RCL thanks to the attractive offer price.

Post-Acquisition Returns to ICL Shareholders

Now, it is interesting to have a look at the post-acquisition scenario in order to

determine as to whether acquisition of RCL has actually benefited, and, if yes, to what

extent, ICL shareholders.

After acquiring RCL later, in 1999, ICL also acquired Sri Vishnu Cements Ltd. (1mt.

Capacity) – another Raju promoted company in which RCL already had 49% holding.

Therefore, with the acquisition of RCL and its subsequent merger with ICL, ICL also got

a 49 % holding in SVCL. For ICL group, Sri Vishnu cost little over Rs. 170 crores. This

meant an average price of Rs. 76 per share, though it paid about Rs. 100 per share to

the minority shareholders while complying with the takeover code through an open offer.

As can be seen in the Table 2 below Post SVCL acquisition the paid equity capital has

shown an increase.

Though the acquisition spree launched by ICL catapulted it to the top in terms of

capacity, alongside ACC, Grasim Industries and Larsen & Toubro, its profitability came

under considerable strain and its acquisitions are yet to pay. The acquisitions largely

financed by debt coupled with a recession in the market, the company is nowhere near



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to get the kind of returns for the price (Rs. 300 per share and close to Rs. 400 crores)

paid for Raasi Cements. It had a total debt of close to Rs. 1,800 crores as at the end of

March 2001. And, its debt-equity ratio is in the vicinity of 2.14:1.

As can be seen from the table below, earning per share has shown a steady decline

from March 1998, and the decline has been around 40% when compared to the figures

in 1996-97 and 1997-98. What may have acted as a dampener on company's

performance, apart from high financial costs, is the cement price trends. In 1999-2000,

despite a 15 per cent growth in volumes, prices were flat with periodic moves in either

direction. Though prices improved thereafter the company continued its insipid show, as

the company’s first quarter results in 2000-1 were not encouraging compared to those in

the first quarter of 1999-2000. The operating profit margin declined by 1.4% from 22.8%

to 21.4%. Net profit also showed a decline from Rs. 7.4 crores to Rs. 5.7 crores – a

decline of almost 30%.

The large debt burden in spite of soft interest continued to take a heavy toll on the

company’s profitability and hence shareholder returns and unable to improve its bottom

lines ICL was forced to sell its 39.5% stake in SVCL in Jan. 2002.

Therefore, what we see in this case is that a (hostile) takeover almost invariably

increases target shareholder value but the same may not be true of returns to the

shareholders of the acquirer company. If the decision to takeover another company was

not taken with prudent economic interests in mind, it may lead to decrease in the wealth

of shareholders of the acquiring company.



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Table 2:5 Financial Performance of India Cements Ltd. Account of ICL for 1998-99

incorporate results of RCL w.e.f. April 1, 1998.

Mar. 1996 Mar. 1997 Mar. 1998 Mar. 1999 Mar. 2000

Net Sales

(Rs. Crores)

687.6 712.8 782.6 1137.1 1168.4

Operating

Profits

161.5 178.2 196.8 278.3 289.8

OPM (%) 20.4 21.8 21.7 20.6 20.6

EPS (Rs.) 80.7 81.7 53.8 50.4 42.9

Cash Profits 118.0 130.7 104.0 119.9 127.6

Paid-up

Equity

(Rs.Cr.)

64.3 64.3 64.3 125.0 138.4

Shareholder

Funds

418.2 466.6 487.2 630.1 742.9

5 Source: The Business Line at <www.blonnet.com/iw/2001/01/07/stories.html>



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III. TATA-CORUS Merger Tata acquired Corus, which is four times larger than its size and the largest steel

producer in the U.K. The deal, which creates the world's fifth-largest steelmaker,

is India's largest ever foreign takeover and follows Mittal Steel's $31 billion

acquisition of rival Arcelor in the same year.

Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion. The price

per share was 608 pence(rs 484), which is 33.6% higher than the first offer which

was 455 pence.

Process of Acquisition:

• Finding A Target Business

• Appointing Advisers

• Negotiating terms

• Due Diligence

• Exchange of Contracts

• Completion

Finding a Target Business:

• Synergy of Operations

• Help the Organizations to Achieve Strategic Objectives

• Enter new markets

• Vertical Integration



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Negotiating terms:

• The nature of the fit

• Commonality of client base

• Financial strength

• Strategic intent

• Sharing of resources

• Applicable Benefits

Negotiation by TATA:

• September 20, 2006: Corus Steel has decided to acquire a strategic

partnership with a Company that is a low cost producer

• October 5, 2006: The Indian steel giant, Tata Steel wants to fulfill its

ambition to Expand its business further.

• October 6, 2006: The initial offer from Tata Steel is considered to be too

low both by Corus and analysts.

• October 17, 2006: Tata Steel has kept its offer to 455p per share.

• October 18, 2006: Tata still doesn’t react to Corus and its bid price

remains the same.

• October 20, 2006: Corus accepts terms of £ 4.3 billion takeover bid from

Tata Steel



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• October 23, 2006: The Brazilian Steel Group CSN recruits a leading

investment bank to offer advice on possible counter-offer to Tata Steel’s

bid.

• October 27, 2006: Corus is criticized by the chairman of JCB, Sir Anthony

Bamford, for its decision to accept an offer from Tata.

• November 3, 2006: The Russian steel giant Severstal announces officially

that it will not make a bid for Corus

• November 18, 2006: The battle over Corus intensifies when Brazilian

group CSN approached the board of the company with a bid of 475p per

share

• December 18, 2006: Within hours of Tata Steel increasing its original bid

for Corus to 500 pence per share, Brazil's CSN made its formal counter

bid for Corus at 515 pence per share in cash, 3% more than Tata Steel's

Offer.

• January 31, 2007: Britain's Takeover Panel announces in an e-mailed

statement that after an auction Tata Steel had agreed to offer Corus

investors 608 pence per share in cash

• April 2, 2007: Tata Steel manages to win the acquisition to CSN and has

the full voting support from Corus’ shareholders

Financing the Deal:

• TATA- CORUS Deal - $12 billion

• Equity Contribution from Tata Steel- $3.88 billion



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• Credit Suisse leaded, joined by ABN AMRO and Deutsche Bank in the

consortium.

• Of the $ 8.12 billion of financing , Credit Suisse provided 45% and ABN

AMRO and Deutsche provided 27.5% each.

Why Cash Deal?

• Tata Steel's security credit rating was investment grade whereas Tata

Steel UK had a lower security credit rating.

• 'share swap' deal less attractive to the Corus shareholders.

• 'share swap' would have diluted Tata Steel's equity base.



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Hostile Takeover

A takeover takes place when one company acquires control of another company,

usually a smaller company than the first company. It may be defined as a transaction or

series of transactions whereby a person (individual, group of individuals or a company)

acquires control over the assets of another company, either directly by becoming the

owner of those assets or indirectly by obtaining the control of the management of the

company. The company, which acquires control of another company, is called the

‘acquirer’ (offeror) whereas the company, which is acquired, is called the ‘target’

(offeree). In a case where shares are closely held (i.e. held by a small number of

persons) a takeover will generally be affected by agreement with the holders of the

majority of the share capital of the company being acquired. Where the shares are held

by the public generally, the takeover may be affected:

1. By an agreement between the acquirer and the controllers of the acquired

company;

2. By purchases of shares on the stock exchange; or

3. By means of a “takeover bid”.

A takeover bid is a technique for affecting a takeover or a merger: in the case of a

takeover, the bid is frequently against the wishes of the management of the target

company; in the case of a merger, the bid is generally by consent of the management of

both companies. It may be defined as an offer to acquire shares of a company whose

shares are not closely held (dispersed shareholding), addressed to the general body of

shareholders with a view to obtaining at least sufficient shares to give the offeror voting

control of the company.



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A takeover bid may be undertaken in the form of an offer to purchase shares for cash or

of a share-for-share exchange or of a combination of those two forms. In other words,

the consideration part in a takeover bid may be cash, or shares/debentures of the

acquiring company, or the shares of a third company, which has nothing to do with the

takeover.

A takeover may broadly be classified into two categories:

i) Agreed/Friendly Takeover: where the Board of Directors of the target agree to the

takeover, accept the offer in respect of their own shareholdings (which might range

from nil or negligible to controlling stake) and recommend other shareholders to

accept the offer. The directors of the target may agree to do so right from the start

after early negotiations or even after public opposition to the bid (which may or may

not have resulted in an improvement in the terms of the proposed offer); or the

directors of the target may actually have approached the offeror to suggest the

acquisition. In a friendly takeover, the controlling group sells its controlling shares to

another group of its own accord.

ii) Defended/Hostile Takeover: a takeover bid is hostile if the bid is initially rejected by

the target Board. It is sometimes also called ‘unsolicited or unwelcome bid’ because

it is offered by the acquirer without any solicitation or approach by the target

company. In a hostile takeover the directors of the target company decide to oppose

the acquiring company’s offer, recommend shareholders to reject the offer and take

further defensive measures to thwart the bid. The decision to defend may be

influenced by a number of factors but more often than not it is with the intention of

(a) stopping the takeover (which in turn may be prompted by the genuine belief of



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the directors that it is in interests of the company to remain independent or by a

desire of the directors to protect their own personal positions or interests); or (b)

persuading the bidder to improve the terms of its offer.

There may be different motives/causes behind launching a takeover bid and it is not

necessary, as widely believed, that only poorly performing firms are the potential targets

of a hostile bid. Bidders seem to pursue companies with strong operating managements

as often as they pursue companies that have been clearly mismanaged. In fact bidders

seldom seem to be interested in a firm where a turnaround is unlikely. For instance,

truly sick companies – or at least those whose problems do not appear to be easily

remedied – become indigestible and survive, immune form takeover, precisely because

of their inefficiency. A bidders offers a premium, often very high, to acquire a target and

a rational bidder will offer such a premium over the market price (and incur notoriously

high transaction costs as well) only if it believes that the future value of the target’s

stock under different management will exceed the price it offered the target’s

shareholders within a relatively brief period. There may be a number of objectives

behind mounting a hostile bid. It may be a strategic objective like

consolidation/expansion of the raider/acquirer. It may be aimed at achieving ‘economies

of scale’/critical mass/reducing costs in a particular product/service market. It may also

be aimed at acquiring substantial market share or creating a sort of a monopoly.

Following are the primary motive/causes of a takeover:

1. Assets at a Discount: this refers to a situation where the offeror can acquire the

assets/shares of a target at less than the value, which the offeror or its

shareholders place upon them: a process commonly referred by financial



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journalists as ”acquiring assets at a discount”. The situations in which assets may

be available at a discount are:

Ø Where the target has not put its assets to their most efficient use;

Ø Where its directors are unaware of the true value of its assets;

Ø When it has an inefficient capital structure;

Ø Where it has followed a policy of limited distribution of dividends;

Ø Where the shares have a poor market rating relative to its real prospects; or

Ø Where due to any other non-economic reasons, the shares of the target are

trading at low prices.

2. Earnings at a Discount: because the offeror can by taking over the target acquire the

right to its earnings at a lower multiple than the market places on the offeror’s own

profits, a process that can be described as acquiring “earnings at a discount”.

3. Trade Advantage or Synergy: because there is a trade advantage or an element of

synergy (i.e. a favorable effect on overall earnings by cutting costs and increase in

revenue) in bringing the two companies under a single control which is believed will

result in the combined enterprise producing greater or more earnings per share. This

has been found to be one of the biggest drivers of takeovers in the 1990s. In a globally

competitive environment the companies require a critical mass to be able to survive and

prosper and the lexicon of even the most hostile endeavors is filled with sober phrases

like synergy, the global marketplace and accretion to earnings etc. This can be

achieved either through a ‘horizontal takeover’ or a ‘vertical takeover’.

The factors leading to this improvement in earnings could include:

Ø Economies of scale;



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Ø Ensuring raw materials/ sales;

Ø Marketing advantages;

Ø Acquisition of a competitor;

Ø Diversification or reduction of earnings volatility;

Ø Purchasing management.

4. Method of Market Entry: because it represents an attractive way of the offeror

entering a new market on a substantial scale.

5. Increasing the Capital of the Offeror: Because the offeror has particular reasons to

increase its capital base. These include the acquisition of a company a large

proportion of whose assets are liquid or easily realizable instead of making a rights

issue and the acquisition of a company with high asset backing by a company

whose market capitalization includes a large amount of goodwill.

6. Management Motives: Because of motives of the management of one/other of the

Companies, either the aggressive desire to build up a business empire or personal

remuneration or the defensive desire to make the company bid- proof.

Takeovers perform following important functions in an economy:

Ø Successful takeovers help realize efficiencies by reallocating capital and

corporate assets to more high-value uses; enabling two entities to generate joint

operating efficiencies and providing companies access to financial, management

and other resources not otherwise available. It unlocks the hidden value of

unutilized/underutilized assets by transferring them from inefficient management

to an efficient management. This function of takeovers is commonly described as



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the ‘market for corporate control’. The term was coined by Professor Henry

Manne in 1965 in his seminal paper on the utility of tender offers and of an active

market for corporate control. According to this description, there is a market for

the rights to manage corporate resources in just the way that there is a market

for different kinds of goods and services. Companies are up for auction for those

who wish to take control from the existing owners. If bidders attach a higher

value to control than the existing owners, then they should be allowed to

purchase it. The market in corporate control ensures that companies pass to

those who attach highest value to ownership. Michael Jenson and Richard

Ruback, vocal supporters of hostile bids wrote in 1983: “The market for corporate

control is creating large benefits for the shareholders and for the economy as a

whole by loosening control over vast amounts of resources and enabling them

move more quickly to their highest-valued use. This is a healthy market in

operation …and it is playing an important role in helping the American economy

adjust to major changes in competition and regulation of the past decade.” They

allow companies to realize the benefit of large-scale operations or to achieve

what is called ‘economies of scale’.

Ø It is widely believed that hostile takeovers help in policing the management

conduct in widely held public corporations. It has a disciplining effect on the

incumbent management as the threat of a hostile takeover keeps them on their

toes to perform efficiently and deliver goods to the shareholders.

Ø Moreover, they help identify undervalued assets and permit shareholders to

realize the true value of their investments.



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Hostile takeover threat can trigger far-reaching changes in corporate strategy resulting

in significant gains to the shareholders. Many have claimed that without a hostile

takeover the inertia that exists within many large organizations would have prevented

such efficiency-enhancing (and consequently, shareholder value enhancing)

restructurings from taking place.

According to Weinberg and Blank a takeover may be achieved in the following ways:

Ø Acquisition of shares or undertaking of one company by another for cash.

Ø Acquisition of shares or undertaking of one company by another in exchange of

shares or other securities in the acquired company.

Ø Acquisition of shares or undertaking of one company by a new company in

exchange for its shares or other securities

Ø By acquisition of minority held shares of a subsidiary by the parent.

Ø Management buyouts.



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Aggressive Tactics of Hostile Takeover 1. Bear Hug - An offer made by one company to buy the shares of another for a

much higher per-share price than what that company is worth. A bear hug

offer is usually made when there is doubt that the target company's

management will be willing to sell.

The name "bear hug" reflects the persuasiveness of the offering company's

overly generous offer to the target company. By offering a price far in excess

of the target company's current value, the offering party can usually obtain an

agreement. The target company's management is essentially forced to accept

such a generous offer because it is legally obligated to look out for the best

interests of its shareholders.

2. Proxy Content - If you own shares of stock in a company that's involved with

a proxy contest, then it's important to understand how that contest can affect

the price of that stock. In recent years, there have been notable proxy

contests such as Carl Icahn's attempt to replace Yahoo Inc.'s board of

directors.

By definition, a proxy contest is a strategy that involves using shareholder's

proxy votes to replace the existing members of a company's board of

directors. By removing existing board members, the person or company

launching the proxy contest can establish a new board of directors that is

better aligned with their objectives.



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The easiest way to explain why a proxy contest would be launched against a

company is by supplying an illustration as the backdrop. In this example, we'll

use the well-publicized takeover attempt involving Microsoft and Yahoo.

Proxy Contest Example - Microsoft and Yahoo

In February of 2008, Microsoft Corporation made an unsolicited offer to buy

Yahoo for $31 per share. At that time, this offer represented to shareholders

a 62% premium over Yahoo's stock price prior to the announcement. With

the potential to realize a large capital gain on their investment, many

shareholders would have liked to see the merger with Microsoft become a

reality.

Unfortunately, the board of directors at Yahoo felt the offer by Microsoft

under-valued the company. Negotiations between the executives at Microsoft

and Yahoo eventually stalled, and Microsoft withdrew their offer on May 3,

2008.

Less than two weeks later, billionaire Carl Icahn launched an effort aimed at

replacing the board of directors at Yahoo via a proxy contest.

Strategy Behind Proxy Fights

In the example above, one company was being acquired by another and the

takeover attempt was considered hostile, or unsolicited. The target company

desired to remain independent, and their board of directors ultimately rejected

the acquiring company's bid.



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The acquiring company, or a large group of investors, can get frustrated with

the management or board of directors of the target company, and decide to

use a proxy fight as a strategy to force the target company to merge.

Steps Involved in a Proxy Contest

Generally, the steps involved in a proxy contest include:

1. The acquiring company and / or a group of major stakeholders, such as

large institutional investors, decide to join forces and launch a proxy contest

against the target company.

2. These investors threaten to use their proxy votes, which is commonly

used in large corporations for voting by shareholders, to make the target

company comply with their wishes. Proxy voting allows shareholders who

have confidence in the judgment of others to "stand-in" and vote for them on

corporate governance matters such as the election of board members.

3. If successful in gathering enough proxy votes, the acquiring company can

then elect new board of directors using proxy ballots.

4. These newly installed board members will be much more agreeable to the

takeover or merger, and eventually the deal is finalized.

Oftentimes, just the mere threat of a proxy contest is enough for the target

company to enter into serious merger talks with the acquiring company.

Proxy Contest Statistics

According to SharkRepellent.net, a website that specializes in the tracking of

mergers and acquisitions, there were 133 proxy contests or activist



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campaigns launched in 2009. In that same year, these investors were able to

gain board seats at 57 companies, which is a success rate of 43%.

The high rate of success for proxy contests should not come as a surprise to

anyone. The struggle for control in a company is usually initiated by large

and powerful institutions, or investors that have a great deal of money to gain

if the merger is successful.

3. Tender Offer – Tender offer is a takeover tactics in which the acquirer goes

directly to the shareholders of the target with an offer to purchase their

shares. A tender offer puts individual shareholder under pressure to tender

their shares regardless of their collective interest with each other. A company

usually resorts to a tender offer when a friendly negotiated transaction does

not work. Tender offer can be for cash or stock. But, it is more expensive than

a negotiated deal because of various cost associated with it.



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Defenses adopted against Hostile Takeover

The increase in the corporate takeover activity motivates various innovations in the art

of corporate anti-takeover. Anti-takeover defenses can be divided into preventive and

active measures. Active Anti-Takeover defenses are those which are employed after the

hostile bid attempts while the preventive anti-takeover defenses are those which are

employed before the takeover bid attempts.

A. Preventive Anti-Takeover Defenses

I. Anti-Takeover Amendments – In anti-takeover amendments the

Corporate Charter (the equivalent of Memorandum and Articles of

Association in India) is amended by including provisions which impede

hostile takeovers. Such amendments to the charter generally require

approval of the shareholders. The common types of charter amendments

are super majority provisions, fair price provisions and staggered boards

and dual capitalization.

a. Super Majority Provisions - Supermajority provisions typically increase

the shareholder approval requirement for a merger to the range, thus

superseding the approval requirement of the charter of the state in

which the firm is incorporated. Supermajority requirements may block a

bidder from implementing a merger even when the bidder controls the

target's board of directors, if the bidder's ownership remains below the

specified percentage requirement. Supermajority provisions raise the

cost of a hostile takeover and encourage potential bidders to deal

directly with the target company's board of directors, which typically



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has the option to waive the provision if a majority of directors approves

the merger (a so-called `board-out provision'). Pure supermajority

provisions would seriously limit the management's flexibility in takeover

negotiations.

b. Classified Boards – Another major type of anti-takeover amendment

provides for staggered or classified boards of directors to delay

effective transfer of control in a takeover. For example, a nine-member

board might be divided into three classes, with only three members

standing for election to a three-year term each year. Thus, a new

majority shareholder would have to wait at least two annual meetings

to gain control of the boards of directors. Effectiveness of cumulative

voting is reduced under the classified-board scheme because a greater

shareholder vote is required to elect a single director. Variations on

anti-takeover amendments relating to the board of directors include

provisions prohibiting the removal of directors except for cause, and

provisions fixing the number of directors allowed to prevent “packing”

the board.

c. Fair Price Amendment – Fair price provisions require the acquirer to

pay a ‘fair’ price to the minority shareholders of the firm. The fair price

may be stated in the form of a minimum price or in a terms of a price-

earnings multiple at which a tender offer can be made.



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Fair price provisions are most useful when the acquirer offers a two

tiered bid to the target shareholders. A two tiered offer is general

designed to give the shareholders of the target company an incentive

to tender early so as to be a part of the first tier. The provision of fair

price in the charter can force the bidder to provide those in the second

tier also with the same prices and terms in the first tier. Hence, the

existence of a fair price is a disincentive for a bidder to initiate a two

tiered offer.

d. Dual Capitalization – This is a defense mechanism used against a

hostile takeover bid, according to which the Board of Directors are

authorized to create a new class of securities with special voting rights.

This voting power is given to a group of stockholders who are friendly

to the management. A typical dual capitalization involves the issuance

of another stock that has superior voting rights to all the current

outstanding stockholders. The stockholders are then given the right to

exchange this stock for ordinary stock. The stockholders prefer to

exchange the super voting stock to the ordinary stock because the

former usually lack marketability and also fetch low dividends.

Management retains the special voting stock. This results in the

management increasing its voting control of the corporation.

II. Poison Pills - The classic 'poison pill strategy' (the shareholders' rights

plan) is the most popular and effective defense to combat the hostile

takeovers. Under this method the target company gives existing



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shareholders the right to buy stock at a price lower than the prevailing

market price if a hostile acquirer purchases more than a predetermined

amount of the target company's stock. Poison pill provisions are the most

recent and perhaps the most controversial of the antitakeover provisions.

Poison pill provisions provide target shareholders the right to purchase

additional shares at a discount or to sell shares to the target at a premium

if certain ownership changes occur, such as the acquisition of a specified

percentage of the firms shares by a bidder considered hostile by current

management. The target shareholder's right to purchase shares at a

discount is known as a flip-over plan.

Further, a poison pill variant highlighted in part two of this article series,

discussed how a company could put in a provision in its articles whereby a

hostile acquirer who succeeds in taking control of that company and/or its

subsidiaries is prohibited from using the company's established brand

name. It is believed that different Tata Companies have in place an

arrangement with the Tata Sons holding entity, whereby any hostile (or

otherwise) acquirer of any of those entities is not permitted to make use of

the established Tata brand name. Consequently, the bidder might be able

to takeover the target Tata Company but will be shortchanged as it will not

be entitled to a significant bite of its valuation -the valued brand name.

The right to sell shares at a premium is known as a `back end plan'. The

poison pill is considered the most potentially harmful antitakeover

measure since shareholder approval is not required to adopt poison pill



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provisions and management has full discretion in determining when the

poison pill provision is applicable. The purpose of this move is to devalue

the stock worth of the target company and dilute the percentage of the

target company equity owned by the hostile acquirer to an extent that

makes any further acquisition prohibitively expensive for him.

III. Staggered Board – This defence involves an amendment of the by-laws

of the company to create a staggered board of directors. A staggered

board is a board whose members are elected in different years or in other

words only part of the board comes up for election each year.

Implementation of a staggered board may cause an acquirer to have to

wait for several years or at least till the next annual general meeting

before it controls the board of directors. Because the acquirer would not

control the board initially, the acquirer would not have the power to change

management or the corporation's business plan. As with the other pre-

tender offer defences, courts will allow amendment of the charter to create

a staggered board of directors provided the amendment is allowed under

the governing corporation law and the amendment was made for a valid

business reason.

IV. Golden Parachutes - This defense requires management to arrange

employment contracts between the management and key employees to

increase their post employment compensation in the event of a hostile

takeover. When golden parachutes are created for management and key

employees, a corporation becomes less attractive to the acquirer because



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generous payments to departing management and employees could

financially deplete the corporation.

B. Active Anti-Takeover Defenses

Active Anti-Takeover Defenses technique is applicable after an acquisition bid

has been received.

I. Share Repurchases – This involves the firm buying back its own shares

from the public. This is a sound strategy and has two-fold impact. Firstly,

the amount of floating stock which is available for a raider is reduced.

Secondly, the management is able to increase its stake in the company

without investing any additional funds. Share repurchases can be done

through:

• Fixed-price tender offers (FPTs)

• Dutch auctions (DAs)

• Transferable put rights (TPRs)

• Open-Market repurchases (OMRs)

II. White Knight - After coming to know of an initial hostile bid other rival

bidders also enter the battle often offering higher bids than the initial

bidder. Among the rival bidders whose bids are recommended by the

target company are classified as ‘white knights’ or this expression is also

used to refer to a an acquirer whom the target, faced with a hostile bid,

approaches to save it from being taken over by the initial bidder.

However, this is not exactly a defense strategy by the incumbent

management because a white knight may successfully defend the target



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company from the initial hostile bid but in most cases the company is still

taken over, albeit by the white knight. Realistically, the target’s choice is

between ravishment by the hostile bidder or a hastily arranged shotgun

wedding with the ‘white knight’. Only advantage is that it raises the

offer/bid value. It may also be that the white knight may offer some

positions to the incumbent management in the merged entity. However, it

is only lesser of the two evils. Even if the management of the target firms

are able to retain their jobs (and this is not frequently the case), control is

generally ceded to the acquiring company. White knight enters the fray

when a hostile suitor raids the target company. The regulation 25 of SEBI

Takeover regulations allows the entry of a White Knight to offer a higher

price than the predator to avert the takeover bid. (With the higher bid

offered by the white knight, the predator might not remain interested in

acquisition and hence the target company is protected from the raid.)

Alcan of Canada had bought the shares in Indian Aluminium Company at

Rs.200, which was higher than Sterlite’s offer in 1998. Thus Alcan

emerged as the White Knight in this deal.

III. Greenmail - A targeted share repurchase, or greenmail, is the buyback of

the shares owned by a particular shareholder of the target who has made

or threatened a takeover bid. The greenmail payment is typically at a

premium over the prevailing market price. A large block of shares is held

by an unfriendly company, which forces the target company to repurchase

the stock at a substantial premium to prevent the takeover. The critique of



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this theory is that the management, which has mismanaged the target’s

assets, pays greenmail in order to perpetuate its ability to exploit the

targets. According to this view greenmail should be prohibited because it

decreases shareholders’ wealth and discriminates unfairly.

IV. Corporate Restructuring - Asset disposals announcement by the target

firm that parts of its existing business will be sold off, e.g., sale of

subsidiaries, the disposal of holdings in other companies, sale of specific

assets such as land or property, de-merging of completely unrelated

businesses, decision to concentrate on core businesses and hiving off

non-core interests etc. By doing so the target seeks to make the company

less attractive for a potential acquirer.

V. Pac-Man Strategy - This is nothing but a counter bid. The target company

attempts to takeover the hostile raider. This usually happens when the

target company is larger than the predator or is willing to leverage itself by

raising funds through the issue of junk bonds.

VI. Just say No – The just-say-no defense comes into play when a target

board does not yield to the potential acquirer’s demands. The board

cannot arbitrarily decide to ignore an acquirer’s overtures. Only

reasonable defensive measures can be used, and the board must be able

to demonstrate that the bid is inadequate and disrupts the long-term

strategy of the firm.

VII. Crown Jewels – In business, when a company is threatened with

takeover, the crown jewel defensive is a strategy in which the target



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company sells off its most attractive assets to a friendly third party or spin-

off the valuable assets in a separate entity. Consequently, the unfriendly

bidder is less attracted to the company assets. Other effects include

dilution of holdings of the acquirer, making the takeover uneconomical to

third parties, and adverse influence of current share prices.



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Conclusion

The basic purpose of this project report is to understand whether hostile takeover needs

to be restricted or promoted or it should be left untouched with minimum set of

regulations. It depends upon whether benefits to the society of a hostile takeover

outweigh its costs.

There are certain advantages and disadvantages of a hostile takeover and it may be

difficult to categorize it into a strict mould in order to say that hostile takeover should be

promoted or discouraged. It is a widely shared belief that hostile takeovers allow the

shareholders of the target company realize the best price of their investment or in other

words it promotes economic efficiency by transferring the control of corporate resources

from an inefficient management to an efficient one. While it is true that hostile takeovers

are value-maximizing to the target shareholders; some hostile takeovers may promote

efficiency, some may result in a misallocation of economic resources, and some may be

neutral in terms of economic efficiency. After all market behaves on the basis of past

records and future expectations and therefore, when a company makes a bid for

another share price of the target generally rises in anticipation of more profits and

greater shareholder returns from the company under the new management. But, there

is no guarantee that the new management would not mismanage and hence, if

mismanaged, the reallocation of resources may not be promoting efficiency.

Moreover, it is not necessary that only poorly managed companies become takeover

targets; even well-managed companies may be the targets of a hostile takeover, this is

especially true when the primary purpose of takeover is consolidation, business synergy



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and to achieve growth in size and volumes. When a well-managed company is acquired

by another equally well-managed company, the takeover may be neutral in terms of

economic efficiency.

Secondly, the proponents of hostile takeover zealously argue that hostile takeover has a

disciplining effect on inefficient managements and therefore, an active market for

corporate control is not only desirable but it should be promoted. However, this

disciplinary hypothesis – namely, that poor stock market performance implies poor

management - also has its limitations. Poor stock prices may be due to a number of

non-economic reasons and something else may be occurring on an industry-wide basis,

or on a narrower basis within a portion of that industry, that precludes an inference of

managerial failure based solely on below average stock performance. For example, an

overproduction in the world steel market coupled with low demand has caused share

prices of steel company to fall steeply, however, it does not imply that TISCO is a poorly

managed company and hence a potential takeover target.

Further, bidders seem to pursue companies with strong operating managements at

least as often as they pursue companies that have been clearly mismanaged and a

bidder’s search will be biased in favor of industries in which it already operates. Since

firms within the industry have greater knowledge about each other’s properties,

products and prospects, this certainty of information enables the bidder to pay a higher

premium to emerge as the winning bidder. This may result in the displacement of a

competent management of the target after acquisition. In such situations the

Disciplinary Effect of hostile takeover has no consequence.



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Therefore, it is appropriate to say that the market for corporate control has a disciplinary

effect, but the scope of that effect tends to be more limited than neo-classical economic

theory has made it out to be.

As a consequence, a public policy toward hostile takeovers that seek to promote them

in the interests of economic efficiency and greater shareholder returns may have to

contend with the dangers of increased industry consolidation and oligopolistic market.

Now, the question arises whether the conclusion drawn above varies form country to

country and can it be something different in case of India?

In the specific Indian context, we have a long history of family run business houses

which tend to pay scant regard to improving returns to shareholders and vast economic

assets are lying underutilized under their control, it may be desirable to allow a

regulated but not restricted market for corporate control to operate in order that old blue-

chip companies are run in accordance with sound management principles and the

influence of corporate families are reduced on the running and management of the

company. What should be guarded against is the notorious US-style ‘bust-up’ takeovers

and the impact of hostile takeovers on non-shareholder constituencies must also be

kept in mind.



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Bibliography

Websites:

1. www.investopedia.com 2. www.wikipedia.com 3. www.moneycontrol.com 4. www.businessline.com

Books:

1. Mergers & Acquisitions – Himalaya Publishing House Pvt. Ltd

http://www.investopedia.com/

http://www.wikipedia.com/

http://www.moneycontrol.com/

http://www.businessline.com/

Defenses Against Hostile Takeover

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