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Hostile Takeovers StrategiesHostile with an analysis of Case Studies

04/09/20232

What is Takeover???

A takeover is virtually the same as an acquisition.

The term acquisition under SEBI Takeover Regulations is defined

as

“ directly or indirectly, acquiring or agreeing to

acquire shares or voting rights in, or control over,

a target company”

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Kinds of Takeover

Friendly or Negotiated Takeover

Hostile Takeover

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Friendly or Negotiated Takeover

Friendly takeover means takeover of one company by change in its

management & control through negotiations between the existing

promoters and prospective investor in a friendly manner. Thus it is

also called Negotiated Takeover. This kind of takeover is resorted

to further some common objectives of both the parties.

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Hostile Takeover

A takeover would be considered "hostile" if

• the board rejects the offer, but the bidder continues to pursue it, or

• If the bidder makes the offer without informing the board beforehand.

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Types of Hostile Takeover

• Tender offer: The acquirer makes a public offer at a fixed

price above the current market price.

• Creeping Tender offer: Slowly buying enough shares from

the open market to effect a change in management.

• Proxy Fight: The Acquirer tries to persuade enough

shareholders, usually a simple majority, to replace the

management with a new one which will approve the takeover.

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Framework

• A hostile tender offer begins with an unsolicited offer by a bidder to purchase

a majority or all of the target firm’s shares.

• The bidder will set the offer for a particular period of time, at a price, and with

a form of payment, and may attach conditions to the offer.

• The target will ordinarily undertake evasive maneuvers.

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Profile of the Target of a hostile bid: Negative• Less promoter holding usually less than 25%.

▫ Mahan Industries Ltd – 1.48%

▫ Esaar (India) Ltd – 3.86%

▫ Tricom India Ltd – 6.03

▫ Global Securities Ltd – 9.14%

▫ Nuchem Ltd – 9.65%

▫ Pasupati Fincap Ltd – 11.51%

▫ Channel Nine Entertainment Ltd – 20.58%

• Less market value and high asset base.

• Higher liquidity in share.

• Unused debt capacity.

• Lower sales growth, returns on equity, and price/earnings ratios.

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Profile of the Target of a hostile bid: Positive

• Targets present attractive investment opportunities owing to strong growth prospects or synergies.

▫There is little evidence of poor performance prior to bids.

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Players in the Game

• Bidder: Entrepreneurs who discover profitable opportunities.

• Target: The profitable opportunity

• Free riders: Other shareholders who profit by the actions of the bidder.

• Groups within the target i.e. Directors, Majority & Minority Shareholders.

• Other potential buyers: white knights and white squires

• Arbitrageurs

• Group of Investors

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Designing a Hostile Takeover

Organize YourselfUnderstand your

Target

Evaluate Legal Pitfalls Build backup

Disarm Defenses

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Strategies of Hostile Takeover

• Market Accumulation followed by an Open Offer;

• Negotiated Deal with Financial Institutions followed by an Open Offer;

• Negotiated Deal with a breakaway Promoter Fraction followed by an Open

Offer;

• Direct offer to Shareholders.

04/09/202313

Legal Process under SEBI Takeover Regulations

No preconditions for making Hostile Takeover.

Any Person with an intent to acquire the Target Company can make Hostile Bid.

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SEBI Takeover Regulations, 2011

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Initial Threshold & Creeping Acquisition

3(1)

Acquirer along with PAC

25% or more shares or voting

rights

3(2)

Acquirer with PAC holding 25% - 75%

Creeping Acquisition - 5% in

each F.Y.

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Change in Control

Irrespective of acquisition of shares

or voting rights

Through Open

Offer Only

• Through Shareholder

ApprovalSEBI (SAST) Regulations,

2011

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Voluntary Open Offer

• Prior holding of atleast 25% or more shares;

• No acquisition during the preceding 52 weeks without attracting the obligation to make a public announcement.

Eligibility

• The aggregate shareholding not exceeds the maximum permissible non-public shareholding.Condition

• No further acquisition of shares for a period of six months after completion of the open offer except by way of another voluntary open offer or competing offer.

Restriction

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Minimum Offer Size

Mandatory Offer -

26%

Voluntary Offer -

10%

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Process ChartParticulars Timeline

(Legal)

Public announcement through notice to Stock Exchange X

Detailed Public Statement in newspapers X+5 Working Days

Draft letter of offer to be submitted to SEBI and sent to Target Company

X+10 Working Days

Last date of Competing offer X +15 Working Days

Receipt of comments from SEBI on draft letter of offer X+25 Working Days

Upward revision in offer X+33 Working Days

Comments on the offer by independent directors of Target Company

X+34 Working Days

Issue of advertisement announcing the schedule of activities for open offer

X+36 Working Days

Date of opening of offer X+37 Working Days

Date of closing of offer X+46 Working Days

Payment of Consideration X+56 Working Days

Promoters of Target Company or any

other person with or without promoters

support can make a competitive Bid as a defensive Strategy

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Warning Bells

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Signals for Target Company

• Minority shareholders starts showing interest and asking for copies of certain

documents;

• The company and its executives become the target of negative publicity.

• Increase in the number of small transaction in the shares of the Company;

• Other companies in your industry have been attacked by the raiders;

• Voluntary offers to sell the shares in the company have been received during the last

few months.

• Law suits, often with absurd claims for protection of the rights of minority shareholders.

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04/09/202323

Swraj Paul Vs. Escorts, DCM Shriram

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Parties Involved

• Target Company 1 - DCM Limited headed by Bharat Ram and Charat Ram.

• Target Company 2 – Escorts controlled by H.P. Nanda and Family.

• Acquirer – Swraj Paul through CAPARO Group.

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Background

•The Shri Ram family owned 10% stake in DCM and Nanda’s

owned < 5% stake in Escorts.

•Even this relatively small holding gave them a controlling interest

because of the support given by public financial institutions and

the backing, cultivated over the years, of politicians and the

officialdom.

04/09/202326

CAPARO attempt to Acquisition

13 companies of CAPARO Group (belongs to Swraj Paul) has acquired 80,000

equity shares of DCM and 75,000 of Escorts.

The above acquisition has exceeded the permissible Non resident Investment Limit of 5%

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DCM & Escorts Reaction

• The management of DCM and Escorts refuse to register the shares.

• Further they have brought to the notice of RBI, the violation done by the Company belonging to

CAPARO group i.e.

▫ Violation of circular dated May 2, 1983 after which no non-resident could invest and hold more

than 5% of Indian Company share capital.

▫ No permission obtained from RBI for Investment (this was the reason why Swraj Paul did not

approach CLB when Escorts and DCM refuse to register the shares.)

• The RBI could give its permission only after it has satisfied that CAPARO was a genuine company

with atleast 60% Non- Resident Indian shareholding.

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Political Move in favour of Swraj Paul

• Mr. Paul Joseph, joint controller of DSE sent a communication to all Stock

Exchanges throughout the country to step up the registration of shares in CAPARO

Company name

• It brought a variety of pressure to bear on Dr. Manmohan Singh to clear CAPARO

purchases retrospectively.

• Later on RBI refer the matter to the Ministry of Finance for the final decision.

• The finance Ministry cleared the CAPARO group acquisition for investment upto 1%

each in Indian Company.

04/09/202329

Political Move in favour of DCM

Shri Ram family members use their connection in Central

Government to persuade Paul to give up his bid through a number

of private meetings.

04/09/202330

End Result

Ultimately Both DCM and Escorts management were able to abort

the Takeover bid and CAPARO group lost on account of

controversial purchase of shares.

04/09/202331

Guy Dolle Lakshmi Mittal

04/09/202332

About the Companies

Mittal Steel

• Based in Netherlands

• Founded in 1989 as Ispat International in Sumatra, Indonesia,

• It was the largest producer of steel in terms of volume.

Arcelor

• Second largest producer of steel in terms of turnover and output.

• Created by the merger of three companies:

▫ Aceralia (Spain)

▫ Arbed (Luxembourg)

▫ Usinor (France)

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The Bid…On Jan 27, 2006, Mittal steel announced a hostile bid for Arcelor

Mittal Steel offered €28.21 per Arcelor share, i.e. a premium of 27% per share

• A minimum acceptance of more than 50%• Mittal steel shareholder approval and the Mittal family undertaking to vote in

favour of the transaction• No disposal or acquisition from Arcelor was allowed during the offer

The offer was subject to three condition

The offer from Mittal consisted of a mixture of cash and stock

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Motive Behind Takeover Bid

• Acquisition would terminate its biggest competitor dominating the

steel industry.

• Acquisition helps in companies improving their

▫ sourcing of raw materials;

▫access to more markets;

▫ better utilization; and

▫ better efficiency.

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Reaction to the Bid• The bid from Mittal Steel caused a lot of opposition and many political party opposed

the Hostile Offer -▫ The prime minister of Luxembourg said in the press that the bid was

“incomprehensible” and encouraged initiatives to stop the takeover by “all necessary means”.

▫ French Prime Minister & Finance Minister questioned the bid’s ‘industrial logic’ as well as pushing for a mobilization of ‘economic patriotism’.

▫ Spain’s Finance Minister announced its opposition against the bid and the Belgium government appointed Lazard in order to conduct a more thorough analyze of the bid.

• The board of Arcelor stated that ▫ The company did not share the same strategic vision, business model or values as Mittal

Steel▫ Deal would have risking severe consequences on the group, shareholders, employees

and its customers

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Indian Government Initiative

The Indian government felt need to protect and support him, thus

resulting in that the Indian Trade Minister, Kamal Nathn, publicly

accused the European governments of being racist and

discriminating.

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• Developed a communication plan, ‘Project Tiger’, to persuade its shareholders that the company

was better off without Mittal Steel’s involvement and to not sell their shares to Mittal Steel.

• Introduced a ‘2006-2008 plan’ with the aim to ‘maximize value creation for shareholders’ and the

board of Arcelor even promised an increase in results by 24 per cent and generous bonuses.

• Arcelor released a 13 Billion Euros merger plan with Severstal, a Russian company. This merger

would have made the new Severstal-Arcelor entity too big for Mittal Steel to buy.

• Communicated that the French government was against this deal as it was concerned about the

dismissal of about 28000 Arcelor employees

Takeover Defenses employed by Arcelor

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Market Reaction on the possible merger of Severstal-Arcelor

The possible merger of Severstal and Arcelor did not get positive reactions from

analysts, who described a merger with Mittal Steel as a more attractive and

reasonable option than merging with Severstal.

Severstal-Arcelor would geographical have been mainly restricted to the EU,

Russia and Latin America whereas a merger with Mittal would contribute to a

greater global presence, a larger production capacity and a greater self-

sufficiency for iron ore

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Conclusion

Mittal agreed to pay €40.27 for each Arcelor share, almost double the

amount they first offered, and a merger between the two giants

occurred.

Furthermore, Arcelor had to pay Severstal a fine of €140 million, as a

result in failing to close a deal after negotiations with the Russian

giant

04/09/202340

Great Offshore – Bharati Shipyard V/s ABG Shipyard

04/09/202341

About the Parties Involved

• Great Offshore Limited (Formerly known as GOL Offshore Limited) – Target Company

▫ Great Offshore Limited (GOL) was hived off from Great Eastern Shipping Compnay

Limited and Incorporated as a separate company under the supervision of Mr. Vijay

Kantilal Sheth.

• Bharati Shipyard Limited (BSL) – Bidder 1

▫ Incorporated on June 22, 1976 and Promoted by Mr. P.C. Kapoor and Mr. Vijay Kumar.

• ABG Shipyard Limited (ABG) – Bidder 2

▫ Incorporated on March 15, 1985 as the flagship company of the ABG Group and engaged

in manufacturing of variety of ships.

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Bid by BSL

BSL acquired 14.86% equity through sale of pledged shares;

On June 3, 2009, BSL made a Voluntary Open Offer for 20% at a price of Rs. 344 per

share.

Later they increased their holding to 23.23% and increased the offer price from Rs. 344

to Rs. 405, then to Rs. 560 and finally to Rs.590 per share;

Shares acquired through Open Offer – 21.02%, shareholding as on date is 49.72%.

Initially Open offer were made under Regulation 10, Later on BSL modified it to include

Regulation 12 as well. However the same was rejected by the SEBI and directed it to

continue with Regulation 10.

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Bid by ABG

Eleventh Land Developers Private Limited (ELD) along with ABG Shipyard Limited gave

a Counter Offer for 32.12% at Rs. 375 per share on June 23, 2009;

They slowly increased their stake to 8.2% and increased the Offer Price from Rs. 375 to

Rs. 450 and then to Rs. 520 per share;

As soon as Bharti Shipyard hiked its Offer price to Rs. 590, they decided to quit and sold

its 8.2% stake in market. Nevertheless, the open offer of ABG continued at a price of

Rs.520 a share and even received 15.2% shares in the Offer;

ABG made around Rs. 50 Cr. By selling shares in market at higher price;

Shareholding as on date - NIL.

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End Result

BSL ABG

Acquired Target Company

Made profit of around Rs. 50

cr. By selling shares in

market at higher price

04/09/202345

Orissa Sponge Iron and Steel Limited –Bhushan Power and Steel Limited v/s Mount Everest Trading

and Investment Limited v/s Bhushan Energy Limited

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Parties Involved

• Target Company - Orissa Sponge Iron and Steel Limited

• Acquirer - Bhushan Power and Steel Limited along with Titanic Steel Industries Limited

and Olympian Finvest Limited (“PACs”)

• Competitive Bidder 1 – Monnet Ispat & Energy Limited along with Torsteel Research

Foundation in India and TRFI Investment Private Ltd. ('PACs')

• Competitive Bidder 2 - Bhushan Energy Limited along with Mr. Neeraj Singal and other

PACs.

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Bid by Bhushan Power and Steel Limited (Acquirer)

• Pre holding of the Acquirer - NIL

• On February 07, 2009, It has given voluntary offer for the acquisition of 26% shares in the

Target Company at a price of Rs. 300.

• They later became dormant and did not fought further

• Post Shareholding of the Acquirer - NIL

04/09/202348

Bid by Monnet Group (Competitive Bidder 1)

• It had held around 38.64% in the Target Company along with the Promoters who are PAC with it.

• It joined hands with the promoters and entered into a Share and warrant purchase agreement to

acquire 27.10% Equity stake and warrants held by promoters.

• It then made an offer to acquire 20% of the Emerging Voting Rights at a price of Rs. 310 per share

which was revised to Rs. 370 per share.

• Shares acquired through Open Offer – 5.42%.

• Post Open Offer Shareholding was 71.16%.

(The percentages are calculated on the basis of equity share capital as on the date of PA without taking into effect the conversion of

warrants done at a later stage)

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Bid by Bhushan Energy Group (Competitive Bidder 2)

It had held approx. 15% share and During the Open Offer it acquired 6.10 % shares

It had made Second Competitive Offer to acquire 20% of the Emerging Voting Rights at a price of Rs.

330 per share which was further revised to Rs. 360.

Shares acquired through Open Offer – 0.02%,

Post Open Offer Shareholding was 17.12%.

35,00,000 Warrants held by the Bidder were under Litigation. Vide SEBI order dated June 12, 2014 the

matter has been resolved and it was held that pursuant to the conversion of above warrants there could

be no change in control.

(The percentages are calculated on the basis of equity share capital as on the date of PA without taking into effect the conversion of

warrants done at a later stage)

04/09/202350

END RESULT

Though the open offer has been completed. However the battle

between Monnet Group and Bhushan Energy Group is still going

on and involved various issues.

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As a Company How you can Defend Yourself

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White Knight

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The target company or its existing promoters enlist the services of another

company or group of investors to act as a white knight who actually takes over

the target company, thereby foiling the bid of the raider and retaining the control

of existing promoters.

White Knight

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ITC vs EIH

In 2010, Reliance Industries played white knight to the

promoters of EIH by buying 14.1% in the flagship hotel

chain. The move was seen as an attempt to thwart the ITC

group which had gradually raised its stake in EIH to 14.8%

over the years.

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Highlights

• ITC acquired 14.98% shares of EIH and planning to go beyond 15% by

making open offer.

• To thwart this threat for acquisition, the promoters of EIH offered their 14.2%

stake to Reliance and the offer was accepted by Reliance.

• In this way, Reliance ruins ITC dream of hostile takeover of EIH.

• As on date, Reliance holds 18.53% and ITC holds 15.98% stake in EIH.

• Ms Nita Ambani and confidante Manoj Modi are on the Board of EIH.

04/09/202356

RK Damani vs VST Industries

In 2001, stockbroker Radhakishen Damani made an

open offer for BAT-controlled VST Industries, but was

foiled by ITC which entered the fray as a white knight,

with support from BAT. Damani still holds 26% in VST.

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Highlights

• Mr. Damani, though his investment arm Bright Star Investments acquired 14.97% stake in VST.

• In 2001, Hostile Bid for acquisition of 20% stake at a price of Rs. 112 per share.

• ITC enters the Battle as White Knight and made the offer at a price of Rs. 115 per share and

further increased to Rs. 126 per share.

• Damani hiked the price to Rs. 151 per share and size to 30%.

• However, Damani fails to win over the battle as Banks, Fis, Insurance company holding 22%

have not give their support to him.

• As on date, he holds 25.95% stake in VST Industries.

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Greenmail

04/09/202359

Greenmail is a strategy where the target company agrees to buy back the

bidder's stockholding in the target company but at a substantial premium to

the fair market stock price to avoid the hostile takeover. This tactic shall be

used only after a cost-benefit analysis. This is quite similar to targeted

repurchase strategy of avoiding hostile takeover.

Greenmail

04/09/202360

Abhishek Dalmia vs GESCO

In 2000, Abhishek Dalmia cornered 10.5% in the

Sheths-controlled GESCO Corp and made an open

offer for another 20%. But rather than dislodging the

existing promoters, Dalmia sold his stake to them for

profit.

04/09/202361

Arun Bajoria vs Bombay Dyeing

In 2000, Kolkatta-based Arun Bajoria bought 15% in Bombay

Dyeing, and threatened to make an open offer to public

shareholders. He finally sold out his stake to the Wadias-- the

promoters of Bombay Dyeing--at a profit.

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Other Defenses against Hostile Takeover

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Non Voting Stock

Non-voting stock is that stock which gives the

shareholder nil voting rights on the matters relating to

the management of the company. This can be used as

a strategy to avoid hostile takeovers if a company

issues all the voting shares to its promoters and offers

only non-voting shares to the public.

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Crown Jewel Defense

Crown jewel defense is a strategy where the target company spins

off its major attractive assets to new company specially formed for

this purpose. This makes the target company less attractive for the

hostile acquirer. Crown jewel defense is a useful tactic to avoid

hostile takeover especially for those companies where its assets

backing is major strength.

This defense is not practical in India because of Reg. 26(2)(a) of Takeover Regulations, which restricts the BODs of Target Company & any of its subsidiary from alienating any material assets outside the ordinary course of business without the approval of shareholders of the Company by Special resolution.

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Gray Knight

In this tactic, the services of a friendly company or a group of

investors are engaged to acquire shares of the raider (Listed

Company) itself to keep the raider busy defending himself and

eventually force a break.

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Pac-man defense

Pac-man defense is a strategy where the target company

starts buying the shares of its acquirer company with the

ultimate objective of taking over its acquirer. Although the

effect will almost be the same, the matter is just of

acquiring controlling authority. This strategy was used in

Bendix Corporation Vs Martin-marietta in August 1982.

04/09/202367

Highlights

• Bendix Corporation Vs Martin-marietta was one of the most interesting battle in U.S. Economic History.

• In August 1982, Mr. William Agee, chairman of Bendix made a bid for MARTIN-MARIETTA which was

rejected by it.

• As a defense, Martin-marietta initiated its own tender offer for Bendix.

• Both the firms are engaged in various defenses including litigations.

• At last, Mr. Edward Hennessey, chairman of Allied Signal was introduced as “White Knight” of Bendix

and won control over it.

• Mr. Hennessey signed an agreement with Martin-marietta to exchange shares.

• Martin-marietta remained independent and Mr. Hennessey end up with valuable Bendix assets.

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Poison Pill

Poison pill is a strategy where the target company issues low-priced

preference shares to its shareholders. This increases the total

issued share capital of the target company and consequently makes

it more costly for the acquirer to acquire the target company.

Although this strategy may cause loss to the target company but this

strategy is sometimes very effective in avoiding the hostile takeover

as in Saurashtra Cement Case where the company allotted shares

to its promoter and other foreign companies and expand its capital

base thereby made it more costly for the Acquirer as well as made

the offer invalid as it was not made on the expanded capital.

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Suicide pill

This is the extreme version of poison pill where the

tactics adopted by the target company to avoid

hostile takeover results in self-destruction. But this

defense is not practical and thus not normally

resorted to.

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Positive Outcome of Hostile takeovers

• Results in disclosure of true value of the Company.

• Control would lie with the person who values it most. It might be either the

existing promoters or the New Hostile Bidder.

• Results in an efficient allocation of resources.

• Shareholders gets an opportunity to decide whether to sell their shares or

continue with the Company.

• Pressure on the management to work efficiently and thus contribute in

Corporate Governance.

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Reason for Non-Popularity of Hostile Takeover in India

Hostile acquisitions have limited reference in Indian corporate history

• Dominant promoter shareholding

• Takeover Regulations favor consolidation of holding by persons in control

• Financial institutions as ‘friendly’ shareholders

• Domestic acquirers have limited access to funding

• Historical impediments to acquisitions by foreign entities

▫ Sectoral caps

▫ FIPB/RBI approval requirements

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