TAKEOVER AND DEFENCE TACTICS

INTRODUCTION

When the existing promoters are not ready to cede their control BUT!

The acquirer is hell bent upon acquiring the target company then the corporate game turns into a war and both sides have to deploy ‘tactics’.

Friendly versus Hostile Takeovers

Friendly Takeovers Hostile Takeovers1. Agreeable to be taken over by the

acquirer willing to peacefully cede control

1. Sometimes, promoter group receives an offer from a prospective acquirer whom they don’t want to sell out.

It may also happen that some of the entities in the promoter group are against the sales out.

2. Cooperation in sharing critical information required by the acquirer to carry out valuation.

2. An acquirer has to depend upon information available in public domain only,

and has to force his way for due diligence and regulatory compliance.

3. Chances of the acquirer allowing the promoters/management of the target company to continue having important role post- acquisitions are far better.

3. Allowing continuation of the target company’s management/promoters is highly unlikely.

4. Example: Daiichi Sankyo’s acquisition of Ranbaxy

4. Example: Mittal Steel’s acquisition of Arcelor

Dawn Raid

Takeover Tactics

Brokers acting on behalf of acquirer/raider swoop down on stock exchange(s) at the time of its opening and buy all available shares before the target/prey wakes up.

This is not a good tactic.

An acquirer can get a sizeable chunk in capital in the dawn raid only if the scrip is highly liquid in comparison to its total paid-up capital.

Price shoot up

Investors, sensing the acquisition, may hold back the quantity offered thereby reducing the liquidity and making the dawn raid fail.

Takeover tactics

Dawn Raid

In the Indian context, dawn raid would be much more expensive.

It is rather more prudent to gradually acquire upto slightly below 15 per cent over a period of time and then make an open offer.

Takeover Tactics

• The acquirer makes a very attractive tender offer to the management of the target company for the latter’s shareholders.

This is a sound tactic.

• Backed by the acquirer’s preparedness to make a hostile open offer to the public shareholder if the board of the target company rejects the offer.

• Board generally cannot reject it, chances may come that public shareholders would favorably respond to the offer.

Bear Hug

Offer beneficial for shareholders

Accept or Reject???

Bear Hug

Company ACompany B

Takeover Tactics

Same tactic as bear hug but made on a Friday or Saturday night (last working day of the week) asking for a decision on Monday (first working day of the subsequent week).

To give very little time to the promoter/board of the target company to set up their defences.

This is also called ‘Godfather Offer’.

Saturday Night Special

Takeover Tactics

Acquirer convinces majority (in value) shareholders to issue proxy rights in his favour so that he can remove the existing directors from the board of the target company and appoint his own nominees…

This method is not sustainable because

Every time the acquirer will have to keep on acquiring proxies from the geographically scattered shareholders.

Such removal or appointment of majority of directors will be treated as an acquisition of control over the target company requiring the acquirer to make an open offer.

Proxy Fight

Successful Takeover Tactics in India

1. Market accumulation followed by an offer(

➨(takeover regulations)

It would rather be more prudent to gradually purchase from the stock market upto slightly below 15 per cent over a period of time and then make an open offer.

The acquirer can and should control the highest price paid by him while purchasing the shares in the stock market.

Also, acquisition upto first 5 per cent can be done without any disclosure, helping the acquirer to keep his market acquisition cost low.

Negotiated deal with financial institutions followed by an open offer

Upon striking such a deal, an acquirer would first enter into a Memorandum of Understanding (MOU) with FIs to acquire more than 15 per cent stake followed by an open offer.

The open offer will have to be for minimum 20 per cent of the equity capital of the company.

Successful Takeover Tactics in India

Negotiated deal with a breakaway promoter faction followed by an open offer

Factions who get sidelined in managing the company are sometimes willing to get out at the ‘right’ price by selling out to other promoter faction(s) or to outsiders.

Then make an open offer to wrestle the control out of the hands of the entire promoter family.

Successful Takeover Tactics in India

Direct offer to the shareholders of the target company

Acquirer/raider makes an open offer to the shareholders of the target company without acquiring any substantial shares either from the open market or through a negotiated deal.

In India, an acquirer does not have to acquire any shares of the target company prior to his open offer.

Successful Takeover Tactics in India

Disadvantage:

If such an offer fails, but still a good amount of shares are tendered by the shareholders, the acquirer would have to acquire them and sink a good amount of money without gaining any control over the target company.

Advantage:The acquirer would not have sunk any money in the market

purchases.

Successful Takeover Tactics in India

Crown Jewels

Defence Tactics

The target company sells its highly profitable or attractive business/division to make the takeover bid less attractive to the raider.

The target company makes a preferential allotment to existing promoters or friendly shareholders to increase the control of the promoter group.

BUT! SEBI (Disclosure and Investor Protection DIP) Guidelines, 2000.

The existing promoters have to pay a price close to the market price, which makes such preferential allotment expensive.

A preferential allotment would normally trigger an open offer requiring the promoters to buy additional 20 percent from the public.

Blank Cheque

The target company amends its charter, i.e., Memorandum of Association or Article of Association or the like to make the takeover expensive or impossible.

Shark repellents

Examples of shark repellent

A company may stipulate a certain minimum educational qualification and/or experience for directors….

stipulating a super majority (say 90 percent) would be required to approve a merger.

Any strategy which upon a successful acquisition by the acquirer, creates negative financial results and leads to value destruction.

Poison Pill

Poison pill can take various forms:

– The target company may issue rights/warrants to the existing shareholders entitling them to acquire large number of shares in the event an acquirer’s stake in the company reaches a certain level (say 30 percent). This is also called shareholders’ right plan.

In India, however, this is not possible under extant regulations.

- The target company may add to its charter a provision that gives the current shareholders a right to sell their shares to the acquirer at an increased price (say 100 percent above last two or four week’s average price), if the acquirer's stake in the company reaches a certain limit (say 30 percent ).

In India, however, this would not be allowed under extant regulations.

-The target company may borrow large long-term funds from banks or financial institutions, However, the repayment terms would be such, that in the event of a takeover of the target company the same would become repayable immediately. It may further add twist by making the loan repayable at a premium. This tactic is possible in India.

-1. Borrow not for its genuine needsLike for paying one time huge dividend to the shareholders.(‘leveraged cash out’.)In India, this is possible.

2. To buy back its shares to have a double effect of increasing promoters’ stake and the negative effect on cash flows. (‘leveraged recap’ or ‘leveraged recapitalization’).

This tactic is possible in India if executed smartly, working around the SEBI regulations.

• Current management team of the target company threatens to quit en masse in the event of a successful hostile takeover.

• BUT!!!!

People Pill

It virtually destroys a company either through extreme form of poison pill or crown jewel tactic or through stripping assets.

In India this tactic can be used prior to an acquirer making public announcement of an open offer.

ACQUIRERS BEWARE!!

Scorched Earth

◙ The target company or its promoters start acquiring sizeable holding in the acquirer/raider’s company, threatening to acquire the raider itself.

◙ This tactic is possible in India prior to the acquirer hitting the trigger for open offer and making the public announcement thereof.

Pacman

The target company or the existing promoters arrange through friendly investors to accumulate large stock of its shares with a view to raise its market price.

➨ This makes the takeover very expensive for the raider.

In India this is possible;

Green mail

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,.

This tactic is possible in India.

Example: Used by Indal to foil Sterlite’s bid.

White Knight

Services of a friendly company or a group of investors are engaged to acquire shares of the raider itself to keep the raider busy defending himself and eventually force a truce.

This is also possible in India.

Grey Knight

A contractual guarantee of a fairly large sum of compensation is issued to the top and/or senior executives of the target company whose service are likely to be terminated in case the takeover succeeds.

Golden Parachute

• Buy-back, with or without a creeping acquisition, can help the existing promoters to consolidate significantly their stake without requiring to shell out their own money, except for creeping acquisition part.

• However, what would happen, if due to the buy-back, the existing promoter’s stake increases by more than 5 percent? Would it trigger an open offer?

• SEBI used to maintain the view that for any increase in the promoter’s holding (in terms of percentage) as a result of buy-back, the promoters should seek exemption from making an open offer from SEBI (failing which they would have to make an open offer). Now it has allowed such increase upto 5 per cent beyond which, either an exemption by SEBI or open offer would be necessary.”

Buy-back as a takeover defence tactic

Defence Tactics• In India, at least as of now, a company cannot effect a buy-back out of

borrowed funds.

• In short, in India, if one wants to use buy-back as a takeover defence tactic, he has to follow a circuitous route at present.

Thank you