2011

Defenses Against Hostile Takeover Takeover

Hemanshu Roy United Business Institutes, Belgium, Europe MBA Finance – July 2010 Batch

United Business Institutes, Belgium, Europe

2011

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.

Hemanshu Roy

MBA Finance JL2010

2

Defenses against Hostile Takeover

United Business Institutes, Belgium, Europe

2011

Table of Content

Sr. No

1 2 3 4 5

Title Acknowledgement Table of Content Introduction Case Studies Hostile Takeover Aggressive Tactics of Hostile Takeover Defenses adopted against Hostile Takeover Conclusion Bibliography

Pg No 2 3 4 7 28 35 39 48 51

Hemanshu Roy

MBA Finance JL2010

3

Defenses against Hostile Takeover

United Business Institutes, Belgium, Europe

2011

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.
Defenses against Hostile Takeover

Hemanshu Roy

MBA Finance JL2010

4

United Business Institutes, Belgium, Europe

2011

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: Whether hostile takeovers are always beneficial to the target shareholders? Whether hostile takeover has a disciplining effect on an inefficient management or does it just destabilize the incumbent management? Do hostile takeovers always lead to efficient allocation of scarce economic resources? What is the effect of hostile takeover on the shareholders of the acquiring company? Whether hostile takeover has adverse consequences on non-shareholder constituencies of the target company? Whether an active market for corporate control is desirable in India?

Hemanshu Roy

MBA Finance JL2010

5

Defenses against Hostile Takeover

Research Questions The questions. 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. Belgium.United Business Institutes. Europe 2011 The purpose of this project report is to understand the concept of hostile takeovers. which have been used. which have been dealt with in. understand the implication from the perspective of not only the shareholders but also other stakeholders in the company. are articles. this paper are: What is a takeover and how is a hostile takeover different from a friendly takeover? What are the defenses to a hostile takeover? Hemanshu Roy MBA Finance JL2010 6 Defenses against Hostile Takeover . books and websites.

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. Europe 2011 Case Studies I. 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. Hemanshu Roy MBA Finance JL2010 7 . Belgium.6 billion bid for Arcelor in January 2006 Arcelor management announce large dividend Arcelor makes very positive profit report. reduction in social standards Arcelor managers fear Mittal will shift emphasis from long.United Business Institutes. and Severstal engage in heavy advertising. Mittal. • • • • • • Arcelor-Mittal Takeover Case Mittal makes surprise €18. including break-up fee of Defenses against Hostile Takeover €140 million • Arcelor.to short-term goals Arcelor commits to buy North American steel company that will cause Mittal antitrust problems o Agreement contains clause making it costly to not go through with sale • Arcelor made €13 billion deal with Severstal of Russia.

United Business Institutes. 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. Belgium. The meeting isn’t scheduled until after Severstal deal has been nearly finalized.S. 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. • Mittal raises offer to €26. anti-trust authorities Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 8 .5 billion. Europe 2011 an unusually high percent. 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.

and we wanted to share our perspective directly with you. Belgium. Europe 2011 Mittal’s Letter to Arcelor Shareholders. • We believe that the transaction with Alexei Mordashov gives him control over Arcelor. a quantum leap in the consolidation of our industry. In an attempt to resist a combination with Mittal Steel. they plan to proceed unless Arcelor shareholders holding together more than 50% of the capital vote against it. together. Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 9 . We strongly disagree.United Business Institutes. 2006 Ladies and Gentlemen. The Arcelor Board claims that this is a legitimate and superior alternative to a combination with Mittal Steel. let alone pay a control premium. • The Arcelor Board is proposing to proceed with this significant transaction without seeking a positive vote from shareholders. June 20. The transaction has now reached a critical phase. 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. 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. We believe this process does not give you a proper say in this transformational transaction for your company. yet. the transaction has been structured to allow him not to make an offer for the whole 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. Belgium. the Board can take majority control away from us by issuing new shares to Alexei Mordashov after completion of our offer. the owners of the company. We have better and more diversified mining assets than SeverStal. and the related undervaluation of the Mittal Steel stock today. Mittal Steel is a substantially bigger. more diversified. It is the number one steel producer in the world. which itself was an alltime high for the company. Only the Mittal Steel – Arcelor combination would be a truly transformational deal for the steel industry. 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. We Defenses against Hostile Takeover believe that neither the contemplated partial buy-back by Arcelor.United Business Institutes. nor the terms of the Severstal transaction establish a value of €44 a share for Arcelor.22. Based on the weighted average value of the Mittal Steel stock since announcement of our proposal on January 27. A combination with Mittal Steel will also deliver substantially more value to you. 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. Hemanshu Roy MBA Finance JL2010 10 . and more profitable company than SeverStal. Europe 2011 • Lastly. We firmly believe that the future of Arcelor warrants a real choice – one that has to be made by you.

This is a critical juncture in the life of Arcelor. Your participation in the June 30 meeting is critical. Market reactions to defense tactics: • Market responds especially favorably to LBO announcements. Europe 2011 Unless there is a veto by holders of more than 50% or more of the capital on June 30.United Business Institutes. 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 Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 11 . control of the company could be transferred in a value destroying transaction. Belgium. We strongly encourage Arcelor shareholders to exercise their veto right at this meeting and vote against the SeverStal project.

Belgium.United Business Institutes. while those to establish stronger antitakeover defenses had significant negative returns Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 12 . Europe 2011 • 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. 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 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. 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.

United Business Institutes. (RCL) in a negotiated deal for Rs. after an initial stay. the chief promoter agreed to sell his entire 32 per cent holding in RCL at Rs. 140 crore.36 per cent. the deal could be reached only after three months long "hostile takeover" bid mounted by the ICL over RCL. Though generally. the RCL stock rose by a whooping 318 per cent. 286 per share. the Andhra Pradesh High Court vacated its earlier stay against the takeover proceedings. 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. Belgium. Dr B V Raju. 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. Europe 2011 II. 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. during the same period the ICL stock fell by 46.60.15 from Rs 57. between October 1997 to March 1998. the share price of the target company should remain high even if the initial bid has failed on the expectation of Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 13 . When looked at the takeover bid from target shareholder’s point of view. However. the Raasi scrip crashed to Rs 181 from Rs 187 at the closing on the BSE while India Cements’ share improved to Rs 63. India Cements’ Acquisition of Raasi Cements Though the India Cements Limited (ICL) acquired the Hyderabad-based Raasi Cements Ltd. Mr. On the other hand when the sale was agreed upon. In contrast.

there is no possibility of a fresh offer and expectation of a high premium is naturally dashed pulling the share price down. greater market share. However. But when the bid has ended in a negotiated deal. which may not be offset by the gains that may accrue due to synergy of operations and management between the two companies. The possibilities of sales enhancement. 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. marketing and distribution expected from the takeover and the future growth strategies of the acquirer. Belgium. 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. operating economies and improved management would all decide the rewards to the acquiring company’s shareholders in the future. Europe 2011 a fresh tender offer from other bidders. Now it is worthwhile to investigate into the possible reasons that may have triggered the hostile bid by ICL against RCL. Hemanshu Roy MBA Finance JL2010 14 Defenses against Hostile Takeover .United Business Institutes.

10 0. Many of these companies' share prices are below their net asset values per share-sometimes drastically so.7 0.0 28.4 0. with the average price-earnings (P/E ratio) on the Indian markets ruling at 14.48 0.6 0.44 0.6 0.United Business Institutes. Madras Cements.1 0.7 51.0 51.0 Hemanshu Roy MBA Finance JL2010 15 Defenses against Hostile Takeover 22.1 1.6 1.0 16.11 0. Bajaj Auto and Hindalco.0 1 Book Value (x) 0.44 0.0 31.28 0.3 0. 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.13 0. businesses.7 75. Bharat Forge.07 0. if often poorly run.3 0.9 1. ACC. Europe 2011 Depressed Stock Prices Make An Easy Prey1 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.4 0.4 0.4 0. That also makes takeovers a cheap way to buy real estate.1 0.37 0.12 0.37 0.2 0.4 0.9 1.7 46.6 0. the families have run these companies like fiefdoms.8 . ships. Belgium.3 0.45 0.8 0. factories.41 0.8 32.4 0. giving scant attention to share price and returns to shareholders.18 0.1 68.4 51.5 0. The low valuation of these companies.4 1. makes many of them potential takeover candidates and encourage predators to launch a hostile bid.0 36. and dominant.1 23.6 0.1 Promoters (%) 30. Table 1: Name Price (Rs) Crompton Greaves Essar Steel HPCL Voltas Century Textiles Ashok Leyland Telco Sesa Goa Grasim Thermax India Cements Tata Chem BILT BHEL 22 6 101 27 27 35 78 42 172 68 37 34 58 101 Market cap Market cap/ (Rs m) 1126 2005 34171 897 2698 4168 19923 840 15813 1571 5212 6325 3501 24709 Sales (x) Price/ Market cap/ Cash (x) 0. In the Table it can be seen that barring a few companies like L&T.5 0.5 0.

1 1.166 crore.8 1.6 1.6 million tonnes2 and setting up a new plant of same capacity at current prices would entail an outgo of around Rs.36 2.indiainfoline. Therefore. Belgium.55 0.8 33.7 Source: India Infoline.1 8.9 12.9 .1 1.United Business Institutes.9 0. 150-200 crore.2 24. Europe 2011 Due to general economic recession prevailing in the last 2-3 years. Compare the M&M Tisco Tata Power L&T ACC GESCO Bharat Forge Madras Cements Bajaj Auto Nalco Hindalco 161 88 64 158 88 25 97 3900 307 41 809 17689 32361 7513 39482 15129 6600 3570 4720 36742 27061 60317 0. Anirudha Dutta. For example.53 0.9 2.9 0.64 0. setting up a 1 million tonne plant would roughly cost around Rs. At these abysmally low prices. it is clear that the market capitalization of most cement stocks was way below the cost of setting up similar capacities.5 million tonne for just Rs.400 crores.6 2.5 18.0 1.9 1.9 6. Hence predators find it more reasonable and attractive to launch a takeover bid rather than going in for expansion. This has resulted in bringing down the P/E ratios of several cement scrips to just 6 or 7.71 0.4 1. RCL has a capacity of 1.69 0.1 42.8 87.550-600 crores.6 28. several cement companies with capacities of around one million tonne can be acquired for Rs. Cf.4 1. Hemanshu Roy MBA Finance JL2010 16 Defenses against Hostile Takeover 30.92 1.com/pobl/13oct00. the demand for cement has been very sluggish which has been reflected in the depressed stock prices of major cement manufacturers. Gujarat Ambuja had acquired Modi Cement with an installed capacity of 1. “After Bombay Dyeing Who’s Next?” <www.html> 2 In 1997.3 1.19 1.1 14.7 0.3 19.1 0.6 1.50 0.0 3.2 0.5 1.57 0.97 0.4 0.

In a takeover.62 crores. icfaipress. Defenses against Hostile Takeover All the figures mentioned herein have been taken from Prabhavathi Rao. May 1998. Europe 2011 market capitalization of both RCL and ICL before and after the takeover announcements. In contrast. which came down to Rs.94. the entire process would take around 6 to 8 months before the process is completed and revenues are generated. Cf. ICL's acquisition of RCL also reveals this trend. “Hostile Takeovers-Sharks on the prowl”. Belgium.371. 603. Enviable Capacity Companies in the cement industry have been aiming at garnering large capacities to remain competitive and ensure future survival and growth. The market capitalization of ICL prior to the takeover announcement in October 1997 was Rs.17 cores. <www.55 crores in March 1998. The subsequent developments on the takeover front helped in bringing this upwards to Rs. Analyst.htm> 3 Hemanshu Roy MBA Finance JL2010 17 . the market capitalization of RCL before the hints of takeover in October 1997 was just Rs.3 Accelerated revenue generation ICL probably also realized that takeover would help in augmenting revenues. the acquisition route would streamline this gap.18 crores in March 1998. Given that in the normal circumstances the gestation period of a new plant is usually 30 months before revenues trickle in.org/archives/Analyst/1998/may/cover-Hostile Takeovers Sharks on the prawl.230. 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.United Business Institutes.

4 Rather it has already started slowly. ICL has emerged as the second largest cement maker in the country after ACC (10 mt capacity). Belgium. raising its aggregate market share in the South to 33 per cent from the earlier level of 14 per cent. ICL would be able to enjoy the benefit of having all its plants in one region.to achieve growth. This coincided with the going on stream of ICL's Greenfield plant (0.2 million tonnes of fresh capacity through acquisitions and expansions.4 mt) for Rs. ICL had added 2. With the takeover of RCL.4 mt in 1989 to 4 mt by early 1998.by dint of acquiring RCL's 2 mt plant. Increased market share ICL could now cash in on its dominant position. RCL has come in as a golden mine for ICL . In 1997-98 alone. especially in the southern market and pursue an aggressive pricing strategy.9 mt) for Rs 380 crore and the public sector Yerraguntla plant (0. 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. comfortably for ICL. tucked with a capacity of 7. ICL's market share is expected to be 30. Nine groups make up for 65 per cent of the total capacity – a clear indicator that the consolidation is due.198 crore both in AP. Its capacity has increased from 1.5 mt and an enviable 35 per cent market share in South India . 30 per cent in Karnataka and 43 per cent in AP.4 ICL had started adding capacities through acquisitions much before the acquisition of RCL. Europe 2011 The cement industry in the country is in a fragmented state with 59 companies operating with 115 plants. 34 per cent in Kerala. In 1999. the French cement major Lafarge acquired Raymond Cements. ICL took over Visakha Cements (0. thereby ensuring a substantial market share in the region.77 per cent in Tamil Nadu. the acquisition of RCL has led to enhancing capacity without creating new ones.United Business Institutes.9 mt) at Adalvoi in Tamil Nadu. Thus. Hemanshu Roy MBA Finance JL2010 18 Defenses against Hostile Takeover . Post acquisition.

This could be attributed to its wide distribution network in several states. Europe 2011 Another interesting factor in ICL's favour is the higher growth in demand for cement in the south as compared to the national average. Additionally. Prices in the Southern markets are generally known for being steady in comparison to that in the North.75 mt plant's operations on the anvil in Andhra Pradesh. and employee cost is a merely a fraction (28. 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. ICL can also hope to save on logistics per annum post acquisition scenario to the tune of nearly Rs. Belgium. its raw material costs per ton is lower than ICL by nearly 42.200 per tonne. Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 19 . Competition has gathered momentum in the Southern market of late what with L&T's 1.20 per cent higher than ICL. power and fuel costs are lower by 24 per cent. RCL's only achilles’ heel seems to be its higher selling and distribution costs . ICL's sales primarily come from Tamil Nadu and Kerala. ICL's moves seem to be in the right direction. This should happen thanks to ICL gaining a greater regional foothold and market leadership. the new ICL should be able to realize around Rs. For instance. the synergies of the juxtaposed operations would help ICL in realizing stronger cash flows. In comparison.16 per cent. Madras Cements' expansion plans and Gujarat Ambuja's aggressive strategies of late. The benefits of economies of scale.2 percent) of ICL.United Business Institutes.20 crore. the rationalization of various markets between ICL and RCL and by cashing in on ICL's distribution network.

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. Europe 2011 How the shareholders would actually benefit? It is important to note what the shareholders should actually do during such bid offers. By this time. It would not be easy for every shareholder to realize this price. "If I submit my shares under the offer and if only part is accepted. a shareholder evinces interest in such a situation. Belgium. This is a risk to be evaluated carefully. mandatory bid is to offer for 20% of the equity. Given that the offer generally would be accepted for a small portion.200. it would be sensible to offload the shares in the market when the prices are ruling high on the back of takeover news. Accepting a certainty of Rs 200 could be more practically appealing to some shareholders as against the uncertain Rs. the certificate for the balance will come back to me after three months or so. 300. This will offer relief to small shareholders." Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 20 . with either the existing promoter or the raider at a higher price.300. Consider the case of RCL. Balakrishnan. in comparison to the offer price of Rs.United Business Institutes. the market price will fall back to earlier levels of under Rs 100. SEBI can help in this regard by making it compulsory to accept all offerings up to a maximum of say 500 shares per applicant. For the institutions they can do a negotiated deal outside the offer. The market price of the scrip at the time of the bid was around Rs. which is possible given the circumstances. He explains.

ICL also got a 49 % holding in SVCL. though it paid about Rs. its profitability came under considerable strain and its acquisitions are yet to pay. Therefore. Belgium.United Business Institutes. to what extent. This meant an average price of Rs. and. And given the current wave of consolidation in the cement industry. Post-Acquisition Returns to ICL Shareholders Now. (1mt. 100 per share to the minority shareholders while complying with the takeover code through an open offer. Capacity) – another Raju promoted company in which RCL already had 49% holding. 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. the open offer also benefits the shareholders of RCL thanks to the attractive offer price. 76 per share. The acquisitions largely financed by debt coupled with a recession in the market. the company is nowhere near Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 21 . if yes. ICL shareholders. For ICL group. 170 crores. with the acquisition of RCL and its subsequent merger with ICL. alongside ACC. After acquiring RCL later. Though the acquisition spree launched by ICL catapulted it to the top in terms of capacity. Grasim Industries and Larsen & Toubro. ICL also acquired Sri Vishnu Cements Ltd. in 1999. Europe 2011 ICL’s acquisition of RCL should help in enhancing the shareholder value of ICL shareholders in the long run. As can be seen in the Table 2 below Post SVCL acquisition the paid equity capital has shown an increase. 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. Sri Vishnu cost little over Rs.

Though prices improved thereafter the company continued its insipid show. Therefore. despite a 15 per cent growth in volumes. 1. prices were flat with periodic moves in either direction.5% stake in SVCL in Jan. 300 per share and close to Rs. apart from high financial costs.8% to 21.4 crores to Rs. As can be seen from the table below. 2002. 5. as the company’s first quarter results in 2000-1 were not encouraging compared to those in the first quarter of 1999-2000.14:1. What may have acted as a dampener on company's performance. 400 crores) paid for Raasi Cements.800 crores as at the end of March 2001. is the cement price trends. And. If the decision to takeover another company was not taken with prudent economic interests in mind.United Business Institutes. 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. 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. Europe 2011 to get the kind of returns for the price (Rs. 7. The operating profit margin declined by 1. earning per share has shown a steady decline from March 1998. It had a total debt of close to Rs.4% from 22.4%.7 crores – a decline of almost 30%. its debt-equity ratio is in the vicinity of 2. and the decline has been around 40% when compared to the figures in 1996-97 and 1997-98. In 1999-2000. Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 22 . Net profit also showed a decline from Rs. it may lead to decrease in the wealth of shareholders of the acquiring company. Belgium.

6 487.f.1 Mar.3 289.0 64.html> Hemanshu Roy MBA Finance JL2010 23 Defenses against Hostile Takeover .5 20.e.8 Mar.8 81.9 125. 1998 782.8 104.8 Mar. Account of ICL for 1998-99 incorporate results of RCL w. Belgium.) Cash Profits Paid-up Equity (Rs.7 53. Europe 2011 Table 2:5 Financial Performance of India Cements Ltd.0 20. Crores) Operating Profits OPM (%) EPS (Rs.2 466.blonnet.3 20.4 119.Cr.9 127. 1996 Net Sales 687.7 64.United Business Institutes. 1997 712. April 1. Mar.4 178.0 64.8 278.6 Mar.3 (Rs.7 130. 1998.) Shareholder Funds 418.6 42.7 118.1 742.com/iw/2001/01/07/stories.6 50.9 21. 1999 1137.2 196.6 161. 2000 1168.2 630.4 5 Source: The Business Line at <www.3 21.6 138.4 80.

The deal. Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion.United Business Institutes. Europe 2011 III. 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 Defenses against Hostile Takeover MBA Finance JL2010 Hemanshu Roy 24 . Belgium.6% higher than the first offer which was 455 pence. which is four times larger than its size and the largest steel producer in the U. which is 33. TATA-CORUS Merger Tata acquired Corus. which creates the world's fifth-largest steelmaker. The price per share was 608 pence(rs 484). is India's largest ever foreign takeover and follows Mittal Steel's $31 billion acquisition of rival Arcelor in the same year.K.

Europe 2011 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. October 18. 2006: Tata still doesn’t react to Corus and its bid price remains the same. 2006: Tata Steel has kept its offer to 455p per share.3 billion takeover bid from Tata Steel Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 25 . • • October 17. 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. 2006: Corus accepts terms of £ 4. • October 6. Tata Steel wants to fulfill its ambition to Expand its business further. • October 20. 2006: The initial offer from Tata Steel is considered to be too low both by Corus and analysts. Belgium.United Business Institutes.

CORUS Deal . 2006: The Russian steel giant Severstal announces officially that it will not make a bid for Corus • November 18. 2007: Tata Steel manages to win the acquisition to CSN and has the full voting support from Corus’ shareholders Defenses against Hostile Takeover Financing the Deal: • • TATA. Europe 2011 • October 23. • January 31. Belgium. 2006: Within hours of Tata Steel increasing its original bid for Corus to 500 pence per share.$3. 2006: The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter-offer to Tata Steel’s bid. • November 3. 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. 2006: Corus is criticized by the chairman of JCB. Brazil's CSN made its formal counter bid for Corus at 515 pence per share in cash. • October 27. 3% more than Tata Steel's Offer. 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. Sir Anthony Bamford.$12 billion Equity Contribution from Tata Steel.88 billion Hemanshu Roy MBA Finance JL2010 26 .United Business Institutes. for its decision to accept an offer from Tata.

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. Belgium. Hemanshu Roy MBA Finance JL2010 27 Defenses against Hostile Takeover .5% each. Europe 2011 • Credit Suisse leaded. 'share swap' would have diluted Tata Steel's equity base. Credit Suisse provided 45% and ABN AMRO and Deutsche provided 27.12 billion of financing . • Of the $ 8.United Business Institutes. joined by ABN AMRO and Deutsche Bank in the consortium.

e. is called the ‘acquirer’ (offeror) whereas the company. 2. in the case of a merger. By an agreement between the acquirer and the controllers of the acquired company. Europe 2011 Hostile Takeover A takeover takes place when one company acquires control of another company. the bid is generally by consent of the management of both companies. Belgium. In a case where shares are closely held (i. It may be defined as an offer to acquire shares of a company whose shares are not closely held (dispersed shareholding). A takeover bid is a technique for affecting a takeover or a merger: in the case of a takeover. which acquires control of another company. It may be defined as a transaction or series of transactions whereby a person (individual. Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 28 . which is acquired. group of individuals or a company) acquires control over the assets of another company. the bid is frequently against the wishes of the management of the target company. or 3. The company. 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. By means of a “takeover bid”. By purchases of shares on the stock exchange. usually a smaller company than the first company.United Business Institutes. 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. the takeover may be affected: 1. Where the shares are held by the public generally. either directly by becoming the owner of those assets or indirectly by obtaining the control of the management of the company. is called the ‘target’ (offeree).

In a friendly takeover. ii) Defended/Hostile Takeover: a takeover bid is hostile if the bid is initially rejected by the target Board. Europe 2011 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 a hostile takeover the directors of the target company decide to oppose the acquiring company’s offer. or shares/debentures of the acquiring company. the consideration part in a takeover bid may be cash. 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. 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. which has nothing to do with the takeover. 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). It is sometimes also called ‘unsolicited or unwelcome bid’ because Defenses against Hostile Takeover it is offered by the acquirer without any solicitation or approach by the target company. or the directors of the target may actually have approached the offeror to suggest the acquisition. recommend shareholders to reject the offer and take further defensive measures to thwart the bid.United Business Institutes. 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 Hemanshu Roy MBA Finance JL2010 29 . In other words. the controlling group sells its controlling shares to another group of its own accord. Belgium. or the shares of a third company.

Bidders seem to pursue companies with strong operating managements as often as they pursue companies that have been clearly mismanaged. 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. There may be a number of objectives behind mounting a hostile bid. often very high. Europe 2011 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). It may be a strategic objective like consolidation/expansion of the raider/acquirer. as widely believed. that only poorly performing firms are the potential targets of a hostile bid.United Business Institutes. A bidders offers a premium. which the offeror or its shareholders place upon them: a process commonly referred by financial Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 30 . For instance. There may be different motives/causes behind launching a takeover bid and it is not necessary. or (b) persuading the bidder to improve the terms of its offer. It may be aimed at achieving ‘economies of scale’/critical mass/reducing costs in a particular product/service market. Belgium. 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. Following are the primary motive/causes of a takeover: 1. In fact bidders seldom seem to be interested in a firm where a turnaround is unlikely. It may also be aimed at acquiring substantial market share or creating a sort of a monopoly. 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.

The factors leading to this improvement in earnings could include: Economies of scale. 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. Where it has followed a policy of limited distribution of dividends. When it has an inefficient capital structure. 3. This has been found to be one of the biggest drivers of takeovers in the 1990s. Belgium. Where the shares have a poor market rating relative to its real prospects.United Business Institutes. Where its directors are unaware of the true value of its assets. Hemanshu Roy MBA Finance JL2010 31 . 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. The situations in which assets may be available at a discount are: Where the target has not put its assets to their most efficient use. In a globally competitive environment the companies require a critical mass to be able to survive and Defenses against Hostile Takeover prosper and the lexicon of even the most hostile endeavors is filled with sober phrases like synergy. the shares of the target are trading at low prices. Trade Advantage or Synergy: because there is a trade advantage or an element of synergy (i. 2. the global marketplace and accretion to earnings etc. This can be achieved either through a ‘horizontal takeover’ or a ‘vertical takeover’. a process that can be described as acquiring “earnings at a discount”. or Where due to any other non-economic reasons.e. Europe 2011 journalists as ”acquiring assets at a discount”.

Acquisition of a competitor. 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.United Business Institutes. Management Motives: Because of motives of the management of one/other of the Companies. Increasing the Capital of the Offeror: Because the offeror has particular reasons to increase its capital base. Diversification or reduction of earnings volatility. Belgium. This function of takeovers is commonly described as Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 32 . 6. Europe 2011 Ensuring raw materials/ sales. 4. Marketing advantages. Method of Market Entry: because it represents an attractive way of the offeror entering a new market on a substantial scale. Purchasing management. 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. either the aggressive desire to build up a business empire or personal remuneration or the defensive desire to make the company bid. Takeovers perform following important functions in an economy: Successful takeovers help realize efficiencies by reallocating capital and corporate assets to more high-value uses. 5.proof.

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. 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. According to this description. The market in corporate control ensures that companies pass to those who attach highest value to ownership. then they should be allowed to purchase it. 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. 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.” They allow companies to realize the benefit of large-scale operations or to achieve what is called ‘economies of scale’. 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.United Business Institutes. Moreover. 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. Hemanshu Roy MBA Finance JL2010 33 . Belgium. It is widely believed that hostile takeovers help in policing the management Defenses against Hostile Takeover conduct in widely held public corporations. Michael Jenson and Richard Ruback. Europe 2011 the ‘market for corporate control’. they help identify undervalued assets and permit shareholders to realize the true value of their investments.

Hemanshu Roy MBA Finance JL2010 34 Defenses against Hostile Takeover . Europe 2011 Hostile takeover threat can trigger far-reaching changes in corporate strategy resulting in significant gains to the shareholders. Acquisition of shares or undertaking of one company by a new company in exchange for its shares or other securities By acquisition of minority held shares of a subsidiary by the parent.United Business Institutes. Many have claimed that without a hostile takeover the inertia that exists within many large organizations would have prevented such efficiency-enhancing (and consequently. According to Weinberg and Blank a takeover may be achieved in the following ways: Acquisition of shares or undertaking of one company by another for cash. Management buyouts. Acquisition of shares or undertaking of one company by another in exchange of shares or other securities in the acquired company. Belgium. shareholder value enhancing) restructurings from taking place.

there have been notable proxy contests such as Carl Icahn's attempt to replace Yahoo Inc. the person or company launching the proxy contest can establish a new board of directors that is better aligned with their objectives.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. the offering party can usually obtain an agreement. Hemanshu Roy MBA Finance JL2010 35 . then it's important to understand how that contest can affect the price of that stock. 2. Belgium.United Business Institutes. The name "bear hug" reflects the persuasiveness of the offering company's overly generous offer to the target company. A bear hug offer is usually made when there is doubt that the target company's management will be willing to sell. Europe 2011 Aggressive Tactics of Hostile Takeover 1. Bear Hug . In recent years. Proxy Content .If you own shares of stock in a company that's involved with a proxy contest. a proxy contest is a strategy that involves using shareholder's Defenses against Hostile Takeover proxy votes to replace the existing members of a company's board of directors.'s board of directors. By removing existing board members. 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. By definition. By offering a price far in excess of the target company's current value.

Negotiations between the executives at Microsoft and Yahoo eventually stalled. the board of directors at Yahoo felt the offer by Microsoft under-valued the company. Unfortunately. At that time. one company was being acquired by another and the Defenses against Hostile Takeover takeover attempt was considered hostile. The target company desired to remain independent. this offer represented to shareholders a 62% premium over Yahoo's stock price prior to the announcement. and Microsoft withdrew their offer on May 3. Europe 2011 The easiest way to explain why a proxy contest would be launched against a company is by supplying an illustration as the backdrop. Microsoft Corporation made an unsolicited offer to buy Yahoo for $31 per share. Hemanshu Roy MBA Finance JL2010 36 . In this example. billionaire Carl Icahn launched an effort aimed at replacing the board of directors at Yahoo via a proxy contest. and their board of directors ultimately rejected the acquiring company's bid.Microsoft and Yahoo In February of 2008. 2008. many shareholders would have liked to see the merger with Microsoft become a reality. With the potential to realize a large capital gain on their investment. Proxy Contest Example . we'll use the well-publicized takeover attempt involving Microsoft and Yahoo.United Business Institutes. Strategy Behind Proxy Fights In the example above. Less than two weeks later. or unsolicited. Belgium.

The acquiring company and / or a group of major stakeholders. a website that specializes in the tracking of mergers and acquisitions. and eventually the deal is finalized. there were 133 proxy contests or activist Hemanshu Roy MBA Finance JL2010 37 .net. These investors threaten to use their proxy votes. 2. Oftentimes. Proxy Contest Statistics According to SharkRepellent. If successful in gathering enough proxy votes. such as large institutional investors. to make the target company comply with their wishes. Europe 2011 The acquiring company. which is commonly used in large corporations for voting by shareholders. can get frustrated with the management or board of directors of the target company. the steps involved in a proxy contest include: 1. 4.United Business Institutes. the acquiring company can then elect new board of directors using proxy ballots. decide to join forces and launch a proxy contest against the target company. These newly installed board members will be much more agreeable to the takeover or merger. Belgium. 3. or a large group of investors. and decide to use a proxy fight as a strategy to force the target company to merge. Steps Involved in a Proxy Contest Generally. just the mere threat of a proxy contest is enough for the target Defenses against Hostile Takeover company to enter into serious merger talks with the acquiring company. 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.

A tender offer puts individual shareholder under pressure to tender their shares regardless of their collective interest with each other. 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. Hemanshu Roy MBA Finance JL2010 38 Defenses against Hostile Takeover . Belgium. The high rate of success for proxy contests should not come as a surprise to anyone. these investors were able to gain board seats at 57 companies. which is a success rate of 43%. Europe 2011 campaigns launched in 2009. Tender offer can be for cash or stock. But. or investors that have a great deal of money to gain if the merger is successful. In that same year. A company usually resorts to a tender offer when a friendly negotiated transaction does not work. it is more expensive than a negotiated deal because of various cost associated with it. The struggle for control in a company is usually initiated by large and powerful institutions.United Business Institutes.

which typically Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 39 . Supermajority requirements may block a bidder from implementing a merger even when the bidder controls the target's board of directors. a.Supermajority provisions typically increase the shareholder approval requirement for a merger to the range. Supermajority provisions raise the cost of a hostile takeover and encourage potential bidders to deal directly with the target company's board of directors. Europe 2011 Defenses adopted against Hostile Takeover The increase in the corporate takeover activity motivates various innovations in the art of corporate anti-takeover. The common types of charter amendments are super majority provisions. thus superseding the approval requirement of the charter of the state in which the firm is incorporated.United Business Institutes. Such amendments to the charter generally require approval of the shareholders. Super Majority Provisions . if the bidder's ownership remains below the specified percentage requirement. 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. fair price provisions and staggered boards and dual capitalization. Anti-takeover defenses can be divided into preventive and active measures. Belgium. 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.

Hemanshu Roy MBA Finance JL2010 40 Defenses against Hostile Takeover . Variations on anti-takeover amendments relating to the board of directors include provisions prohibiting the removal of directors except for cause. Thus. b. Belgium. a new majority shareholder would have to wait at least two annual meetings to gain control of the boards of directors. c. Effectiveness of cumulative voting is reduced under the classified-board scheme because a greater shareholder vote is required to elect a single director. Pure supermajority provisions would seriously limit the management's flexibility in takeover negotiations.United Business Institutes. with only three members standing for election to a three-year term each year. 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. and provisions fixing the number of directors allowed to prevent “packing” the board. a nine-member board might be divided into three classes. 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 priceearnings multiple at which a tender offer can be made. For example. Europe 2011 has the option to waive the provision if a majority of directors approves the merger (a so-called `board-out provision').

Dual Capitalization – This is a defense mechanism used against a hostile takeover bid. A typical dual capitalization involves the issuance of another stock that has superior voting rights to all the current outstanding stockholders. Belgium. according to which the Board of Directors are authorized to create a new class of securities with special voting rights. Hence.United Business Institutes. 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. the existence of a fair price is a disincentive for a bidder to initiate a two tiered offer. Poison Pills . The stockholders are then given the right to exchange this stock for ordinary stock. Europe 2011 Fair price provisions are most useful when the acquirer offers a two tiered bid to the target shareholders. This voting power is given to a group of stockholders who are friendly to the management. The stockholders prefer to exchange the super voting stock to the ordinary stock because the former usually lack marketability and also fetch low dividends. This results in the management increasing its voting control of the corporation. 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. Management retains the special voting stock. d. II.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 Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 41 .

Europe 2011 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. The poison pill is considered the most potentially harmful antitakeover measure since shareholder approval is not required to adopt poison pill Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 42 . Consequently. such as the acquisition of a specified percentage of the firms shares by a bidder considered hostile by current management. Poison pill provisions are the most recent and perhaps the most controversial of the antitakeover provisions. The right to sell shares at a premium is known as a `back end plan'. Further. 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. The target shareholder's right to purchase shares at a discount is known as a flip-over plan. whereby any hostile (or otherwise) acquirer of any of those entities is not permitted to make use of the established Tata brand name. Belgium. It is believed that different Tata Companies have in place an arrangement with the Tata Sons holding entity. a poison pill variant highlighted in part two of this article series. 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. 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.United Business Institutes.

As with the other pretender offer defences. Belgium. Because the acquirer would not control the board initially. a corporation becomes less attractive to the acquirer because Hemanshu Roy MBA Finance JL2010 43 . III. Europe 2011 provisions and management has full discretion in determining when the poison pill provision is applicable. the acquirer would not have the power to change management or the corporation's business plan.United Business Institutes.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. Staggered Board – This defence involves an amendment of the by-laws of the company to create a staggered board of directors. 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. 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. Defenses against Hostile Takeover IV. When golden parachutes are created for management and key employees. 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. Golden Parachutes . 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.

the management is able to increase its stake in the company without investing any additional funds. However. B. Share Repurchases – This involves the firm buying back its own shares from the public. I. 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. Secondly. Europe 2011 generous payments to departing management and employees could financially deplete the corporation. faced with a hostile bid.After coming to know of an initial hostile bid other rival bidders also enter the battle often offering higher bids than the initial bidder.United Business Institutes. Firstly. Fixed-price tender offers (FPTs) Dutch auctions (DAs) Transferable put rights (TPRs) Open-Market repurchases (OMRs) White Knight . approaches to save it from being taken over by the initial bidder. Belgium. Share repurchases can be done through: • • • • II. This is a sound strategy and has two-fold impact. Active Anti-Takeover Defenses Active Anti-Takeover Defenses technique is applicable after an acquisition bid has been received. this is not exactly a defense strategy by the incumbent management because a white knight may successfully defend the target Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 44 . the amount of floating stock which is available for a raider is reduced.

is the buyback of Defenses against Hostile Takeover the shares owned by a particular shareholder of the target who has made or threatened a takeover bid. Thus Alcan emerged as the White Knight in this deal. However. or greenmail. (With the higher bid offered by the white knight. albeit by the white knight. White knight enters the fray when a hostile suitor raids the target company. the predator might not remain interested in acquisition and hence the target company is protected from the raid. Realistically. The critique of Hemanshu Roy MBA Finance JL2010 45 . The greenmail payment is typically at a premium over the prevailing market price. which forces the target company to repurchase the stock at a substantial premium to prevent the takeover.United Business Institutes. A large block of shares is held by an unfriendly company. Belgium.A targeted share repurchase. Only advantage is that it raises the offer/bid value. Europe 2011 company from the initial hostile bid but in most cases the company is still taken over. the target’s choice is between ravishment by the hostile bidder or a hastily arranged shotgun wedding with the ‘white knight’.200.) Alcan of Canada had bought the shares in Indian Aluminium Company at Rs. III. control is generally ceded to the acquiring company. Greenmail . It may also be that the white knight may offer some positions to the incumbent management in the merged entity. it is only lesser of the two evils. which was higher than Sterlite’s offer in 1998. 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. Even if the management of the target firms are able to retain their jobs (and this is not frequently the case).

The board cannot arbitrarily decide to ignore an acquirer’s overtures. Europe 2011 this theory is that the management. the crown jewel defensive is a strategy in which the target Hemanshu Roy MBA Finance JL2010 46 . sale of specific assets such as land or property. Crown Jewels – In business. IV. Belgium. VI.g. when a company is threatened with takeover. de-merging of completely unrelated businesses. By doing so the target seeks to make the company less attractive for a potential acquirer. Only Defenses against Hostile Takeover reasonable defensive measures can be used. Corporate Restructuring . decision to concentrate on core businesses and hiving off non-core interests etc. According to this view greenmail should be prohibited because it decreases shareholders’ wealth and discriminates unfairly. 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 disposal of holdings in other companies. and the board must be able to demonstrate that the bid is inadequate and disrupts the long-term strategy of the firm.. sale of subsidiaries. VII. pays greenmail in order to perpetuate its ability to exploit the targets. which has mismanaged the target’s assets. e. 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.United Business Institutes. Pac-Man Strategy .This is nothing but a counter bid. V. The target company attempts to takeover the hostile raider.Asset disposals announcement by the target firm that parts of its existing business will be sold off.

Belgium. Hemanshu Roy MBA Finance JL2010 47 Defenses against Hostile Takeover . Consequently.United Business Institutes. Europe 2011 company sells off its most attractive assets to a friendly third party or spinoff the valuable assets in a separate entity. the unfriendly bidder is less attracted to the company assets. and adverse influence of current share prices. making the takeover uneconomical to third parties. Other effects include dilution of holdings of the acquirer.

it is not necessary that only poorly managed companies become takeover targets. business synergy Hemanshu Roy MBA Finance JL2010 48 . Moreover. 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. even well-managed companies may be the targets of a hostile takeover. this is especially true when the primary purpose of takeover is consolidation. and some may be neutral in terms of economic efficiency. there Defenses against Hostile Takeover is no guarantee that the new management would not mismanage and hence. 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. the reallocation of resources may not be promoting efficiency. It depends upon whether benefits to the society of a hostile takeover outweigh its costs. some hostile takeovers may promote efficiency. Belgium. 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. While it is true that hostile takeovers are value-maximizing to the target shareholders. some may result in a misallocation of economic resources. if mismanaged. Europe 2011 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. But.United Business Institutes. After all market behaves on the basis of past records and future expectations and therefore.

However. the takeover may be neutral in terms of economic efficiency. or on a narrower basis within a portion of that industry. Europe 2011 and to achieve growth in size and volumes. Since firms within the industry have greater knowledge about each other’s properties. an overproduction in the world steel market coupled with low demand has caused share prices of steel company to fall steeply. however. This may result in the displacement of a competent management of the target after acquisition. When a well-managed company is acquired by another equally well-managed company. In such situations the Disciplinary Effect of hostile takeover has no consequence. Further. that precludes an inference of managerial failure based solely on below average stock performance. an active market for corporate control is not only desirable but it should be promoted. that poor stock market performance implies poor management . Poor stock prices may be due to a number of non-economic reasons and something else may be occurring on an industry-wide basis. 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. products and prospects. the proponents of hostile takeover zealously argue that hostile takeover has a disciplining effect on inefficient managements and therefore. it does not imply that TISCO is a poorly managed company and hence a potential takeover target. this certainty of information enables the bidder to pay a higher premium to emerge as the winning bidder. this disciplinary hypothesis – namely.also has its limitations. Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 49 . Belgium. Secondly.United Business Institutes. For example.

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. 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. but the scope of that effect tends to be more limited than neo-classical economic theory has made it out to be. Belgium. Europe 2011 Therefore. 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.United Business Institutes. it may be desirable to allow a regulated but not restricted market for corporate control to operate in order that old bluechip 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. Now. 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. As a consequence. it is appropriate to say that the market for corporate control has a disciplinary effect. Defenses against Hostile Takeover Hemanshu Roy MBA Finance JL2010 50 .

3.com www.investopedia. Mergers & Acquisitions – Himalaya Publishing House Pvt. www.com Books: 1.United Business Institutes.moneycontrol.com www. Ltd Hemanshu Roy MBA Finance JL2010 51 Defenses against Hostile Takeover .com www.businessline. Belgium. 4. 2.wikipedia. Europe 2011 Bibliography Websites: 1.

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