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Hostile Takeover

Friendly vs Hostile Takeover


In friendly takeover, the promoters/ management of the target company are also agreeable to be taken over by the acquirer and are willing to peacefully cede control over the target company to the acquirer. This happens when the entire promoter group is willing to exit. Sometimes, the target company is open to only one specific acquirer (or one out of a select few), if the latter agrees to the price and other conditions of takeover such as nonretrenchment of employees, post- acquisition role of existing promoters/ management etc. At other times, the promoters/ management of the target company are open to any acquirer who offers them an overall best deal.

In the third case, the most likely, the promoters/ management of the target company have a negative list of acquirers in mind that they do not want to sell out to. Outside this list, they are open to sell out to anyone who offers them an overall best deal. When the promoter group that is collectively in exit mood, receives an offer from the prospective acquirer whom they do not mind selling out to, the takeover takes a friendly mode.
But sometimes, promoter group receives an offer from a prospective acquirer whom they do not want to sell out to. Then, the HOSTILE TAKEOVER battle begins. Eg. Mittal Steels acquisition of Arcelor

Friendly takeover
1. There is cooperation between the acquirer and the target company 2. The target company shares the critical information required by the acquirer to carry out valuation of the target company. 3. It also facilitates due diligence by the acquirer and cooperates in carrying out legal formalities. 4. More chances that an acquirer would offer a better price and better terms and conditions. 5. Better chances of the acquirer allowing the promoters/ management of the target company to continue having important role post acquisition. 6. No tactics required. Eg. Ranbaxy by Daiichi Sankyo, Promoter and CEO of Ranbaxy continued as CEO post acquisition.

Hostile takeover
1. An acquirer has to depend upon information available only in public domain. 2. Acquirer has to force his way for due diligence and regulatory compliance. 3. Both sides indulge into tactics- to acquire and to defend. Eg. Demerger of L&T cement business from Ultra Tech Cement Ltd., which was then taken over by Grasim.

TAKEOVER TACTICS
I. BEAR HUG
The acquirer makes a very attractive tender offer to the management of the target company for the latters shareholders and asks them to consider the same offer in the interest of the shareholders. Normally, such an offer is backed by the acquirers preparedness to make a hostile open offer to the public shareholders if the board of the target company rejects the offer. Though such offer of the acquirer is unsolicited, the board of the target company is bound to consider it impartially on account of its fiduciary capacity in protecting public shareholders interests. If the offer is really good for the public shareholders, the board generally cannot reject it just to protect the interests of the promoters of the target company.

II. Saturday night special: It is the same tactic as bear hug, but made on the Friday or Saturday night (last working day) asking for a decision by Monday, giving very little time to the promoter/ board of the target company to set up their defenses. This is also called Godfather Offer. III. Dawn raid: 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 wakes up. But it may happen that the investors, sensing the acquisition, may hold back the quantity offered thereby reducing the liquidity and making the dawn raid fail. Indian takeover regulations prohibit the acquirer, along with the persons acting in concert with him, from acquiring 15% or more shares of the target company without making an open offer. Thus, only through dawn raid, one cannot acquire a controlling interest in a company in India.

IV. Proxy fight: The 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, thereby taking control of the target company. However, this method is not sustainable.

DEFENSE TACTICS
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Crown jewels Shark repellents Poison pill Poison put People pill Scorched Earth Pacman Green mail White knight Grey Knight Golden parachute

I.

Crown jewels: The target company sells its highly profitable or attractive business/ division to make the takeover bid less attractive to the raider. II. Shark repellents: The target company amends its charter i.e. MOA or AOA or the like to make the takeover expensive or impossible. Eg.1. A company may stipulate a certain minimum educational qualification and/ or experience for directors, so that an acquirer finds it difficult to depute his people on the board. However, experienced and qualified people are available easily now-a-days. Eg.2. Stipulating that a super majority (eg 80%) would be required to approve a merger.

III. Poison pill: Any strategy which, upon a successful acquisition bythe acquirer, creates negative financial results and leads to value destruction. It can take various forms: a. The target company may issue rights/ warrants to the existing shareholders entitling them to acquire large number of shares in the event an acquirers stake in the company reaches a certain level (eg. 30%). Such rights/ warrants would be available to a certain set of shareholders only or to all the existing shareholders but not to the acquirer. Further, the purchase price would be very lucrative to the shareholders so they would certainly exercise their right upon acquisition of the trigger percentage by the acquirer, thereby diluting the acquirers stake. This is also called SHAREHOLDERS RIGHTS PLAN. b. 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% above the last 2/4 weeks average price), if the acquirers stake in the company a certain limit (say 30%). This kind of poison pill may not be able to stop a determined acquirer but would at least ensure a high exit price for the existing shareholders.

c. The target company may borrow large long term funds from banks or financial institutions or other lenders, for its genuine need. However, the repayment terms would be such that in the normal course, the loan would become repayable towards the end and also in a staggering manner, but 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. d. In the above case, the target company may borrow not for its genuine needs but for paying one time huge dividend to the shareholders. This tactic is also known as leveraged cash out. However, the target companys financial health would get negatively affected immediately and if the acquirer does not proceed with the acquisition, the existing promoters would have to face the repercussions.

e. OR the target company may buy back its shares using borrowed funds. This will have a double effect of increasing promoters stake (since they would not tender their shares in buy- back) and the negative effect on cash flows. The latter would make the target company less attractive to the acquirer, who may then drop the plan of acquisition. This is also called as leveraged recap or leveraged recapitalization. NOTE: In many countries, other than US, most of the poison pills are not permitted. IV. Poison put: cases of Leveraged recapitalization and Leveraged cash out are called as poison put by some authors.

V. People pill: The current management team of the target company threatens to quit en masse in the event of a successful hostile takeover. It is very difficult to engineer this tactic, in practice, since many of the employees, even at senior level, may not be willing to lose their jobs due to their own compulsions. The effectiveness of this tactic will depend on the circumstances of the case. VI. Scorched Earth: anything that might be useful to the enemy. This could be achieved either through extreme form of poison pill or crown jewel tactic or asset stripping etc. In India, this tactic can be used prior to an acquirer making public announcement of an open offer. However, once such announcement is made, the takeover regulations do not permit any asset stripping etc. till the open offer is closed.

VII. Pacman: The target company or its promoters start acquiring sizeable holding in the acquirer, threatening to acquire the raider itself. This makes the acquirer run for cover. VIII. Greenmail: 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. Sometimes, a greenmail is used to describe an arrangement called target block repurchase with standstill agreement. The existing promoters of the target company agree to buy back the shares being accumulated by the raider at a substantial premium. In return, the raider enters into agreement that neither he nor any of his associates shall acquire any sizeable stake in the target company for a stipulated period of time or even forever.

IX. White Knight: 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. X. Grey Knight: The 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. XI. Golden parachute: A contractual guarantee of a fairly large sum of compensation is issued to the top/ senior executives of the target company whose services are likely to be terminated in case the takeover succeeds.

LEGAL ASPECTS
1. Companies Act, 1956 2. SEBI Regulations (Buy back of Securities), 1998 3. SEBI Regulations (Substantial Acquisition of Shares and Takeovers) Regulations, 2011