Kraft Foods’ unsolicited bid for Cadbury has lifted M&A activity, but has also drawn attention to hostile takeovers. If Hershey’s makes a counter offer, it would certainly trigger a bidding war. Corporate India is witnessing its own bidding battle between Bharati Shipyard Limited and its rival ABG Shipyard Limited to acquire Great Offshore Limited. And while their tussle is ongoing, the shareholders of Great Offshore have reason to celebrate. The script recently closed above Rs 560, three times to what it was trading last year. From the shareholders perspective, no one can question the increased value bids like this offer. But events like this do compel one to think why India hasn’t witnessed many unsolicited takeovers, especially if they enhance shareholder value.
By no means is one advocating them, but takeovers are the fastest way for companies to achieve expansion of product and customer base. They provide immediate access to additional production lines and markets and these factors must have been considered by the boards of Bharati and ABG while making their respective bids for Great Offshore. With a large number of stocks trading at a discount to the company’s underlying assets, one wonders if factors other than business ethics prevent corporate India to take advantage of this route of inorganic growth.
Currently, the acquisition of shares and voting rights of a listed company are governed by the Sebi Takeover Code. Its objective is that the moment an acquirer crosses a certain specified shareholding threshold, he is under an obligation to provide the existing shareholders the opportunity to either tender their shares for sale or continue as shareholders. The Takeover Code also stipulates ongoing disclosure requirements, which could make it burdensome for a sneaky acquirer to gain control of a company, especially if the attempts are unwelcome. Interestingly, however, the regulations don’t make a distinction between friendly acquisitions and hostile takeovers.
But it would be unfair to infer that the Takeover Code presents any direct barriers to a hostile acquisition. Nevertheless, historically, India has witnessed only a handful of hostile takeover attempts. Foremost amongst these (predating the Takeover Code) is the highly contentious and unsuccessful attempt by Swraj Paul to take over Escorts Industries. Thereafter, and after almost 15 years, corporate India witnessed the only successful hostile takeover of Raasi Cements by Indian Cements in 1998. And more recently, Harish Bhasin (stockbroker) led a series of bids to acquire DCM Shriram Industries Limited and his attempts earned him the dubious reputation of being the ‘corporate raider’.
To protect against such raiders, internationally, companies commonly adopt the “Poison Pill” or Shareholder Rights Plans. This involves the issuance of low priced preferential shares to existing shareholders if a purported hostile bid were consummated. Such new issuance results in diluting the shareholding of the raiders, thereby making the acquisition prohibitively expensive. Another equally popular strategy is the “Pac-Man Defense”, where the targets make a counter bid, on its invader, with a view to change roles and go after its chaser. Then there is the “White Knight” that is often approached by the target itself to make an offer, more enticing than the hostile bidder, but with the objective that the target management doesn’t get dislodged.
First Published in the Economic Times on October 01, 2009