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 Takeovers

1.

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 dont 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

companys management/promoters is
highly unlikely.

4.

Example: Daiichi Sankyos acquisition

of Ranbaxy

4.

Example: Mittal Steels acquisition of

Arcelor

Takeover Tactics
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/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
Bear Hug

The acquirer makes a very attractive tender

offer to the management of the target company
for the latters shareholders.
This is a sound tactic.

Backed by the acquirers 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
Accept or Reject???

Offer beneficial for

shareholders

Company B

Company A

Takeover Tactics
Saturday Night Special

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.

Takeover Tactics
Proxy Fight
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.

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.

Successful Takeover Tactics in India

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.

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

Blank Cheque
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.

Shark repellents
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.

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.

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

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 acquirers 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 weeks average price), if the
acquirer's stake in the company reaches a
certain limit (say 30 percent ).

-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 needs
Like 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.

People Pill

Current management team

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

BUT!!!!

Scorched Earth

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!!

Pacman
The target company or its promoters start
acquiring
sizeable
holding
in
the
acquirer/raiders 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.

Green mail
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;

White Knight
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
Sterlites bid.

Grey 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.

Golden Parachute

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.

Buy-back as a takeover defence tactic

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 buyback, the existing promoters 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 promoters 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

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