Takeovers

1

TAKEOVERSMeaning and Concept

Types of Takeovers

Thomas Mathew

Unit - III

2

MEANING AND CONCEPT OF TAKEOVERS

Takeover implies acquisition of control of a company which is already registered through the purchase or exchange of shares.

Takeover takes place usually by acquisition or purchase from the shareholders of a company their shares at a specified price to the extent of at least controlling interest in order to gain control of the company.

3

WHAT IS TAKEOVER

In General term referring to transfer of control of a firm from one group of shareholders to another group of shareholders.

Change in the controlling interest of a corporation, either through a friendly acquisition or an unfriendly, hostile, bid. When an "acquirer" takes over the control

of the "target company", it is termed as Takeover.

When an acquirer acquires "substantial quantity of shares or voting rights" of the Target Company, it results into substantial acquisition of shares.

4

Procedure for Takeover

The takeover could take place through different methods. A company may acquire the shares of a unlisted company through what is called acquisition under Section 395 of the Companies Act , 1956.

However where the shares of the company are widely held by the general public, it involves the process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended in 2002, 2004 and 2006 .

5

The term ‘Takeover’ has not been defined under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 , the term basically envisages the concept of an acquirer taking over the control or management of the target company . When an acquirer, acquires substantial quantity of shares or voting rights of the target company, it results in the Substantial acquisition of Shares

6

For the purposes of understanding the implications of taking over it is necessary for us to know what is the actual meaning

of:

[i] Acquirer, [ii] Target Company, [iii] Control, [iv] Promoter, [v] Persons acting in concert and [vi] substantial quantity of shares or voting rights.

7

Important Terms in Takeover

1. Acquirer

An Acquirer means (includes Persons Acting in Concert (PAC) with him) any individual/ company/ any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company

8

Stakeholders in Takeover

2. Target Company

A Target company is a listed company i.e. whose shares are listed on any stock exchange and whose shares or voting rights are acquired/ being acquired or whose control is taken over/being taken over by an acquirer

Important Terms in Takeover

9

3. Control

Control includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company.

Important Terms in Takeover

10

Important Terms in Takeover

4. Promoter The definition of promoter after amendment in 2006 now includes “any person who is in control of the target company” or “named as promoter in an offer document or shareholding pattern filed by the target company with the stock exchanges according to the listing agreement, whichever is later.”

11

Important Terms in Takeover

Promoter…..

The takeover code has also modified the definition of individual. The new definition of individual includes:1. Spouse, parents, sisters, brothers and children of

the promoter.2. A company in which 10% or more of the share

capital is held by the promoter or his immediate relative or a firm/HUF in which the promoter or his immediate relative is a member holding an aggregate share capital of 10% or more.

3. Any company in which the company specified in sub-clause above, holds 10% or more of the share capital. (The earlier threshold was 26%)

12

Important Terms in Takeover

5. Persons Acting in Concert (PAC)

PACs are individual(s) /company(ies)/ any other legal entity(ies) who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal. Acting in concert would imply co-operation, co-ordination for acquisition of voting rights or control. This co-operation/ co-ordinated approach may either be direct or indirect.

13

PAC…..

The concept of PAC assumes significance in the context of substantial acquisition of shares since it is possible for an acquirer to acquire shares or voting rights in a company "in concert" with any other person in such a manner that the acquisition made by them may remain individually below the threshold limit but may collectively exceed the threshold limit.Unless the contrary is established certain entities are deemed to be persons acting in concert like companies with its holding company or subsidiary company, mutual funds with its sponsor / trustee/ Asset management company, etc

Important Terms in Takeover

14

1. Friendly or Negotiated Takeover:-

Friendly takeover means takeover of one company by change in its management & control through negotiations between the existing promoters and prospective investor in a friendly manner. Thus it is also called Negotiated Takeover. This kind of takeover is resorted to further some common objectives of both the parties. Generally, friendly takeover takes place as per the provisions of Section 395 of the Companies Act, 1956.

Types of Takeover - legal perspective

15

2. Bail Out Takeover –

Takeover of a financially sick company by a financially rich company as per the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 to bail out the former from losses.

Types of Takeover - legal perspective

16

Types of Takeover - legal perspective

3. Hostile takeover-

Hostile takeover is a takeover where one company unilaterally pursues the acquisition of shares of another company without being into the knowledge of that other company. The most dominant purpose which has forced most of the companies to resort to this kind of takeover is increase in market share. The hostile takeover takes place as per the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997

17

Types of Takeover – Business perspective

1. Horizontal Takeover-

Takeover of one company by another company in the same industry. The main purpose behind this kind of takeover is achieving the economies of scale or increasing the market share.

E.g. Takeover of Hutch by Vodafone.

18

Types of Takeover – Business perspective 2. Vertical Takeover –

Takeover by one company with its suppliers or customers. The former is known as Backward integration and latter is known as Forward integration. The main purpose behind this kind of takeover is reduction in costs.

E.g. takeover of Sona Steerings Ltd. By Maruti Udyog Ltd. is backward

takeover.

19

Types of Takeover – Business perspective 3. Conglomerate takeover:

Takeover of one company by another company operating in totally different industries. The main purpose of this kind of takeover is diversification.

Eg. General Motors and EDS (Electronic Data Systems [EDS], specialized in information technology and data services,

was acquired by giant automaker General Motors in 1984.)

20

The first player in this battle was Reliance Industries Limited (RIL), in the late 1980’s. Armed with 10.05 percentage stake

in L&T was aspiring to acquire as a whole.

For L&T it was life and death issue. But then L&T was successful to fought back tooth and nail.

At that time major stake holder of L&T were LIC and UTI.

How L&T Cement is now UltraTech Cement : An illustration

21

On November 18, 2001 the threat again raised for L&T when RIL sold its entire stake to Grasim (A. V. Birla group) at 46 percent higher price than market.(167 to 209/306)

On October 13, 2002 Grasim made a public announcement of open offer to acquire 20 percent stake in L&T at Rs.190 per share.

On November 8, 2002 the SEBI asked not to proceed with this offer since it wanted to investigate the matter.

Further, on January 27, 2003 Grasim made a counter proposal of vertical de-merger of cement business to L&T board.

Grasim valued L&T’s cement business at Rs. 130/- per share and made open offer to acquire control of the cement business / company.

L&T now UltraTech

22

L&T now UltraTech

By April 2003, the SEBI came to conclusion that Grasim had not violated Takeover Code, and that its offer was valid subject to making some additional disclosures.

However Grasim had got only 0.38 percent stake in open offer.

But with the help of its subsidiary co. it managed to get 15.73 percent of L&T equity capital.

Thereafter, in June 2003 itself the L&T management and Birla’s planned out a deal to carry out a structured de-merger of cement business of L&T .

23

L&T now UltraTech

It was decided that post de-merger, Grasim will acquire the control of the resultant cement company. [UlraTech]

However, L&T managed to retain certain key assets like L&T brand, ready mix cement (RMC) business, the gas power plant in Andhra Pradesh, and the entire residential and office property of the cement division.

As a part of the scheme of de-merger L&T was allotted 20 percent of UlraTech’s equity.

The open offer by Grasim was meant for not only taking control of UltraTech, but to give a chance to FIs to bring down their stake, in the process making heavy capital gains.

24

L&T now UltraTech

In acquiring L&T’s cement business, Birla had a simple motive of ‘growth through acquisition’

After acquisition the combined capacity of Grasim and UltraTech went up to 31 mn. tones, making Grasim the largest producer in India and the eighth largest in the world.

While Grasim was strong in the Southern markets, L&T was strong in the rest of India. L&T’s strong distribution network was very vital to Grasim to push its own brands also.

25

L&T now UltraTech

On 2004 July 6 Larsen & Toubro and Grasim Industries announced the completion of the scheme of demerger L&T’s cement division with Grasim having acquired a majority stake in the company for around Rs.2,200 crore.

Grasim, which has cement brands such as Birla Plus and Birla Super, was allowed to use the L&T Cement brand till March 31, 2005.

However, the company decided not to use the L&T Cement brand anymore and instead has now chosen the UltraTech brand.

Along with Birla Plus and Birla Super, UltraTech is positioned as a national brand ………… AND

26

27

DIFFERENCE BETWEEN A MERGER AND A TAKEOVER

In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously separate firms into a single legal entity. A company that combines itself with another can experience boosted economies of scale, greater sales revenue and market share in its market, broadened diversification and increased tax efficiency.

28

A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity.

29

A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio.

30

Thank U