We need real hostile takeovers, green-mailers please excuse!

25 June, 2012

Corporate takeovers are an integral part of a healthy capitalist economy – be they strategic (quicker expansion for the buyer and an exit by the seller), opportunistic (distress sale by seller and cheap acquisition by a buyer) or hostile (scope of overhauling weak or inefficient incumbent management). Sure, these are pretty loose buckets and there are intersections among them, which I am skipping since that’s not the focus here.

Not so much for an economist by qualifications but definitely for a journalist by training and profession (and for corporate strategy enthusiasts in general), it is the third strand which has the most sex appeal. But it is precisely the one with the patchiest history in the country. So my null hypothesis goes like this: Hostile takeover in India is something of an oxymoron.

Corporate watchers (with a lot more grey hairs than mine) may interject that it was not always so. Jumbo Group’s Manu Chhabria and RPG’s RP Goenka successfully added the prefix of ‘takeover tycoon’ to their names way back in the 1980s. But if one really scans the deals struck by them, he will find that barring a few, others don’t fit the bill of a classical hostile takeover as the world knows it. They acquired some of the firms from foreign owners who were already selling their businesses (like Dunlop) and not just in India.

Indeed, in a media interaction a few years ago, Goenka talked about his takeover days and said, “I was never hostile and refrained from changing the top management of the companies I acquired.” But the same cannot be said of late Manu Chhabria, of course, who had the chutzpah to eye even L&T and Gammon (both unsuccessfully) among many others where he successfully wrenched the control of the companies (most notably, Shaw Wallace).

Then there were others, such as the jute baron from Kolkata, Arun Bajoria. Bajoria went about giving sleepless nights to the Wadias (Bombay Dyeing) and the Thapars (Ballarpur Industries) in the late 90s and at the turn of the millennium. Still, if what transpired later is factored in, they were probably just what their targets termed as ‘green-mailers’ – acquirers who were just looking to make a quick buck by forcing the promoter to buy back at a higher price. Nothing came out of those except some extensive media coverage occupying some newsprint space.

A few other hostile takeover attempts, such as Swaraj Paul’s endeavour to grab Escorts (one of the earliest hostile takeover bids in the true sense, which was thwarted despite the government’s support) and ICI’s (now Akzo Nobel) attempt to pull a clever one on its key Indian rival Asian Paints, fizzled out. The fate of a few others were sealed by political changes (Reliance-L&T) or through corporate restructuring compromise (AV Birla-L&T saga, which was put to rest after L&T’s cement business was spun out and acquired by the Birlas).

So the history of hostile takeovers by industrialists or strategic acquirers sports a sepia tint at best. But over the last four years, more than half a dozen fresh cases had sprung up. Most of these were the outcome of post sub-prime crisis bloodbath in the market, which triggered margin calls on promoters’ pledged shares. However, there were a few exceptions.

These targets included Orchid Chemicals (Ranbaxy), GHCL (Pramod Jain), DCM Shriram Industries (HB Stockholdings) and Fame (Reliance ADAG, more on that here), Orissa Sponge Iron (Bhushan Steel and Bhushan Power, more on that here) and most recently, IVRCL Infra (Essel, more here).

Yes, as any i-banker worth his/her salt would guess, all these attempts had either fizzled out or, as some people argue, they were never hostile in the first place.

Ranbaxy, for instance, maintained that it was not looking at a hostile bid. But a few months before Malvinder & Shivinder Singh sold their flagship to Daiichi Sankyo, the company started picking shares in the market, compelling the promoters of Orchid Chemicals to bring in Serum Institute’s Poonawala as a white knight.

All others were pure hostile takeover candidates (although Essel now says that it acted on the knowledge that IVRCL promoters are open to stake sale, which the other side denies). It is probably just a co-incidence that over the past few weeks, there was fresh news related to many of these new-generation hostile takeover attempts and the trigger point for this blog post.

Leaving aside the drama and glam quotient attached to them, hostile takeovers can expunge bad management. In an ideal world, this may lead to the company coming under an owner who would create shareholder wealth rather than strip assets.

In developed markets, there are two sets of acquirers oiling the wheel of hostile takeovers – strategic buyers and private equity firms. And both seem to be missing in India.

But why is it so?

First of all, in many companies, promoter holding is way above the average of the developed economies, which makes them difficult candidates to begin with (and as insiders would tell you, many promoters hold more shares than they have officially declared, which tend to make it a futile affair).

Secondly, hostile takeovers would typically require the support of financial institutions who are large shareholders of listed companies and more often than not, the FIs prefer to stick to the existing promoter.

Private equity firms, who are essentially buyout groups in the West, have been largely focusing on growth capital deals in India. Understandably so, as in developed markets, they pursue large takeovers through leveraged buyouts, a non-option in India due to regulations. But the takeover of smaller and mid-sized firms is also missing here, although it doesn’t require leverage in the first place.

There are two recent changes which may yet mark an inflexion point for hostile takeovers in India. One is the spectre of foreign currency convertible bonds (FCCB) and the other is the change in takeover norms.

Many listed companies raised funds through FCCBs during the heydays of 2007 when valuations were stretched vertically to the top. Bond holders have the option of converting those into shares or going for redemption. We are now in 2012 – in the fifth and final year (given the typical time period for redemption call) of such FCCB issues when those need to be converted into shares or must be repaid.

Companies who are cash-strapped may be forced to sell assets to pay back and thus, some of them (including many with promoters carrying a corporate governance baggage) could make for hostile takeover candidates. The looming threat of bloating debt ripping apart the balance sheet has also led to sharp drop in share prices of companies and the margin calls-triggered promoters’ pledged shares also make them takeover candidates.

Also, the takeover norms now give a much decisive say to would-be acquirers. As against the past, an acquirer now has a high probability of picking 26 per cent stake or more (with open offer trigger raised to 25 per cent from the previous 15 per cent), following which he can have a say on board decisions. Earlier, the lower trigger point required an acquirer to make a big success of its open offer with minority shareholders to ensure that he crosses the threshold to shake up board resolutions.

The question is: Would acquirers be bold enough to attempt hostile takeovers? By this, I mean real corporate takeovers and not the ‘green-mail’ sort, which we have seen aplenty and are typically settled ‘quietly’.

Let me make it clear that I am no sadist who would love to see a hostile takeover for the sake of the drama. But it is one important piece of corporate activity, which is missing in India. It is required as ventilation for the damped corridors of many companies who take their public shareholders for a ride; it is needed for improving management efficiency and it is also important for Indian companies to mature further.


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We need real hostile takeovers, green-mailers please excuse!

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