Hostile Takeover

This is only a summary. Please read the text book and additional
readings for details. Removal of errors and omissions, if any, in
this ppt are your responsibility.

Agenda

What is Takeover
Takeover Code India
Takeover Attack - Gaughan
Takeover Defense Gaughan
How the Poison Pill Works
Indian Scenario
Cooper Industries Case Analysis

Takeover
Acquisition of a certain block of equity of a company
which enables the acquirer to exercise control
Regulation of Takeover:
1. Transparency of procedure
2. Interest of small shareholders
3. Realization of economic gains
4. Avoid undue market concentration

Takeover Code
Evolution and timeline of the Takeover Code
Pre 1992
1992
1994
1995
1997
2001
2002

2009-2011

Listing agreement governed substantial acq. of shares

SEBI constituted
Takeover Code of 1994 notified
Bhagwati Committee constituted
The revamped Takeover Code of 1997 notified
Bhagwati Committee reconstituted
1997 Code revised based on the recommendations of
reconstituted Bagawati Committee
4 September 2009: TRAC constituted
19 July 2010: TRAC released its report
28 July 2011: The SEBI Board considered TRAC reco
23 September 2011: SEBI notified new Takeove Code
22 October 2011: New Takeover code effective

TRAC: Takeover Regulation Advisory Committee

Takeover Code
Key areas of impact

Limits on acquisition of shares or voting rights

Acquisition of control
Exemptions
Open offer: Trigger and conditions
Key aspects of open offer obligations
Key obligations of parties during open offer
Minimum public shareholding
Disclosures
Repeal and savings
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Takeover Code

Read details from the posting on VCmoodle

Takeover Attack
Attack approaches - Gaughan

Takeover Defense
Takeover defense could be
Proactive (pre offer defense)
Deal-embedded (at the time of negotiation
and usually in a friendly offer setting)
Reactive (post offer defense)
Read from Gaughan

How the Poison Pill Works

Flip in poison pill: non-hostile shareholders of a
target company have the right to buy additional
shares at a bargain price if the triggering event
occurs impact is to dilute the acquirers toehold and
increase the cost of acq.
Flip over pill: Gives the target shareholders a right to
purchase shares of the newly merged entity at a
discount price; works in synergy deals where the
buyer must work with the target to achieve greater
value
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How the Poison Pill Works

Suppose the target has a flip-in pill that gives
shareholders the right to buy 0.2 additional shares if
a bidder gets a 10% toehold (20% shares)
When the pill is invoked the hostile bidder with the
toehold is not granted this right
Triggering the pill has ownership implications

Assume that the target has 1000 shares o/s

Compute the numbers and analyze
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How the Poison Pill Works

The pill does two things
Lessens the value of the toehold
If the pill is triggered the buyer has to offer a
complex transaction beneficial to both parties, or
at times withdraw
Since the pill does not need shareholder vote
the BoD can change the terms of the pill after
the tender offer has been announced
In practice BoD has significant discretion in
determining the number of shares to offer 1-for-1,
2-for-1
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Indian Scenario
The cultural and regulatory environment in India
was usually not supportive of hostile acquisition
Indian promoters have a large block of the shares
and influence several decisions
Even if they acquire more shares it does not
trigger penalties
SEBI has been a watch dog ensuing more
oversight
Often the decisions are detrimental to the small
dispersed shareholders
Friendly deals have been the norm
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Indian Scenario
Few examples
1984 Swaraj Paul
Around 2000, Imperial Chemical Industries and Asian Paints
1998 - Raasi cements
2000 GESCO Dalmia group
2008 Emami-Zandu
2007 HB Stockholding - DCM
Around end1980s L&T and RIL

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Indian Scenario
Average Promoter Stake
Average Indian Financial instituion Stake
Average Foreign Financial instituion Stake
Average non-instituional Public Stake
% companies Vulnerable to TO

BSE 100
48.09%
2.00%
18.56%
20.24%
15% - 27%

BSE 500
49.55%
1.73%
12.31%
26.33%
8.2% -22%

Data from BSE site in December 2006 (?)

Only 10 of the BSE companies has promoters shareholding <25%
the required limit
OF the BSE 500 less than 9% of the promoters have < 25%
ownership limit
Indian FIs have a very small holding and may as yet not be able to
play an influential role
Foreign VCs are included in the FII category
Public ownership could increase given changing patterns in the
economy
Source: Shaun Mathew: Hostile TO in India - Columbia Business Law Review
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Indian Scenario
Data from BSE site in December 2006 (?)
A company vulnerable to hostile TO is defined as having:
Promoter+ FI < 45%
Mutual Fund + FII + Insurance company+ 0.5(non-institutional
public stake) >50%
Firm is in an industrial sector that permits FDI > 50% w/o
Foreign Inv Promotion Board( FIPB) or RBI approval

Source: Shaun Mathew: Hostile TO in India - Columbia Business Law Review

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Cooper Industries Case Analysis

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Cooper Industries Case Analysis

Players:
Nicholson File Company Target
Porter - interested in acquiring Nicholson
raided the target
VLN Corporation a white knight offering terms
to Nicholson to avoid raid by Porter
Cooper Industries interested in Nicholson from
a strategic fit perspective, approached Nicholson
3 years ago but deal did not culminate into a
merger, currently considering making a play for
Nicholson again
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Cooper Industries Case Analysis

Set up DCF
WACC calculation
Terminal value calculation
Probable range to offer
Determine exchange rate w/o dilution
Verify valuation using multiple

Consider negotiation possibilities

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Numerical 1
There are two levered firms A and B each having a market value of $8500. Firm
A does well in a boom economy. Firm B does well in a bust economy. The
probability of a boom or a bust is 50% each. The end of period values of the
two firms depend on the economy. In a boom the value of firm A goes up by
41.18% and that of B goes down by the same percentage. In a bust the value
of firm A goes down by 41.18% and that of B goes up by the same percentage.
Both firms have debt outstanding with a face value of $8,000 that has to be
paid at the end of next period. In order to diversify, the two firms have
proposed a merger. There is no synergy and the NPV of the merger is zero.
1. Determine the gain or loss under each state of economy to the
stockholders and bondholders of A
2. Determine the gain or loss under each state of economy for the
stockholders and bondholders of B
3. Determine the gain or loss under each state of economy for the
stockholders and bondholders of the combined firm AB
4. Will the stockholders of either firm support the merger?
5. Will the bondholders of either firm support the merger?
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Numerical 2
On August 11, 1983, T.Boone Pickens and a consortium of investors began
purchasing shares of Gulf Oil for $39. In late 1983/early 1984 Pickens
announced a partial tender offer at $65 per share. (A rich oilman conducting
piracy on the high seas will hurt all of us. lamented the chairman of another
oil company). Gulf turned too white knight Chevron for help. Your task is to
figure out how much Chevron to could afford to pay for Gulf. So far, you
know that the pre-takeover bid price was $39. The price was based upon
the assumption that real oil price would not change very much in the future
years and the investment and the operating policies of Gulf would stay the
same. A take-over premium would make sense to Chevron only if it could
implement cash flow increasing changes in Gulfs policies. Two such actions
were available to Chevron
(a) Reducing Gulfs ambitious exploration program (actually rationalizing the
exploration program of the merged company), and
(b) Rationalizing administrative and distribution operations to generate
additional cost savings.
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Numerical 2
Preliminary calculations indicated that the merged company could expect to
realize about $2 billion of additional after-tax free cash flow per year during
the first 8 years by a combination of (a) and (b) above. However, reduction
of the exploration program would result in a decrease in after-tax free cash
flow per year of about $350 million per year after the 8th year. This reduction
could be assumed to continue long enough to be treated as perpetuity. In
addition, a 1 year implementation delay was expected and restructuring cost
would amount to $1 billion. All the above estimates are expressed in 1984
dollars. In early1984, the long term government bond rate was 12%, the AA
corporate yield was 13.5% (both Gulfs and Chevrons bonds were rated
AA), the corporate tax rate was 50%, Chevrons target debt ratio was 26%,
and expected long term inflation was estimated at 6%. Gulfs and Chevrons
stock betas were both equal to 1.15 the prospective market equity risk
premium equity risk premium over the long term treasuries was estimated at
4%. There were 165.3 million Gulf shares outstanding.
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Numerical 3
Your firm, First Energy Advisors, had been retained to review the
valuation of the Gulf Oil Corp. made using the information provided in
the previous problem. You are in charge of this assignment. You
have been asked to pay particular attention to the long term trends of
the energy market. In the process of reaching your conclusion on the
value of Gulf Oil you have to access the following information:
a. The original valuation implied that Chevron would bid up to $85
per share of Gulf.
b. The original valuation assumed that Gulfs $39 per share was
based upon the assumption that real oil price would not change
very much in the future years and reflected the markets
assumption that it would maintain its current policy and that no
significant changes would take place in the energy in the future.

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Numerical 3
c. On the other hand, based upon your research you have conclude
that although the real price of oil would stay fairly constant through
1991, oil prices would increase faster than general inflation after
1991. You estimate that Gulfs stand alone real cash flow from oil
and gas production would increase at 5% per year after 1991 and
will continue growing at the rate well into the 21st century because
of the projected upward trend in the oil demand and prices.
Furthermore, you believe that the $39 per share price of Gulf
already discounts the upward trend in the oil prices projected for
the 1990s and beyond.

Modify the valuation of Gulf to take into account your projection of

the post -1991 growth of real free-cash flow from oil and gas
exploration. What is the maximum price per share that Chevron
should be willing to pay for gulf oil as per your new valuation?
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Thank you!

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