Takeovers

In case of takeover, one company obtains

control over management of another company.
A takeover is a process wherein an acquirer
takes over control of the target company. The
acquirer may do so with or without the consent
of the shareholders. An acquirer may also
acquire a substantial quantity of shares or voting
rights of the target company. This is termed as
substantial acquisition of interest.
 Reasons for Takeover
To gain opportunities of market growth more quickly than through
internal means.

To gain benefits from economies of scale.

To gain a more dominant position in national and inter national

market.

To acquire the skills and strengths of another firm to complement

the existing business.

To acquire a speedy access to revenue streams that it would be

difficult to build through normal internal growth.

To diversify its product and service range to protect itself

 Hostile Takeover
Where in a merger one firm acquires another firm
without the knowledge and consent of the management
of the target firm, it takes the form of a hostile takeover.
The acquiring firm makes an unilateral attempt to gain a
controlling interest in the target firm, by purchasing
shares of the later firm directly in the open (stock)
market.
An example of hostile takeover was the TMBL by
Sivasankaran of the Sterling Group. Since this type of
takeover is generally prejudicial to the interest of the
stakeholders, SEBI has come out with relevant code of
conduct for the purpose of disciplining the takeover
practice in India.
Hostile Takeover- Strategic Tactics
When a target firm fears a forced or hostile
takeover, the management of the company may
initiate the following defensive measures and
strategies to thwart any bid for takeover. The
management being in a fiduciary position has to
take decisions in the best interest of the
shareholders. Further, the existence of the
management of the target firm is also uncertain
as there is an all- likely chance of management
of the target firm, if the takeover bid proves
successful.
 Dawn Raid- In this tactic, brokers acting on behalf of
acquirer/ raider swoop down on stock exchange at the
time of its opening and buy all available shares before
the target/ prey wake up.
It is not considered as a good tactic, as an acquirer can
get a sizeable chunk in the dawn raid only if the scrip is
highly liquid in comparison to its total paid- up capital.
In this type of tactic, as the investor gets an idea about
takeover, he may hold back the quantity offered thereby
reducing the liquidity and making the dawn raid fail.
 Bear Hug- The acquirer makes a very attractive
tender offer to the management of the target
company for the latters shareholders and asks
them to consider the same offer in the interest of
the shareholders.
This is a sound tactic. Normally, such an offer is
backed by the acquirers preparedness to make
a hostile open offer to the public shareholders if
the board of the target company rejects the offer.
 Saturday Night Special- This is the same tactic
as bear hug, but made on the Friday or Saturday
night (last working day of a week) asking for a
decision by Monday (first working day of the next
week). The idea behind this is to give very little
time to the promoter/ board of the target
company to set up their defenses. This is also
called Godfather Offer.
 Proxy Fight- In this tactic, the acquirer convinces
majority (in value) shareholders to issue proxy
rights in his favor, so that he can remove the
existing directors from the board of the target
company and appoint his own nominees thereby
taking control of the target company.
However, this method in which the control is
sought to be acquired without acquisition is not
sustainable since every time the acquirer will
have to keep on acquiring proxies from the
geographically scattered shareholders.
 Also, 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. Hence, proxy
fight cannot be sustainable tactic of hostile
acquisition.
 Takeover Defenses/ Anti- Takeover
Amendments
A Target company which faces the threat of a
hostile takeover, would adopt the following
strategies:
Divestiture
Crown Jewels
Poison Pill
Greenmail
White- knight
Golden Parachutes
Other Strategies
 Divestiture- Strategy whereby target
company arranges to divest or spin off
some of its businesses in the form of an
independent, subsidiary company thus
reducing the attractiveness of the existing
business to the predator.
 Crown Jewels- Strategy whereby the
target company arranges to sell its crown
jewels (highly profitable arm) in order to
dissuade the predator.
 Poison Pill- Strategy adopted by an acquiring company
itself while it is in the process of bidding for another
company in order to make it unattractive to any prowling
potential bidder. This strategy aims at initiating action
against the predator by destroying the attractiveness of
the firm. The acquiring company may issue substantial
amount of convertible debentures to its existing
shareholders which would make it difficult for the potential
acquirer as there is a danger of considerable increase in
the voting power of the company. Under this strategy, the
target firm sells or mortgages or leases or otherwise
disposes off some of its precious assets. Another way by
which the target firm can defend itself from onslaught of
the potential bidder is to dispose of its liquidity by
acquiring some asset or other firm.
 Greenmail- Strategy whereby incentive is
offered by management of the target
company to the potential bidder for not
pursuing the takeover bid.
 White- knight- Voluntary offer by the management of the
target company to the acquiring company to escape from
the dangers of a hostile takeover and to protect itself
from the possibility of displacement of existing
management. The purpose of white- knight strategy is to
seek to find a bidder who could offer a higher offer price
which would eventually drive away the original bidder.
The objective is to make the takeover exercise as much
unviable and unprofitable as possible for the original
bidder. Such a strategy will help get the target firm a
better deal.
 Golden Parachute- Strategy adopted by
the target company by offering hefty
compensations to its managers if they
manage to get ousted due to takeover,
this is pursued to reduce their resistance
to takeover.
 Other Strategies:-
Legal Strategy
Tactical Strategy
Offensive Strategy
 Legal Strategy- Where the target firm attempts
to forestall the possible takeover bid through
legal mode, it takes the form of legal strategy for
guarding against hostile takeovers. In this case,
it is possible for the target firm to move a court
of law for obtaining injunction against the offer.
For this purpose, relevant provisions exist in the
Securities Contracts (Regulations) Act, 1956 and
the Companies Act, 1956. This strategy is
resorted to either to block or delay the tender
offer in circumstances where the shares are
lodged for the transfer by the bidder.
 Tactical Strategy- Strategy where the management of the
target firm may adopt different types of tactical moves to
thwart the evil designs of hostile takeover bid. For this
purpose, the target company may initiate the following
tactics:
Mounting media campaign against the tender offer with
facts and figures.
Sending letters and circulars to the shareholders
dissuading them from accepting the tender offer.
Educating the shareholders that the consideration being
offered by the acquiring firm is inadequate and that the
proposed merger/ takeover does not make any
economic sense and the performance of the firm may be
adversely affected by the takeover.
 Causing reduction of floating stock of the target
firm by persuading business associates,
directors and employees to purchase the shares
of the firm from the market in order to frustrate
the efforts of the bidder to acquire the controlling
interest.
Allowing the existing shareholders to increase
their stake by the issue of warrants or
convertible preference shares or convertible
bonds, etc at a relatively low price.
 Offensive Strategy- Also Known as
Pacman Strategy aims at launching a
counter takeovers bid on the acquiring
firm. A big, vibrant and a financially sound
target company may undertake this step
to woo the management of the acquiring
firm by offering an attractive higher price
for the shares of the acquiring firm.
 Prey for Takeovers

Following provide ideal combination for an

acquiring firm to prey a target firm for a takeover
bid:
Overall poor market performance of the target
firm, especially in terms of return to the
shareholders in the preceding years.
Less profitability of the target firm as compared
to other firms.
Lower shareholding of the promoter/ owner
group in the target firm.
 Mergers Vs Takeovers
S.No Parameter Merger Takeover
1. Definition It is an arrangement It is a transaction or series of
whereby the assets transactions whereby a
of two companies person (individual, group of
become vested in, or individuals or company)
under the control of, acquires control over the
one company (which assets of a company, either
may or may not be directly by becoming the
one of the original owner of those assets or
two companies), indirectly by obtaining control
which has as its of the management of the
shareholders all, or company.
substantially all, the
shareholders of the
two companies.

2. Control over Shareholding in the Direct or indirect control over

assets combined enterprise the assets of the acquired
will be spread company passes to the
between the acquirer.
shareholders of the
two companies.
S.No Parameter Merger Takeover
3. Mode Effected by the shareholders of one or Effected by
both of the merging companies agreement with the
exchanging their shares (either holders of the
voluntarily or as the result of a legal whole of the share
operation) for shares in the other or a capital of the
third company, the arrangement being company being
frequently effected by means of a acquired,
takeover bid by a third company for the
shares of both.

4. Bid Bid is generally by the consent of the Bid is frequently

management of both companies against the wishes
of the
management of
the offered
company
 Benefits of Takeovers
It helps to acquire to attain increase in sales/
revenues.
The acquirer is able to venture into new business
segments and markets with ease.
The overall profitability of the entities improves.
It helps the acquirer in increasing its market
share.
It reduces competition from the perspective of
the acquiring company.
The industry can reduce over- capacity by cutting
down the scale of operations in the new entity.
 It helps the acquirer to expand its brand
portfolio.
The new entity is able to attain the
benefits of economies of scale.
It helps attain increased efficiency as a
result of corporate synergies.
 Disadvantages of Takeovers

It results in reduced competition and thus reduced

choice for consumers.
It results in job cuts, as the acquirer tries to reduce
operating costs.
The firms that merge may suffer from cultural differences
that may lead to conflict with the new management.
The acquirer is often burdened with the hidden liabilities
of the target entity.
The employees of the target company work in an
environment of fear and uncertainty, which affects their
motivational levels.