Hostile Takeover

Hostile Takeover

When you say “Hostile Takeover” the first impression that comes to mind is Oracle and Peoplesoft. Oracle’s $10.3 billion takeover of Peoplesoft in 2004 remains the most vivid of all takeovers creating a war-like situation amongst CEOs, employees, and shareholders of those corporations. A very recent bid by world’s largest software company Microsoft for Yahoo Inc. would also be very fresh in our minds.

In India hostile takeover reminds us of Swaraj Paul v/s Escorts (led to SEBI Takeover Code being enacted), Reliance and L&T (ultimately unsuccessful), GESCO and Grasim v/s L&T for Ultratech Cement.
This article sheds light on the concept of Hostile Takeover, reasons for it and defenses against it. The article also spells out the failures and successes of such deals and conclude with some recent examples where Indian companies are involved in such a mode of takeover.

In a friendly takeover, one company purchases another. The purchased company ceases to exist, or it becomes a part of the buying company. The buying company owns all assets, including the name of the company, their equipment, their personnel, even their patents and other intellectual property. However, just like a merger, the boards or owners of both companies would have agreed to the transaction.

M&A-Hostile Takeover

A hostile takeover is an acquisition in which the company being purchased does not want to be purchased, or does not want to be purchased by the particular buyer who is making a bid. How can someone buy something that’s not for sale? Hostile takeovers only work with publicly traded companies.

So a hostile takeover boils down to this: The buyer has to gain control of the target company and force them to agree to the sale.

Reasons for Hostile Takeovers

There can be ‘N’ number of reasons why a company might want or need a hostile takeover – dirt cheap valuations along with low promoter stake, EPS accretive, majority market share and so on. The target company can generate more profit in the future vis a vis the selling price. That’s why so many conglomerates have subsidiaries that do not have anything in common — they are just cash cows for the company. On the subject, Strategic takeovers are more common. In a strategic takeover, the buyer company acquires the target company because it wants to access its distribution channels, customer base, brand name, or technology.

The purchase factors may be the same for friendly acquisitions as well as hostile ones. But sometimes the target does not want to be acquired.

  • Perhaps they are a company simply wanting to stay independent.
  • Members of management might want to avoid acquisition because they are often replaced in the aftermath of a buyout. They are simply protecting their jobs.
  • The board of directors or the shareholders might feel that the deal would reduce the value of the company, or put it in danger of going out of business.

In these cases, a hostile takeover will be required to make the acquisition. In some cases, purchasers use a hostile takeover because they can do it quickly, and they can make the acquisition with better terms than if they had to negotiate a deal with the target’s shareholders and board of directors.

Methods of Hostile Takeover

The two primary methods of conducting a hostile takeover are the tender offer and the proxy fight.

  1. A tender offer is a public bid for a large chunk of the target’s stock at a fixed price, usually higher than the current market value of the stock. The purchaser uses a premium price to encourage the shareholders to sell their shares. The offer has a time limit, and it may have other provisions that the target company must abide by if shareholders accept the offer. The bidding company must disclose their plans for the target company and file the proper documents with the regulatory body.Sometimes, a purchaser or group of purchasers will gradually buy up enough stock to gain a controlling interest (known as a creeping tender offer), without making a public tender offer. This is risky because the target company could discover the takeover and take steps to prevent it. Sun Pharma attempt to acquire Israel Company Taro falls under the tender offer method.
  2. In a proxy fight, the buyer does not attempt to buy stock. Instead, they try to convince the shareholders to vote out current management or the current board of directors in favor of a team that will approve the takeover. The term “proxy” refers to the shareholders’ ability to let someone else make their vote for them — the buyer votes for the new board by proxy.Often, a proxy fight originates within the company itself. A group of disgruntled shareholders or even managers might seek a change in ownership, so they try to convince other shareholders to band together. The proxy fight is popular because it bypasses many of the defenses that companies put into place to prevent takeovers. Most of those defenses are designed to prevent a takeover by the purchase of a controlling interest of stock, which the proxy fight sidesteps by changing the opinions of the people who already own it.One of the recent proxy fights that come to mind is the acquisition of Ultratech’s stake by Grasim who convinced A. M. Naik of L&T for the stake sale. An overseas instance would include Hewlett-Packard’s takeover of Compaq. The deal was valued at $25 billion, but Hewlett-Packard reportedly spent huge sums on advertising to sway shareholders. HP wasn’t fighting Compaq — they were fighting a group of investors that included founding members of the company who opposed the merger. About 51 percent of shareholders voted in favor of the merger. Despite attempts to halt the deal on legal grounds, it went as planned.

Next, we’ll see how a company can defend against a hostile takeover.

Defenses against Hostile takeover

There are several ways to defend against a hostile takeover. The most effective methods are built-in defensive measures that make a company difficult to take over. These methods are collectively referred to as “shark repellent.” Here are a few examples:

  • The Golden Parachute is a provision in a CEO’s contract. It states that he will get a large bonus in cash or stock if the company is acquired. This makes the acquisition more expensive, and less attractive. Unfortunately, it also means that a CEO can do a terrible job of running a company, make it very attractive for someone who wants to acquire it, and receive a huge financial reward.
  • The Supermajority is a defense that requires at least 3/4th of shareholders to approve of any acquisition. This makes it much more difficult for someone to conduct a takeover by buying enough stock for a controlling interest.
  • A Staggered Board of Directors drags out the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered, so that some members are elected every two years, while others are elected every four. Many companies that are interested in making an acquisition do not want to wait four years for the board to turn over.
  • Dual-class stock allows company owners to hold onto the voting stock, while the company issues stock with little or no voting rights to the public. That way investors can purchase stocks, but they can’t purchase control of the company. Indian company Pantaloon has issued such dual-class stock

In addition to takeover prevention, there are steps companies can take to thwart a takeover once it has begun.

One of the more common defenses is the poison pill. A poison pill can take many forms, but it basically refers to anything the target company does to make itself less valuable or less desirable as an acquisition:

  • The People Pill – High-level managers and other employees threaten that they will all leave the company if it is acquired. This only works if the employees themselves are highly valuable and vital to the company’s success.
  • The Crown Jewels Defence – Sometimes a specific aspect of a company is particularly valuable. For example, a telecommunications company might have a highly-regarded research and development (R&D) division. This division is the company’s “crown jewel.” It might respond to a hostile bid by selling off the R&D division to another company, or spinning it off into a separate corporation.
  • Flip-In – This common poison pill is a provision that allows current shareholders to buy more stocks at a steep discount in the event of a takeover attempt. The provision is often triggered whenever any one shareholder reaches a certain percentage of total shares (usually 20 to 40 percent). The flow of additional cheap shares into the total pool of shares for the company makes all previously existing shares worthless. The shareholders are also less powerful in terms of voting because now each share is a smaller percentage of the total.

Some of the more drastic poison pill methods involve deliberately taking on large amounts of debt that the acquiring company would have to pay off. This makes the target far less attractive as an acquisition, although it can lead to serious financial problems or even bankruptcy and dissolution. In rare cases, a company decides that it would rather go out of business than be acquired, so they intentionally rack up enough debt to force bankruptcy. This is known as the Jonestown Defense.

Other Forms of Defenses

  • Greenmail is similar to blackmail, but it’s green to represent the money the target must spend to avoid the takeover. If the acquiring company is on the verge of a controlling interest, they might offer the target the option to buy their stock back at a premium price. Sometimes, the acquisition isn’t the goal — the acquiring company is just buying stock so they can sell it back and make a profit on the greenmail payment.
  • The White Knight is a common tactic in which the target finds another company to come in and purchase them out from under the hostile company. There are several reasons why they would prefer one company to another — better purchase terms, a better relationship or better prospects for long-term success.
  • With the Pac-Man Defense, a target company thwarts a takeover by buying stocks in the acquiring company, then taking them over.

Recent Examples

Great Offshore – Bharati initiates, ABG joins in

Promoter Vijay Kantilal Sheth pledged 14.9% in Great Offshore out of his total holding of 15.8% with Bharati Shipyard for Rs. 200 crores when it was worth Rs.138 crores. Financial downturn hit hard and Sheth lost control to Bharati Shipyard. In 2006, when he strived for the hive off of Great offshore from GE Shipping nothing would have suggested this consequence. But the twist was not to end here. Even as Bharati acquired 14.9% ABG came in the fray for acquiring Great offshore. Great offshore manufactures oil rigs and both the companies have a strategic interest so neither of them will let go. Hostile Takeover turned into a bidding war !!! This one should go a long way with ABG having backed up by Ruias and Bharati already having a higher stake. Current Status – a 30% increase in open offer price to Rs.450 by ABG bodes well for public shareholders. ABG holds 7.3% and Bharati 19.5%.

Emami v/s Zandu

This hostile takeover triggered in May 2008 when the Emami acquired 24% stake of Zandu from Vaidyas (co-founders) @ Rs. 6900 per share. Open offer for 20% followed along with Parikh’s (co-founders) giving in their 18% after 4 months of futility to save the company. Rs.750 crores were the consideration paid by Emami for a 72% stake in the company. Parikh’s tried creeping acquisition but we guess the offer by Emami (Rs.16500 per share – Rs.15000 + Rs.1500 as non – complete fee) was the one that couldn’t be refused.

Sun Pharma v/s Taro

There was an agreement between Sun Pharma and Israeli company Taro regarding a merger of Taro in May 2007. But due to some violation of some terms, according to Taro, it unilaterally terminated this agreement. Even though Sun pharma has acquired 36% stake for $101 million (Rs. 470 Cr) it has been injuncted by Supreme Court of Israel for non-closure of the deal. Taro has tried various ways like crown-jewels defense (selling its Irish unit) and non-disclosure of financials to shoo away Sun. The Levitts command $15 per share, nearly double of initial open offer price of $7.75 by Sun. Sun is ready to give up to $9.5. The deal is still looming in uncertainty.


Hostile takeover rarely surfaces in India as public shareholding in Indian companies has been relatively very low. Finance Minister Pranab Mukherjee in his budget speech on July 6 took note of this fact “The average public float in Indian listed companies is even less than 15%. Deep non-manipulable markets require larger and diversified public shareholdings.This discourages hostile takeovers, more so than anything else. Still, the 2002-2007 corporate profit dream run has recently given the Indian companies the wherewithal to go for hostile takeovers, even though there is only a handful. High stake helps Indian companies acquire foreign companies with relatively low and disbursed promoter stakes.

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