The recent news of Minda Corp buying a significant stake of approximately 15.7% in Pricol Limited has generated buzz around hostile takeovers. This was the second instance of a company buying another after Adani Group purchased a huge stake in NDTV. This has realised many questions related to hostile takeovers and popular instances of such cases in India and abroad. Given here is the meaning of hostile takeovers and related details of the same.
Read More: Adani’s takeover of NDTV – All you need to know
What is the meaning of a hostile takeover?
The simple meaning of hostile takeover is when a corporate acquisition of a target company is attempted by the acquiring company against the wishes of the former’s management and board of directors. Under a hostile takeover, the acquiring company can make a direct offer to the shareholders of the target company in order to purchase their shares bypassing the management and the Board of the company. Such an offer is generally at a premium price to attract shareholders with significant gains.
The primary reasons for a hostile takeover can be the analysis that the target company is undervalued or has few strategic assets that directly complement the business of the acquiring company. The synergy of the resources can boost the growth trajectory of the acquiring company and can also increase its overall market share.
What are a few strategies for hostile takeovers?
Hostile takeovers are complex and often require significant planning, resources, and expertise. The strategies for executing a hostile takeover can vary depending on the specific circumstances and goals of the acquiring company. Some of the common strategies for hostile takeovers are mentioned below.
- Tender offer
A tender offer is a public offer made by the acquiring company. This offer is made with the aim to purchase a substantial portion or all of the outstanding shares of the target company directly from its shareholders. The offer is usually made at a premium price that is significantly above the current market value of shares of the target company. This increased offer is to incentivize the company’s shareholders to sell their shares.
- Proxy fight
A proxy fight is a battle for control of the Board of Directors in the target company. The acquiring company may seek to nominate its own directors to replace the current board. This is with the aim to gain control of the company’s decision-making process. This mode of a hostile takeover is often costly and time-consuming and requires the support of a significant number of shareholders.
- Down raids
Down raids are referred to the sudden entry of the predator acquirer in the open markets. The acquirer company attempts to buy a significant stake in the target company at a higher than current value in a very short time. This also allows them the element of surprise and an opportunity to buy a controlling stake. This type of acquisition is followed by a further takeover offer or similar action over the course of an acquisition attempt.
What are the defensive strategies against hostile takeovers?
Companies facing hostile takeovers may employ several defensive strategies as protection from the acquiring company. These strategies are designed with the aim to make the company less attractive or give the target company’s management more time to consider the acquisition and explore their options. Some defensive strategies against a hostile takeover include,
- Scorched earth
This is the last ditch effort against a hostile takeover. The aim of this strategy is to make the target company less attractive and make them lose interest in the acquisition. Under this strategy, the target company may sell off key assets or may increase its overall debt making the acquisition more expensive.
- Pac-Man Defense
The Pac-Man defense strategy is where the target company makes a counteroffer to acquire the acquiring company. This essentially is turning the tables on the acquiring company and making them reconsider their offer.
- Golden Parachute
Under this strategy, a financial incentive is given to the top executives of the target company in the event of a change in ownership or control. This makes the overall acquisition more expensive for the acquiring company making it less attractive or feasible.
- White Knight
Under this strategy, the target company seeks a white knight who is a friendly acquirer that steps in as a competing entity for the acquiring company. When the target company is acquired by the white knight, the former gets a more favourable buyer and can avoid the negative consequences of a hostile takeover.
Top cases of hostile takeover in India and abroad
Hostile takeovers are relatively rare in the Indian market. Some of the top cases of hostile takeovers in India and abroad are mentioned below.
- The hostile takeover attempt by Reliance Industries Limited of L&T Finance in 2011. The former acquired a 14.98% stake in the subsidiary of the engineering conglomerate L&T, without L&T’s approval. There was a prolonged legal battle between the two companies to prevent the acquisition of L&T Finance.
- The takeover of Satyam Computer Services by Mahindra Tech was another instance of a hostile takeover in India. The former was involved in huge scandals of fraud and Mahindra Tech had taken over the company with the aim of restoring investor confidence.
- A few other cases of hostile takeovers in India include the acquisition of Adani Group’s takeover of NDTV, India Cements’ acquisition of Raasi Cements in 1998, Emami’s acquisition of Zandu in 2008, and Larsen & Toubro’s acquisition of Mindtree Limited via Cafe Coffee Day’s VG Siddhartha.
- The takeover of Twitter by Elon Musk is the latest case of a hostile takeover abroad.
- A few other cases of hostile takeovers that have occurred abroad are Sanofi-Aventis’s acquisition of Genzyme Corporation, InBev’s acquisition of Anheuser-Busch in 2008, and Oracle’s acquisition of PeopleSoft in 2004.
Conclusion
As mentioned above, hostile takeovers are a rare case in the Indian economy. A company usually attempts a hostile takeover when it believes that there is value to be gained by taking control of a target company without the approval of its management or board of directors. While there are multiple benefits of a hostile takeover for the acquiring company, it also poses a few risks. Hence, it is important to thoroughly review all the aspects of a company before going all out to acquire the same through a hostile takeover.
FAQ
The key difference between a merger and an acquisition is that the former is where two or more companies come together to pool their resources and form a single new entity. Acquisition, on the other hand, is where a company acquires a significant stake in another company through either a hostile takeover or in the form of a bailout for the target company.
The possible reasons for a hostile takeover can be gaining access to key assets in the target company, expansion of the market share, achieving economies of scale, elimination of competition, and increasing shareholder value.
A poison pill is a defense mechanism against a hostile takeover. Under this strategy, the target company changes the bylaws or issues new shares which makes it more expensive for the acquiring company to purchase the target company.
The possible risks of hostile takeovers include negative publicity, loss of control, damaged relationships between the two entities, financial losses, regulatory and legal hassles, loss of employee morale, and more.
