CH 3 TAKEOVER

1. CH 3 TAKEOVER

2. TAKEOVER: MEANING & DEFINITION • It is an act of assuming control of something, especially the buying out of one company by another. • Assumption of control of another (usually smaller) firm through purchase of 51 percent or more of its voting shares or stock. • Is a process wherein an acquirer takes over the control of the target company • Acquirer may be an individual, company, any other legal entity or Persons Acting in Concert with the acquirer

3. Persons Acting in Concert • Also known as concert party arrangements. A group acting together in a takeover situation. • Person Acting in Concert Under regulation 2 (1) (q) of the SEBI Takeover Regulations, the term ‘Person Acting in Concert’ has been defined in two parts: • Commonality of Objective: The persons will be deemed to be person acting in concert who are acting in concert because of the commonality of objective of acquisition of shares or voting rights or gaining control over the Target Company. There must be an element of co-operation in the concerted action of these persons. This cooperation could be extended in several ways, directly or indirectly, or through an agreement, formal or informal. • Business Relations: the person who out of business relation or they have been given that responsibility cooperates with the acquirer will be termed as Person Acting in Concert. • To be the person acting in concert should compulsorily share common objective of substantial acquisition of shares or voting rights or acquisition of control or else they will not be treated as persons acting in concert

4. OBJECTIVES BEHIND TAKEOVERS

5. E.g. of Transaction (Main motives for the transaction)

6. Qatar Foundation's 5% stake in Bharti Airtel, the world's fourth-biggest mobile-phone company by customers, for $1.27 bn ranks fifth.. The purchase by Qatar Foundation, which controlled by SheikhaMozha, the second wife of the country's Amir, is the latest investor to dial into Airtel. • ONGC's $2.6 billion acquisition of a 10% stake in a Mozambique gas block is the second biggest and India's largest cross-border transaction in 2013 • Tech Mahindra, on Thursday, said it had signed an agreement BASF to acquire the IT and consultancy services business of the chemical giant in a bid to strengthen its presence in Western Europe. • Online auction platform eBay is leading yet another round of funding for online marketplace Snapdeal, sparking rumors of a possible buyout. In 2013, eBay lead the first funding round that resulted in an investment of $50 million.

7. 12 biggest takeovers by Indian companies • Tata Group Acquired Corus, October 2006. Deal size: $12.98 billion, Country: United Kingdom • Bharti Airtel acquired Zain Africa, February 2010. Deal size: $10.7 billion, Country: Kenya Tata Steel is India’s second largest steel company with a capacity of producing 3.8 million tones of crude steel. It has most of its plant in Jamshedpur, Jharkhand. It is considered as one of the best companies in producing steel. In October 2006, Tata Steels acquired Corus with an outstanding price of $12.98 billion. At present, Bharti Airtel is the largest mobile network in India. It is also expanding its reaches throughout the globe. In February, 2010, Bharti Airtlel added 180 million new customers in its list by acquiring an African Mobile Network provider called Zain Africa. This acquisition took place against an amount of $10.7 billion

8. 12 biggest takeovers by Indian companies • Hindalco Industries acquired Novelis , February 2007. Deal size: $5.73 billion, Country: Canada • ONGC acquired Kashagan Oilfields, November 2012, Deal size: $5 billion, Country: Kazakhstan • This acquisition took place in November, 2012. After this acquisition, India has become one of the major energy providers among other oil producing nations. After acquiring these oilfields, ONGC’s shares rose by 8 percent in the stock market. ONGC fulfills a major portion of India’s crude oil requirement. It also fulfills forty-eight percent gas requirement of India. Hindalco Industries is one of the main branches of the Aditya Birla group. It is headquartered in Mumbai and is one of the largest producers of aluminum in the world. On the other hand, Novelis is a Canadian company which has been the best in its kind during 2007.Few years back, Hindalco acquired Novelis with an outstanding amount of $5.73 billion

9. 12 biggest takeovers by Indian companies • Tata Motors acquired Jaguar Cars and Land Rover, March 2008, Deal size: $2.3 billion, Country: United Kingdom • Tanti Group of Companies and Arcapita Bank BSCc acquired Honiton Energy, April 2010 ,Deal size: $2 billion, Country: China • Arcapita Bank is headquartered in Bahrain. It is one of the leading investment firms in the world. In April 2010, this investment firm went into partnership with Tanti Group of Companies. This partnership was of $2 billion and the reason behind this partnership was to develop windmills to produce 1,650 MW power in China. Tanti Group is an Indian conglomerate company. The Chairman and Managing Director of Suzlon Energy is the owner of this company. Tata Motors is one of the common names on the Indian roads. It is the eighth largest car manufacturer in the world. In terms of manufacturing trucks and buses, it comes in the fourth and second ranks respectively. By March, 2008, Tata Motor offered a deal of $2.3 billion and acquired British brands, Land Rover and Jaguar

10. 12 biggest takeovers by Indian companies • Adani Enterprises acquired Port Terminals, May 2011. Deal size: $1.97 billion, Country: Australia • Adani group is an Indian conglomerate company founded in 1988 by GautamAdani. It has its headquarter in Ahmedabad. Adani Group has a tight grip on various fields. Resources, logistics, energy, agribusiness, etc. are the main operational fields of this group.During May, 2011, this group announced a deal of $1.97 billion. This deal was to acquire Port Terminal in Australia. • Essar Global acquired Algoma Steel, April 2007. Deal size: $1.79 billion, Country: Canada Algoma Steel was founded by Francis Hector Clergue in 1901. It is one of the very few steel companies that have seen World War I and II. Essar Global acquired Algoma Steel in 2007. During that period, Essar Global had forty-eight percent of Algoma’s shares. The final deal was set at $1.97 billion.

11. ONGC acquired Imperial Energy, August 2008. Deal size: $1.7 billion, Deal size: $2.62 billion, Country: United Kingdom • Imperial Energy Corporation was founded in 2004. It has it’s headquarter in Leeds, United Kingdom. It operates mainly from Siberia. By August 2008, Imperial Energy was acquired by ONGC. The deal was finalized for $2.62 billion. • Reliance Industries acquires Oil & Gas Assets (Marcellus Shale), April 2007. Deal size: $1.7 billion Country: United States Reliance industries are expanding its business, not only in India but all over the world. The Marcellus shale is located in the northern Appalachia, Pennsylvania. It is the major source of gas producing rocks. The thickness of these rocks is more than 900 feet. Reliance Industries acquired this gas source in April 2007, offering a deal of $1.7 billion.

12. Indian Hotels Co acquired Orient-Express Hotels, October 2012 Deal size: $1.67 billion, Country: Bermuda • Essar Global acquired Minnesota Steel, April 2007Deal size: $1.65 billion, Country: United States • Essar Global invested $1.65 billion to acquire Minnesota Steel in April, 2007. Prior to acquiring Minnesota Steel, Essar Group had acquired Algoma Steel. Minnesota Steel has an estimated production capability of 1.4 billion tonnes. During the time of acquiring Minnesota Steel, EssarGlobal’s experts said that they are expecting to produce 1.5 million tonnes of steel by the end of 2009. Indian Hotels Company is the chain of luxury hotels, run by the Tata group. Most of the hotels in this chain are run under the ‘Taj’ tag. This hotel chain has set a new standard for the hotel business. In terms of luxury and comfort, it is one of the prominent names in India. This time, Indian Hotels’ wish is to provide luxury and comfort in the British way. They have already offers a deal of $1.67 billion to the Orient-Express Hotels

13. SOME INDIAN TAKEOVERS BY INDIAN COMPANIES • Cipla, a leading drug manufacturing company of India, bought CiplaMedpro from South Africa for a price of INR 2707 crore. It had in fact bought all the shares of the South African company. • During February 2013, Mahindra & Mahindra bought all the ownership of Navistar, a US based company in two joint ventures by the companies – Mahindra Navistar Engines and Mahindra Navistar Automotives. • CoalIndia to takeover 50% Indian Oil Corporation’s explosive division • HLL Lifecare Limited (HLL), a Mini Ratna public sector enterprise of Ministry of Health and Family Welfare, has acquired majority stake in Goa Antibiotics and Pharmaceuticals Ltd. (GAPL), a public sector company owned by the Goa Government.

14. SOME INDIAN TAKEOVERS BY INDIAN COMPANIES • NTPC has invited expressions of interest (EoIs) for acquiring some seven stranded power plants • JK group, on Friday, announced acquisition of a majority stake in Deepti Electronics and Electro-Optics Pvt. Ltd. (DELOPT), a Bangalore-based company manufacturing defence electronics, avionics and electro-optics • Ahmedabad-based Torrent Pharmaceuticals, brought Mumbai-based Elder Pharmaceuticals’ branded domestic formulations business in India and Nepal for Rs.2,004 crore. • UltraTech Cement, a part of the Aditya Birla group, would acquire the 4.8 million-tonne Gujarat unit of Jaypee Cement Corporation Ltd. (JCCL) by way of a de-merger. The enterprise value for the transaction is Rs.3,800 crore. • Asian Paints invested Rs.99.78 crore in kitchen solutions provider Sleek International Pvt. Ltd. (SIPL) for a 51 per cent stake by subscribing to equity shares of the company.

15. OPEN OFFER • It is a part of the takeover code as defined by the Securities and Exchange Board of India. When a company acquires up to 15 per cent stake in another listed entity, an open offer gets triggered. • This means the acquiring company must make an offer to existing shareholders to buy an additional 20 per cent stake in the company. And, it is typically kept open for about a month, from the date of announcement. • It is aimed at providing the shareholders an exit option, as there may be a management change post-acquisition and investors may perceive potential risks in the business.  • The prices of the shares are fixed on the basis of negotiation under the agreement. It is the highest price paid by acquirer or by the person acting in concert. • Includes shares allotted through public issue or rights issue during the 26 week period , as statutorily prescribed, prior to the date of the open offer.

16. FORMS OF TAKEOVER • Bailout: • Involves takeover of a financially sick company by a financially rich company as per the provisions of the Sick Industrial Companies (Special provisions) Act, 1985. • Objective behind this takeover is to bail out the sick unit from losses. • Friendly Takeover: • Is one where the acquirer acquires the shares of the target by informing the board of directors his intention to purchase the shares of the target company. • If board feels the offer is worth accepting, it recommends to the shareholders that the offer be accepted. • The acquirer may either acquire the assets or purchase the stock of the target

17. FORMS OF TAKEOVER • Hostile Takeover: • One where the board of directors of the target firm disagrees to the offer of the acquirer to purchase the shares, but the acquirer continues to pursue it or makes the offer by by-passing the target company’s management • Represents an offer made by the acquirer without informing the target company’s management about their intention of acquiring stake in the company. • A Tender Offer : • An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price. • Strategy expensive as the price payable is higher than the market price; also the stock price tends to rise in anticipation of a takeover

18. FORMS OF TAKEOVER • PROXY FIGHT: • a measure used by an acquirer to gain control of a takeover target; acquirer tries to persuade other shareholders that the management of the target should be replaced. • Hopes to secure enough proxies that would help in gaining control over the board of directors and replace the incumbent’s management • CREEPING TENDER OFFER: • A takeover strategy involving the gradual acquisition of the target company's shares. • A creeping tender offer is conducted through the open financial markets rather than as a direct bid to the shareholders as is common in regular tender offer procedures.

19. FORMS OF TAKEOVER • HORIZONTALTAKEOVER: • Is a process where a company takes over another company from the same industry • Basic objective is to attain economies of scale and increase market share by entering into the market segments of the company taken over. • VERTICALTAKEOVER: • A merger between two companies producing different goods or services for one specific finished product. • Can be of two types: backward and Forward • Backward is one where the business of the vendor is taken over in order to reduce costs • Forward is one where the business of the customer is taken over in order to access market directly • An example of a vertical merger is a car manufacturer purchasing a tire company. Such a vertical merger would reduce the cost of tires for the automaker and potentially expand business to supply tires to competing automakers.

20. FORMS OF TAKEOVER • CONGLOMERATETAKEOVER: • Is one where a company takes over another company from a totally different industry • Is pursued with the objective of attaining diversification. • REVERSETAKEOVER: • Is a takeover strategy where a private company acquires a public company • Helps private company to effectively float itself and at the same time bypass the lengthy and complex process of going public by coming out with an IPO

21. BENEFITS OF TAKEOVER • Helps the acquirer to attain increase in sales/ revenues. • Helps acquirer to venture into new business segments and markets with ease • Improves overall profitability of the entity • Helps the acquirer in increasing its market share • Reduces competition from the perspective of the acquiring company • Reduces overcapacity in industry • Helps acquirer to expand the brand portfolio • Generates benefits of economies of scale • Helps attain increased efficiency as a result of corporate synergies • Helps in eliminating jobs that overlap in responsibilities

22. WEAKNESS OF TAKEOVERS • Reduces competition and choice for consumers • Results in job cuts • Cultural differences lead to conflict • Acquirer often burdened with hidden liabilities of the target entity • Employees of the target company work in an environment of fear and uncertainty affecting motivational levels.

23. DEFENSE STRATEGIES FOR TAKEOVERS- BANK MAIL • A strategy where the bank of the target firm refuses financing options to a firm that is keen on takeover. • Is done with the objective of preventing acquisition: • thwarting merger acquisition through financial restrictions • increasing the transaction costs of the competitor’s firm to find other financial options • to permit more time for the target firm to develop other strategies or resources.

24. DEFENSE STRATEGIES FOR TAKEOVERS-GREEN MAIL • Is a practice of purchasing enough shares of another publicly traded company that poses a threat of takeover for the target company • Threat of a takeover then forces the target firm to buy those shares at a premium, in order to avoid/suspend the takeover. • Buyback is referred as the Bon Voyage Bonus for it enables the target company to be left alone by the green mailer

25. DEFENSE STRATEGIES FOR TAKEOVERS-WHITE MAIL • Is another strategy wherein the target company issues large number of shares to a friendly party at a price quite below the market price • Forces the acquiring company to purchase these shares from the party to complete the takeover • Strategy discourages takeover by making the deal more difficult and expensive as the corporate raider (who buys large number of shares of the company whose assets seemed to be undervalued and he uses this for gaining voting rights so as to make changes in management) is required to purchase shares from a party that is friendly to the target company. • Once takeover is averted the target company may either buy back the issued shares or leave them floating in the market

26. DEFENSE STRATEGIES FOR TAKEOVERS-PRESS NOTE 18 • It sets out the government's policy for approval of new projects of foreign companies, when they already have an existing joint venture running in India. • The guidelines were set out in a 'Note', numbered 18, by the Department of Industrial Policy and Promotion, for public information, hence it came to be known as Press Note 18. • It says that if a foreign company has entered into a joint venture or embarked on a technology transfer/trade-mark agreement with a domestic company in a particular field of operation, then the foreign company will not get an automatic approval from the Reserve Bank of India to open another such venture in the same field. • This will be so irrespective of whether the new venture is with a new company or on its own. • Instead, the company would have to route its application for a fresh foreign direct investment through the Foreign Investment Promotion Board.

27. DEFENSE STRATEGIES FOR TAKEOVERS-PRESS NOTE 18 • Committee concluded: • Strong need for takeover code to retain the confidence of retail investors in the capital markets • Need to provide an exit opportunity to the investors in case they do not want to continue with the new management • Full and truthful disclosure to be made on all material information relating to the open offer to facilitate informed decision • Acquirer to ensure sufficiency of financial resources for the payment of acquisition price to the investors • Disclosures be made on all material transactions at the earliest opportunity • Clause 40 A and B of the Listing Agreements introduced to protect Minority Shareholders interest • Clauses prescribe a basic framework pertaining to initial disclosure before going ahead with acquisition of shares from the public