Subject- CRFE- UNIT- 4

Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

UNIT- IV - BID STRATEGY & TACTICS

Defenses against takeover, evaluating merger performance, post merger activity,

regulations of M & A, Roles of institutional Player in M&A

Bid is an offer to pay a specified price for an article about to be sold at auction.The bidder has a r
ight to withdraw his bid at any time before it is accepted, which acceptance is.generally manifest
ed by knocking down the hammer. A price offer is called a bid.

Bidding is an offer (often competitive) of setting a price one is willing to pay for
something The term may be used in context of auctions, stock exchange, card games, or real
estate. Bidding is used by various economic niches for determining the demand and hence the
value of the article or property,

Example -: In today's world of advance technology, Internet is one of the most favourite
platforms for providing bidding facilities; it is the most natural way of determining the price of a
commodity in a free market economy.

The Tactics that may be used in developing a bidding strategy should be viewed as a series of
decision points, with objectives and options usually well defined and understood before a
takeover attempt is initiated.

Pre-bid planning should involve a review of the targets current defenses, an assessment of the
defenses that could be put in place by the target after an offer is made, and the size of the float
associated with the targets stock.

Poor planning can result in poor bidding, which can be costly to CEOs. Studies show that almost
one-half of acquiring firms CEOs are replaced were replaced within five years of a major
acquisition. Moreover, top executives are more likely to be replaced at firms that had made poor
acquisitions sometime during the prior five years.

Common bidding strategy objectives include winning control of the target, minimizing the
control premium, minimizing transaction costs, and facilitating post-acquisition integration. If
minimizing the cost of the purchase and transaction costs, while maximizing cooperation
between the two parties is considered critical, the bidder may choose the friendly approach.

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Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

Advantages and Disadvantages of Alternative Takeover Tactics

TAKEOVER

A takeover is virtually the same as an acquisition. The term acquisition under SEBI Takeover
Regulations is defined as directly or indirectly, acquiring or agreeing to acquire shares or voting
rights in, or control over, a target company

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TYPES OF TAKEOVER

1. Friendly Takeover
2. Hostile Takeover

Friendly Takeover-: Friendly takeover means takeover of one company by change in its
management & control through negotiations between the existing promoters and prospective
investor in a friendly manner. Thus it is also called Negotiated Takeover. This kind of takeover is
resorted to further some common objectives of both the parties.

Hostile Takeover-: A takeover would be considered "hostile" if

The board rejects the offer, but the bidder continues to pursue it, or

If the bidder makes the offer without informing the board beforehand

Types of Hostile Takeover

Tender offer: The acquirer makes a public offer at a fixed price above the current market price.

Creeping Tender offer: Slowly buying enough shares from the open market to effect a change
in management.

Proxy Fight: The Acquirer tries to persuade enough shareholders, usually a simple majority, to
replace the management with a new one which will approve the takeover.

RESAON FOR TAKEOVER

1. To gain opportunities of market growth more quickly than through internal means.
2. To seek to gain benefits from economies of scale.
3. To seek to gain a more dominant position in a national or global market.
4. To acquire the skills or strengths of another firm to complement the existing business.
5. To acquire a speedy access to revenue streams that it would be difficult to build through
normal internal growth.
6. To diversify its product or service range to protect itself against downturns in its core
markets.

DEFENSES AGAINST HOSTILE TAKEOVERS

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.

Pre-Offer Takeover Defense Mechanisms

Poison pills (flip-in pill and flip-over pill)

Poison puts

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Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

Incorporation in a state with restrictive takeover laws

Staggered board of directors

Restricted voting rights

Supermajority voting provisions

Fair price amendments

Golden parachutes

Post-Offer Takeover Defense Mechanisms

Just say no defense

Litigation

Greenmail

Share repurchase

Leveraged recapitalization

Crown jewels defenses

Pac-Man defense

White knight defense

White squire defense

Bank mail pills

White mail

Lollipop defence

PRE-OFFER TAKEOVER DEFENSE MECHANISMS

A company may set up preemptive defense mechanisms in order to help ensure that it remains
independent or to increase its purchase price.
Rights Based Defenses: These are shareholder actions that can be taken to make the company
less attractive to a would-be acquirer.

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Poison Pills: Trigger the issuance of target company stock at a discounted price to dilute
earnings.
Flip-in Pill: Target company shareholders can buy stock at a discount, once one share
owner crosses a specific ownership threshold.
Flip-over Pill: Target company shareholders can buy the acquirers stock at a discount
from the market price.
POISON PILL -: It is a strategy where the target company issues low-priced preference
shares to its shareholders. This increases the total issued share capital of the target
company and consequently makes it more costly for the acquirer to acquire the target
company. Although this strategy may cause loss to the target company but this strategy is
sometimes very effective in avoiding the hostile takeover as in
Example -: Saurashtra Cement Case where the company allotted shares to its promoter
and other foreign companies and expands its capital base thereby made it more costly for
the Acquirer as well as made the offer invalid as it was not made on the expanded capital.
SUICIDE PILL
This is the extreme version of poison pill where the tactics adopted
by the target company to avoid hostile takeover results in self-
destruction. But this defense is not practical and thus not normally
resorted to.
Shark Repellants: Can change the targets corporate charter with no action from shareholders,
in order to fend off a hostile acquirer.
Strategic Incorporation Location: In some jurisdictions it may be easier to resist hostile
takeovers, so companies may select one of these locales for incorporation.
Staggering Board Terms: While considered less than optimal from a corporate governance
standpoint, staggered board elections can increase the amount of time takes a would-be
acquirer to get board representation.
Golden Parachutes: The term "golden parachute" is a wonderfully descriptive term for a
defensive measure used by a company to prevent hostile takeovers. With golden parachutes,
employers enter into agreements with key executives and agree to pay amounts in excess of their
usual compensation in the event that control of the employer changes or there is a change in the
ownership of a substantial portion of the employer's assets. Top executives are provided with a
financial soft landing in the event that a takeover results in discharge. The company initiating the
hostile takeover, on the other hand, will either have to pay this associated increased costs when
acquiring the corporation or back down from the takeover

Golden parachute payments do not have to be made under a legally enforceable agreement or
contract. A formal or informal understanding will suffice.

For Example, an oral agreement is enough even though such an agreement would not be legally
enforceable under state contract law principles. Not having a written agreement,

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Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

The golden parachute defense is widely used by American companies. The presence of golden
parachute plans at Fortune 1000 companies increased from 35% in 1987 to 81% in 2001,
according to a survey by Executive Compensation Advisory Services.

Notable examples include ex- Mattel CEO Jill Barads USD 50 million departure payment, and
Citigroup Inc. John Reeds USD 30 million in severances and USD 5 million per year for life.

Fair Price Amendments: Sets a price floor for the would be acquired firms shares.
Supermajority Provisions: Requires a shareholder vote approving the merger well above a
51% simple majority in order for the takeover to be allowed.
Voting Rights Restrictions: Requires a large shareholder to obtain board permission to vote
once a certain ownership threshold has been crossed.

POST-OFFER TAKEOVER DEFENSE MECHANISMS

JUST SAY NO:

Management can decline an acquirers offer and attempt to convince the board that a takeover is
not best for the firm. A strategy used by corporations to discourage hostile takeovers in which
board members reject a takeover bid outright. The legality of a just say no defense may depend
on whether the target company has a long-term strategy that it is pursuing, which can include a
merger with a firm other than the one making the takeover bid, or if the takeover bid simply
undervalues the company.
LITIGATION: Most effective as a delay tactic, a target can use the court system to contend
that a takeover would materially harm the competitive structure of the industry.
LEVERAGED SHARE REPURCHASE: A target may borrow in order to buy shares on
the market; this can drive up the price for the acquirer and also increase the risk of the
targets balance sheet. In its extreme form, target company management may use debt to buy
all of the shares and take the target company private; this would be a leveraged buyout.
LEVERAGED RECAPITALIZATION: Similar to the leveraged share repurchase, but will
leave some equity to trade in the public stock exchange. A corporate strategy in which a
company takes on significant additional debt with the intention of paying a large cash
dividend to shareholders and/or repurchasing its own stock shares. A leveraged
recapitalization strategy typically involves the sale of equity and the borrowing or
refinancing of debt.

The result is asset and/or liability restructuring, where the company's liabilities are increased
and where equity is reduced. This strategy is an intentional antitakeover measure used to
make the corporation less attractive to potential acquirers. In mergers and acquisitions,

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Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

strategies, these are often called "shark repellents," since they are intended to fend off
unwanted or hostile takeover attempts. Also called leveraged recap.
WHITE KNIGHT
The target company or its existing promoters enlist the services of another company or group
of investors to act as a white knight who actually takes over the target company, thereby
foiling the bid of the raider and retaining the control of existing promoters.
2006 - Severstal almost acted as a white knight to Arcelor as the merger negotiations were in
place between Arcelor and Mittal Steel
2006 - Bayer acted as a white knight to Schering as the merger negotiations were in place
between Schering and Merck KGaA
Example -: In 2010, Reliance Industries played white knight to the promoters of EIH by
buying 14.1% in the flagship hotel chain. The move was seen as an attempt to thwart the ITC
group which had gradually raised its stake in EIH to 14.8% over the years.
Highlights of the study

ITC acquired 14.98% shares of EIH and planning to go

beyond 15% by making open offer.
To thwart this threat for acquisition, the promoters of EIH
offered their 14.2% stake to Reliance and the offer was accepted
by Reliance.
In this way, Reliance ruins ITC dream of hostile takeover of EIH.
As on date, Reliance holds 18.53% and ITC holds 15.98% stake in EIH.
Ms Nita Ambani and confidante Manoj Modi are on the Board of EIH.
GREENMAIL
Greenmail is a strategy where the target company agrees to buy back the bidder's
stockholding in the target company but at a substantial premium to the fair market stock price
to avoid the hostile takeover. This tactic shall be used only after a cost-benefit analysis. This
is quite similar to targeted repurchase strategy of avoiding hostile takeover.

Example -: Arun Bajoria vs Bombay Dyeing

In 2000, Kolkatta-based Arun Bajoria bought 15% in Bombay

Dyeing, and threatened to make an open offer to public shareholders.
He finally sold out his stake to the Wadias-- the promoters of Bombay
Dyeing--at a profit.

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Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

CROWN JEWEL DEFENSE

Crown jewel defense is a strategy where the target company spins off its major attractive assets
to new company specially formed for this purpose. This makes the target company less attractive
for the hostile acquirer. Crown jewel defense is a useful tactic to avoid hostile takeover
especially for those companies where its assets backing is major strength.

This defense is not practical in India because of Reg. 26(2)(a) of Takeover

Regulations, which restricts the BODs of Target Company & any of its subsidiary
from alienating any material assets outside the ordinary course of business
without the approval of shareholders of the Company by Special resolution.

PAC-MAN DEFENSE
Pac-man defense is a strategy where the target company starts buying the shares of its
acquirer company with the ultimate objective of taking over its acquirer. It is when a
company that is under a hostile takeover attempts to acquire its would-be buyer. The most
quoted example in U.S. corporate history is the attempted hostile takeover of Martin Marietta
by Bendix Corporation in 1982. In response, Martin Marietta started buying Bendix stock
with the aim of assuming control over the company. The incident was labeled a "Pac-Man
defense" in retrospect.

This defense, named after the videogame, consists of a counter-purchase by the target of
the shares against its attacker. This is a highly aggressive step which involves great risk.
For this the target needs to have sufficient capital and assets. This may have great impact on
the company it may either defend itself, may end up in high debts and may be extremely
destructive for Target Company.

Highlights

Bendix Corporation Vs Martin-Marietta was one of the most interesting battle in U.S.
Economic History.
In August 1982, Mr. William Agee, chairman of Bendix made a bid for MARTIN-
MARIETTA which was rejected by it.
As a defense, Martin-Marietta initiated its own tender offer for Bendix.
Both the firms are engaged in various defenses including litigations.
At last, Mr. Edward Hennessey, chairman of Allied Signal was introduced as White
Knight of Bendix and won control over it.
Mr. Hennessey signed an agreement with Martin-Marietta to exchange shares.
Martin-Marietta remained independent and Mr. Hennessey end up with valuable Bendix
assets.

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Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

KILLER BEES
An individual or firm that helps a company fends off a takeover attempt. Killer bees are firms
or individuals that are employed by a target company to fend off a takeover bid; these include
investment bankers (primary), accountants, attorneys, tax specialists, etc. They aid by
utilizing various anti-takeover strategies, thereby making the Target Company economically
unattractive and acquisition more costly. A killer bee uses defensive strategies to keep an
attempted hostile takeover from occurring.
WHITE SQUIRE
A white squire is similar to a white knight, except that it only exercises a significant minority
stake, as opposed to a majority stake. The white squire may be an outside group or company,
a subsidiary of the target or the target's employee pension fund. Generally, a large amount of
stock is issued to the white squire with the aim of ensuring that control of the target stays in
friendly hands.

A White Squire is a firm that consents to purchase a large block of the target companys stock
The White Squire is typically not interested in acquiring management control of the target but either
as an investment or representation in board of the target company Advantage to Target Company
Large amount of Stock will be placed in hands of an investor which may not be tendered to hostile
bidder

E.g.. Technically Reliance is White Squireto Oberoi Hotels against EIH .

VOTING RIGHTS PLAN:

Voting Plans this poison pill strategy is designed to dilute the controlling power of the
acquirer. Under this plan, the target company issues a dividend of securities, conferring
special voting privileges to its stockholders. For example, the target company might issue
shares that do not have special voting privileges at the outset. When a potential hostile bid
occurs, the stockholders, other than the acquiring party, receive super voting privileges.
Alternately, the target company's stockholders might receive securities with voting rights that
increase in value over period. Voting plans were first developed in 1985. They are designed
to prevent any outside entity from obtaining power of the company . Under this plan the
company issues a dividend of preferred stock. If any outside entity acquires a substantial
percentage of the companys stock, holders of preferred stock become entitled to super
voting rights.

BANK MAIL PILLS

Bank mail defense wherein the bank of a target firm refuses financing options to firms with
takeover bids thereby having the triple impact of imposing financial restrictions upon the
acquirer, increasing transaction costs in locating another financing option and also buying

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time for the target company to put more defenses in place. This takeover tool serves multiple
purposes, which include
1. Thwarting merger acquisition through financial restrictions,
2. Increasing the transaction costs of the competitors firm to find other financial options,
and
3. To permit more time for the target firm to develop other strategies or resources.

WHITE MAIL
It is an anti-takeover arrangement in which the target company will sell significantly
discounted stock to a friendly third party. In return, the target company helps thwart takeover
attempts, by raising the acquisition price of the raider, diluting the hostile bidders number of
shares, and increasing the aggregate stock holdings of the company.
LOLLIPOP DEFENCE
This is a strategy where in target creates barriers outside its periphery to protect the company
from takeover. It is called lollipop defence as the company is compared to a lollipop, which
has a hard, crunchy exterior but a soft, chewy centre. i.e. . The takeover is made difficult due
to the initial barriers, but the company in general is an attractive takeover target (soft, chewy
Center). The target company presumes that creating a lollipop type defence provide
adequate security from the takeover attempts .

FRIENDLY TAKEOVERS

Friendly takeovers can involve either the acquisition of the assets of the company or the
purchase of the stock of the target. There are several advantages associated with the purchase
of assets.

First, the acquiring firm can purchase only those assets that it desires.
Second, the buyer avoids the assumption of any contingent liabilities of the target.
Third, the purchase of assets is easier to negotiate since only the board of directors, and not
the shareholders, need approve the acquisition.
The second type of friendly takeover involves the purchase of the stock of the target. In this
instance, the acquiring firm does assume the liabilities of the target firm. The target firm
continues to operate as an autonomous subsidiary or it may be merged into the operations of the
acquiring firm. The approval of the target's shareholders is necessary for this type of acquisition.

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MERITS AND DEMERITS OF 'HOSTILE TAKEOVER'

An analysis and study of the various cases of corporate takeovers exposes the following merits
and demerits of 'hostile takeover' (for the sake of brevity, the company contemplating a hostile
takeover is referred to as 'Acquirer Company' and the company proposed to be taken over is
referred to as 'Target Company').

Advantages to the acquirer company:

1. The acquirer is benefited by way of reduction in procurement costs and operational synergies
resulting in improved margins.
2. The acquirer is able to acquire new technology and add to its manufacturing capacities.
3. The acquirer is able to increase its market share and acquire new brands.
4. The acquirer is also able to reap the benefits of the lower cost of capital, cheaper working
capital and enhancement of equity value.

Disadvantages for the acquirer company :

1. Studies have revealed that returns to the shareholders of the acquirer company
are minimal. Minority share-holders of the acquirer company may not be in favour of
deployment of funds towards acquisition since there could be no direct benefits flowing.
2. Secondly, the acquiring company may offer hefty premiums to ensure the success of its bid.
Such inflated prices are generally unjustified and unsubstantiated by sound reasoning since
there is a 'blind rush' to acquire.
3. Thirdly, the acquirer company could face financial hazards like 'hidden liabilities', size
mismatch and valuation pitfalls.
4. Fourthly, the acquirer company could face legal hurdles/litigations which may tend to
become protracted and cause substantial loss of the opportunity cost diverted towards
acquisition.
5. Fifthly, the acquirer company may not be able to garner adequate funds for the takeover in
absence of a specific lending policy of the banks and financial institutions to finance hostile
takeovers.

Advantages to the shareholders of the target company:

1. Takeovers can throw out managements which have mismanaged the affairs of the companies
or not rewarded their shareholders appropriately.
2. Takeovers result in sub-stantial returns to the share-holders since the share prices shoot up on
the bourses and also the offer price is much above the quoted price.

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3. A sincere and committed acquirer would endeavour to set the target company on the proper
tracks and the resultant improvement in performance would benefit the company as a whole.

Disadvantages to the share-holders of the target company :

1. A malicious predator can play a destructive role by damaging the business prospects, the
market share and the future potentials of the target company.
2. In the event of the takeover bid getting stalled due to litigation or other factors, the share
price tumbles on bourses resulting in losses to the shareholders.
3. In the event of a failure of the takeover bid, the share prices may tumble even below the pre-
offer level.
4. Existing managements which are in the process of being shunted out may resort to hasty and
brash decisions or may even misuse the company's property for immediate selfish gains.

Factors responsible for increase in hostile takeover bids in India:

With the revamp of the SEBI Takeover Code in 1997, the area of takeovers has opened up
encouragingly, and optimum transparency is sought to be achieved. The takeovers that were
witnessed in the 1980s and the beginning of 1990s were of a different hue altogether from the
current scenario. Earlier, the regulatory factors were stifling and takeovers were determined
by a willing buyer-seller relation-ship. In many such cases the foreign owner diluted his stake to
less than 50% and thereafter lost interest in the Indian Company ultimately selling it out; e.g.
Shaw Wallace. Another category of takeovers that took place during the pre-takeover code times
were the ones where, due to the presence of financial crisis on the part of the acquired company,
lending financial institutions actively pushed for takeovers; e.g. Tata's acquisition of Special
Steel, Hindustan Lever's acquisition of Stepan Chemicals, etc. Some important factors which
have been instrumental in fostering an era of takeovers in India are the following :
1. With sweeping liberalization measures, the Indian markets have been characterised by
increased competitiveness and loss of protection to domestic players.
2. Consolidation is now the only means of increasing, or even sustaining the position in the
market. As the propensity for competitiveness increases, the big players start looking at
hostile takeovers in situations where negotiated deals with the competitors are expected to be
unsuccessful.
3. Plenty of takeover opportunities are available now due to factors like : Companies
undervalued but having strong prospects; companies which are cash-rich but are not using
their resources properly; family run businesses which have witnessed a fall out between
family members.

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ROLE OF BANKS AND FINANCIAL INSTITUTIONS TOWARDS HOSTILE

TAKEOVERS:
The role of all public sector banks and financial institutions towards financing of hostile
takeovers has been absolutely passive. The logic and reasoning behind this is that can public or
government funds which have been originally contributed for developmental purposes, be used
for corporate ware and funding hostile takeovers ? Consider a case where a bank or a financial
institution decides to finance the hostile takeover of a small company by a big business house. A
writ petition by the target company challenging mis-use of government funds for restricting the
fundamental right of carrying on a business under Article 19(1)(g) of the Constitution, would be
the immediate fallout. So long as banks and institutions remain under government control,
funding of hostile takeovers so as to detrimentally affect the fundamental rights of the target
company is ruled out. The moot question here would be why should a government owned bank
or institution support the business of one company (acquirer) to the detriment of the business of
the target company. Such an action would be highly vulnerable to legal challenge on the ground
of violation of fundamental rights. It must be distinctly pointed out here that any indirect
financing of hostile takeovers via the route of subscribing to debentures/bonds/preference shares
by the banks or institutions, would also be vulnerable to judicial challenge. Further, the question
as to whether funding of hostile takeovers was ever recognized as an objective when such banks
or institutions were set up, also arises.
Another crucial role of financial institutions and banks arises in the context of their share-
holdings in the private sector companies; it is estimated that they control 35 to 70% of the private
equity. It is doubtless true that institutions and banks holding such percentage of shareholding
can tilt the scales in the event of any hostile take-over bid. However, experience has proved that
they play a passive role and maintain status quo when confronted with such situations. There
definitely exists a 'gateway' (in the context of shareholding control) for banks and institutions
when confronted with a takeover bid whether to retain or dispose of the share-holding of the
target company should be a pure commercial decision. Institutions and banks have every right to
buy or sell shares, and hence such an action cannot be challenged on the ground of misuse of the
instrumentality of the State. This is supported by the Supreme Court decision in Electronic
Corporation of India Ltd. v. Govt. of Andhra Pradesh, (1999) 97 Comp. Cases 470 (SC), which
inter alia stated that a clear cut distinction existed between a company and its shareholders, even
though the shareholder was only one, be it the Central Government or the State Government.

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Thus the decision to retain buy/sell shares of a company which is confronted with a takeover bid
should be left to the pure commercial wisdom of the bank/financial institution.
With a view to provide an impetus to the takeover activities in India, the banks and financial
institutions need to be more proactive needing a new kind of commercial prowess and clear
profit objective. The following steps are suggested in this context:

1. RBI needs to frame a pragmatic policy giving autonomy to banks and financial institutions to
fund hostile takeovers purely on commercial considerations. A code of conduct for such
lending could also be framed listing out the situations where hostile takeovers could be
funded, viz. rectifying mismanaged companies, establishing level playing fields, etc.
2. The process of government disinvestment in public sector banks and financial institutions
needs to be speeded up so that they cease to carry the 'label' of 'instrumentalities' of the State.
3. Steps should be initiated to professionalize the boards of such banks and financial institutions
by appointing outside professional directors and withdrawing government nominees. This
will give functional autonomy without government interference.
4. RBI should also consider permitting lending against the security of shares to give a boost to
takeovers.
The need for a proactive approach on the part of banks and financial institutions to finance
hostile takeovers stands abundantly justified in view of the fact that the Indian investors have
been to a large extent victims of mismanaged and vanishing companies, unprofessional
approach and oppressive promoters, and hence would look forward to a positive management
change. This will not only boost the growth of capital markets but will also reward the share-
holders.
Restrictions on hostile takeovers by foreign Entities:
Foreign entities/companies need the prior approval of FIPB and also need to furnish a Board
Resolution of the target company to acquire shares of the target company. FIPB would obviously
be opposed to hostile takeovers. Further, it is a next to impossible proposition that the Board of
the target company will pass a resolution according approval for registering shares to make
successful a hostile takeover bid.
Reference -: https://www.bcasonline.org/articles/artin.asp?167

REGULATIONS OF M & A

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