Mergers & Acquisition(M&As) deals in the Indian Corporate Ecosystem have been rising significantly through the years with 2018 being the benchmark for the most M&A deals with a deal value surpassing the $125 billion mark as per Thomson Reuters Deals Intelligence. However, the number of coercive acquisitions in these deals have been fairly low. This doesn’t imply that there haven’t been adequate attempts in the Country’s M&A history for hostile takeovers. While many of these attempts didn’t reach Indian courts often enough for substantial jurisprudence, India has witnessed a notable number of hostile takeover attempts and acquisitions. A few instances would be like those of the successful acquisitions of Mindtree by L&T and Zandu Pharmaceuticals by Emami, to several attempted hostile takeovers over the years.
Several Indian Companies are confronting a rise in dilution of promoter shareholding, specifically in the distressed acquisitions context, given the fact that promoters leverage their shareholding to financiers for debt undertaken by the target company. While coercive takeovers are mostly initiated with tender offers being put on the table, given the thriving distressed acquisitions in India, there are a number of other methods for hostile acquisitions of such distressed entities.
The jurisprudence around coercive takeovers comes principally from other developed countries like the USA, given the evolved status of their law regime. A renowned rule in this regard across the global stage is the Revlon rule. The Revlon rule, simply put, substantiates the need for the management of a company to focus on maximization of value for shareholders over preservation and long-term strategies of the company, in situations where a hostile takeover is impending and, in some cases, inevitable.
There is ample emphasis placed on value maximisation in the Indian Corporate Governance Landscape already. Many argue that the sale of shares of the target company by the existing shareholders may not maximize value for them since the target company may have recently capitalised its costs and would begin sharing higher returns with its shareholders in the immediate future. Therefore, true value for shareholders is maximized by retention of their shares and not selling them off. However, this is entirely based on the potential maximization of share value, a consideration that seems a little far-fetched to be taken into account for the Revlon Rule.
On the other hand, a benign poison pill that target companies may employ to increase the share price is the announcement of dividends. Poison pills simply refer to strategies developed by the target company’s management to defend any attempts of a hostile takeover or to increase the price that would have to be offered by the potential buyer. Announcing dividends is usually effective as it leads to a rise in share prices making it far more expensive for the acquirer to complete the acquisition and depletes the cash reserves of the target company, making the acquisition less valuable.
This being a fairly safe choice in terms of attracting any adverse corporate governance scrutiny, is often one of the first strategies that a target company resorts to. However, any attempt to raise share prices will go in vain if the boosted share price is insignificant. This is an evident risk because the phenomenon is largely dependent on market sentiment, as manifested from the dividend declaration by Mindtree, arguably, to defend L&T’s hostile bid. Furthermore, many companies targeted in the past have argued that the absence of operational synergies between them and their acquirer does not create any notable value for them or their shareholders in the long run.
A few other typical strategies deployed for defending hostile takeovers include the ‘flip-in’ and ‘flip-over’ strategies, which enable differential issue of shares of the target company to existing shareholders except the hostile acquirer. However, this has the potential of attracting oppression and mismanagement concerns in India, and therefore, may not be a viable option. These strategies mostly only work when undertaken well in advance before the hostile acquirer has acquired any stakes in the targeted company.
While finding one’s way out of a hostile bid is rare, and largely dependent on the individual considerations of the hostile acquirer in relation to the target company, a negotiating strategy worth considering for diversified companies is the compromise of a non-core segment of their business with a view to retain the larger umbrella entity. This strategy had been successfully exercised 2 decades ago, ironically, by L&T, to defend the Birlas’ by selling L&T’s non-core business of cement to them.
Typically, a coercive takeover attempt follows an acquisition of a large stake by the acquirer. Target companies usually consider blocking such attempts from this stage itself. A pre-emptive measure that is usually undertaken by companies whose shareholding is particularly scattered, is housing material assets of the target company in another company that cannot be subjected to a hostile acquisition.
For instance, organisations with a well-established brand may house the intellectual property in relation to the brand in another group entity and use such brand on a license basis. At the time of a hostile takeover, the brand not being available to the target entity on such hostile acquirer coming in may act as a poison pill for the hostile acquisition. This strategy, however, may attract increased corporate governance compliances and some tax concerns. The Tata Group has successfully implemented this strategy by housing its brand name in a private company – Tata Sons.
Another strategy worth considering is maintaining a ‘white knight’ entity, which could in itself be a promoter entity, for salvaging the target entity from such hostile takeovers, or at the least present potential poison pills for such hostile acquisitions. White knights are friendly investors, typically brought in by target entities’ management that allow the current management to retain control while the white knight acquires stake in target entity, in place of the hostile acquirer. India is not unknown to such white knights, with certain instances in the past, including Reliance acting as white knight for EIH to ward off ITC’s attempt of a hostile takeover.
Hostile acquisitions for entities in the insolvency resolution process have already become popular with many acquirers entering into bidding wars with external, promoter-backed entities. Even for the non-distressed sector, hostile acquisitions in India may gain momentum in light of the increasing M&A activity in India, especially before potential target entities become cognizant of possible pre-emptive measures that they may undertake to ward off such attempts.