Sunday, April 8, 2012

The risk that these 480 Indian companies face...

Hostile takeovers have dotted the US landscape since the 1950s. But in India these have only recently begun to gain momentum. According to Wikipedia, a hostile takeover allows a suitor to take over a target company whose management is unwilling to agree to a merger or takeover. A takeover is considered hostile if the target company's board rejects the offer, but the bidder continues to pursue it.

In India, one such example in recent times has been that of the hotel chain East Indian Hotels (EIH) wherein ITC had been gradually buying more shares of the former in order to launch a takeover bid. And there is the possibility of more such companies becoming vulnerable in light of the new takeover code. This code allows acquirers to make an open offer for an additional 26% on purchase of 25% stake of the target company. 480 companies as listed by the Economic Times, have promoter shareholding less than 25% of total equity. Thus, they are susceptible to the risks of hostile takeovers. However, it is not that simple. Most companies in India are managed by promoters. Hence, the latter is bound to protect its interest and will not relinquish control without a fight.

This means that the company launching such an attack needs to be very clear as to why it wants to go down this route. In mergers and acquisitions, in general, the acquiring company has to make sure that it pays a reasonable price for the target company. It needs to gauge the synergies that are likely to flow in on making the acquisition such that the payback period is not too long. Many a time, when competition for a particular target heats up, valuations soar. As a result, the company which has finally made the acquisition ends up paying a very high price.

This applies to hostile takeovers as well. Since these are bound to be fought tooth and nail by promoters, the acquiring company at the end of the day needs to evaluate whether the price paid and the potential benefits are all worth it.

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