Takeover can be either ‘friendly’ or ‘hostile’.
In case of a friendly takeover or acquisition, the buyer as well as seller reaches an agreement on the pricing, the sale and the nature of the merged entity.
- Case of Tata Steel’s acquisition of Corus
In case of a hostile takeover the management /promoters of the target company don’t want to sell out to the prospective acquirer. It may even occur that some of the entities in the promoter group are against the sale out. The acquirer might be attracted to the target company because of its assets, technology and distribution strength and would want to add it to existing business.
- Mittal Steel’s acquisition of Arcelor
Hostile Takeover Tactics:
- Market Accumulation followed by an Open Offer:
Gradually purchase from the stock market up to slightly below 15 percent over a period of time and then make an open offer.
- Negotiated Deal with Financial Institutions Followed by an Open Offer
- Negotiated Deal with a breakaway Promoter Fraction Followed by an Open Offer
Due to the conflicts amongst family members, some of the fractions who get sidelined in managing the company are willing to get out at the ‘right’ price by selling out to other promoter faction(s) or to outsiders. This creates an opportunity for an acquirer to acquire a sizeable chunk of the stake from the breakaway faction(s) and then make an open offer to wrestle out the control out of the hands of the entire promoter family.
- Direct Offer to the Shareholders
The acquirer makes a straight open offer to the shareholders of the target company without acquiring any substantial shares either from the open market or through a negotiated deal.
Defense Tactics (hostile takeover):
- Golden Parachute: A contractual guarantee of a fairly large sum of compensation is issued to the top and/or senior executives of the target company
- Crown Jewels: The target company sells its highly profitable or attractive business/division to make the takeover bid less attractive to the raider.
- Poison Pill: The term poison pill is used to generally refer to any strategy which, upon a successful acquisition by the acquirer, creates negative financial results and leads to value destruction.
- Blank Cheque: The target company makes a preferential allotment to existing promoters or friendly shareholders to increase the control of the promoter group.
- White Knight: The target company or its existing promoters enlist the services of another company or group of investors to act as white knight who actually takes over the target company, thereby foiling the bid of the raider and retaining the control of existing promoters
- Grey Knight: The services of a friendly company or a group of investors are engaged to acquire shares of the raider itself to keep the raider busy defending himself and eventually force a truce.
In India the Reserve Bank of India does not allow acquisition financing and leveraged buyouts making a hostile takeover difficult. Hostile takeover don’t go down well with the political corridors and financial Institution in India.