The term 'hostile takeover' is buzzing in the market once again.
Last year, Gautam Adani-led Adani Group acquired a majority stake in NDTV which was widely seen as a ‘hostile takeover’.
Now, Minda Corporation informed that it has acquired 1,91,40,342 equity shares of Pricol, representing 15.7 percent of the company’s total issued and paid-up equity share capital at an average price of ₹208.9 per share aggregating to ₹400 crore.
The acquisition was completed on February 17 in cash and the stake was bought via the open market.
As Mint reported, the move is considered an attempt for hostile takeover since the promoter group of Pricol led by managing director Vikram Mohan had earlier rebuffed buyout offers from Minda.
In an interview, Mohan said the promoters don’t intend to sell their shares to Minda and will hold on to their entire shareholding. Promoters led by Mohan have a 36.53 percent stake in Pricol. The rest is held by the public including banks and foreign portfolio investors.
Suppose Minda buys shares of Pricol from large investor groups to get majority control in Pricol despite promoters' opposition, it can be said a hostile takeover.
Let's dig deeper.
What is a hostile takeover?
The possibility of a hostile takeover occurs when an entity (a company, a person, etc.) tries to take control of another company against the wish of its promoters or management.
When the entity manages to acquire enough shares to hold a majority stake in the target company without the consent of its management or promoter group, it is called a hostile takeover.
How does a hostile takeover take place?
Companies use many methods, such as a proxy vote or a tender offer, for hostile takeovers.
A proxy vote is a strategy when an acquiring firm persuades current shareholders of the target company to vote out the company's management so that it becomes easier to take over the company.
For example, an acquirer firm may persuade shareholders of the target company to use their proxy votes to make changes to the company’s board of directors. This way those board members who are opposing the takeover can be removed and new board members who may not have trouble with a change in ownership can be brought in. As a result, the takeover will be easier.
A tender offer is an offer to purchase shares from the target company's shareholders at a premium to the market price. This strategy is often used when the outlook of the target company is not very bright and large equity holders want to exit it.
In this case, the acquirer firm offers a premium to the current market price of shares and buys a stake.
What are the ways to prevent a hostile takeover?
The management of the target company can use several strategies to prevent a hostile takeover. Here are some of them:
The white knight: When the target company's board is convinced that it would not be able to avert a hostile takeover, it can seek help from a friendlier company by asking it to take a controlling stake before the hostile entity does.
For example, when eminent stockbroker Radhakishan Damani made what is called a hostile bid for cigarette maker VST Industries, owned by British American Tobacco (BAT), ITC entered as a ‘white knight’, with support from BAT.
Poison pill: This is a strategy in which the target company tries to make the acquisition more complex and expensive for the acquirer.
Under this strategy, the target company allows its current shareholders to buy new shares at a discount which will dilute the amount of equity a stakeholder holds. This will increase the number of shares to be bought by the acquirer company in order to get a controlling interest.
There is a possibility that due to the complexity and high expense, the acquirer firm may abandon its takeover attempt.
Crown jewels: Under this strategy, the target company sells off its most valuable asset to reduce its attractiveness to the buyer.
Greenmail: The target company buys back its own shares from the acquirer at a premium.
Golden parachute: This is again a strategy to make acquisition more expensive for the acquirer.
The target company makes an employment contract with key management which guarantees the payment of expensive benefits to them if they are removed from the company after a takeover.
Pac-Man defense: The target company buys the shares of the acquiring company and attempts a takeover. If the acquirer company believes it might lose control of its own business, it may abandon the takeover plan.
However, this strategy is feasible only when the target company is equally capable and has enough capital to buy shares of its hostile bidder.