Corporate Restructuring

1. Meaning and Concept
Types of Takeovers
Thomas Mathew
Unit - III
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MEANING AND CONCEPT OF TAKEOVERS
 Takeover implies acquisition of control of
a company which is already registered
through the purchase or exchange of
shares.
 Takeover takes place usually by acquisition
or purchase from the shareholders of a
company their shares at a specified price
to the extent of at least controlling interest
in order to gain control of the company.

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WHAT IS TAKEOVER
 In General term referring to transfer of control of a
firm from one group of shareholders to another
group of shareholders.
 Change in the controlling interest of a corporation,
either through a friendly acquisition or an
unfriendly, hostile, bid.
 When an "acquirer" takes over the control of the
"target company", it is termed as Takeover.
 When an acquirer acquires "substantial quantity of
shares or voting rights" of the Target Company, it
results into substantial acquisition of shares.

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Procedure for Takeover
The takeover could take place through different
methods. A company may acquire the shares of a
unlisted company through what is called acquisition
under Section 395 of the Companies Act , 1956.
However where the shares of the company are widely
held by the general public, it involves the process as
set out in the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997, as
amended in 2002, 2004 and 2006 .

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The term ‘Takeover’ has not been defined under
SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 , the term basically
envisages the concept of an acquirer taking over
the control or management of the target company .
When an acquirer, acquires substantial quantity of
shares or voting rights of the target company, it
results in the Substantial acquisition of Shares

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For the purposes of understanding the
implications of taking over it is necessary for us to
know what is the actual meaning of:
[i] Acquirer,
[ii] Target Company,
[iii] Control,
[iv] Promoter,
[v] Persons acting in concert and
[vi] substantial quantity of shares or voting rights.

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1. Acquirer
An Acquirer means (includes Persons Acting in
Concert (PAC) with him) any individual/
company/ any other legal entity which intends to
acquire or acquires substantial quantity of shares
or voting rights of target company or acquires or
agrees to acquire control over the target company

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2. Target Company
A Target company is a listed company i.e.
whose shares are listed on any stock
exchange and whose shares or voting
rights are acquired/ being acquired or
whose control is taken over/being taken
over by an acquirer

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3. Control
Control includes the right to appoint directly or
indirectly or by virtue of agreements or in any other
manner majority of directors on the Board of the
target company or to control management or policy
decisions affecting the target company.

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4. Promoter
The definition of promoter after amendment in 2006
now includes “any person who is in control of the
target company” or “named as promoter in an offer
document or shareholding pattern filed by the target
company with the stock exchanges according to the
listing agreement, whichever is later.”

11. Promoter…..
The takeover code has also modified the definition of
individual. The new definition of individual includes:
1. Spouse, parents, sisters, brothers and children of the
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promoter.
2. A company in which 10% or more of the share capital is
held by the promoter or his immediate relative or a
firm/HUF in which the promoter or his immediate relative
is a member holding an aggregate share capital of 10% or
more.
3. Any company in which the company specified in sub-clause
above, holds 10% or more of the share capital. (The
earlier threshold was 26%)

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5. Persons Acting in Concert (PAC)
PACs are individual(s) /company(ies)/ any other legal
entity(ies) who are acting together for a common
objective or for a purpose of substantial acquisition of
shares or voting rights or gaining control over the target
company pursuant to an agreement or understanding
whether formal or informal.
Acting in concert would imply co-operation, co-ordination
for acquisition of voting rights or control.
This co-operation/ co-ordinated approach may either
be direct or indirect.

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PAC…..
The concept of PAC assumes significance in the context of
substantial acquisition of shares since it is possible for an
acquirer to acquire shares or voting rights in a company "in
concert" with any other person in such a manner that the
acquisition made by them may remain individually below the
threshold limit but may collectively exceed the threshold
limit.
Unless the contrary is established certain entities are deemed
to be persons acting in concert like companies with its
holding company or subsidiary company, mutual funds with
its sponsor / trustee/ Asset management company, etc

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1. Friendly or Negotiated 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. Generally, friendly
takeover takes place as per the provisions of
Section 395 of the Companies Act, 1956.

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2. Bail Out Takeover –
Takeover of a financially sick company by a
financially rich company as per the
provisions of Sick Industrial Companies
(Special Provisions) Act, 1985 to bail out the
former from losses.

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3. Hostile takeover-
Hostile takeover is a takeover where one company
unilaterally pursues the acquisition of shares of
another company without being into the
knowledge of that other company. The most
dominant purpose which has forced most of the
companies to resort to this kind of takeover is
increase in market share. The hostile takeover takes
place as per the provisions of SEBI (Substantial
Acquisition of Shares and Takeover) Regulations,
1997

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1. Horizontal Takeover-
Takeover of one company by another company in
the same industry. The main purpose behind this
kind of takeover is achieving the economies of
scale or increasing the market share.
E.g. Takeover of Hutch by Vodafone.

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2. Vertical Takeover –
Takeover by one company with its suppliers or
customers. The former is known as Backward
integration and latter is known as Forward
integration.
The main purpose behind this kind of
takeover is reduction in costs.
E.g. takeover of Sona Steerings Ltd. By Maruti
Udyog Ltd. is backward takeover.

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3. Conglomerate takeover:
Takeover of one company by another
company operating in totally different
industries. The main purpose of this kind of
takeover is diversification.
Eg. General Motors and EDS
(Electronic Data Systems [EDS], specialized in
information technology and data services, was
acquired by giant automaker General Motors in
1984.)

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 The first player in this battle was Reliance
Industries Limited (RIL), in the late 1980’s.
 Armed with 10.05 percentage stake in L&T
was aspiring to acquire as a whole.
 For L&T it was life and death issue. But
then L&T was successful to fought back
tooth and nail.
 At that time major stake holder of L&T were
LIC and UTI.

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 On November 18, 2001 the threat again raised for L&T
when RIL sold its entire stake to Grasim (A. V. Birla
group) at 46 percent higher price than market.(167 to
209/306)
 On October 13, 2002 Grasim made a public
announcement of open offer to acquire 20 percent stake
in L&T at Rs.190 per share.
 On November 8, 2002 the SEBI asked not to proceed with
this offer since it wanted to investigate the matter.
 Further, on January 27, 2003 Grasim made a counter
proposal of vertical de-merger of cement business to L&T
board.
 Grasim valued L&T’s cement business at Rs. 130/- per
share and made open offer to acquire control of the
cement business / company.

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 By April 2003, the SEBI came to conclusion that
Grasim had not violated Takeover Code, and
that its offer was valid subject to making some
additional disclosures.
 However Grasim had got only 0.38 percent stake
in open offer.
 But with the help of its subsidiary co. it
managed to get 15.73 percent of L&T equity
capital.
 Thereafter, in June 2003 itself the L&T
management and Birla’s planned out a deal to
carry out a structured de-merger of cement
business of L&T .

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 It was decided that post de-merger, Grasim will
acquire the control of the resultant cement company.
[UlraTech]
 However, L&T managed to retain certain key assets
like L&T brand, ready mix cement (RMC) business,
the gas power plant in Andhra Pradesh, and the entire
residential and office property of the cement division.
 As a part of the scheme of de-merger L&T was allotted
20 percent of UlraTech’s equity.
 The open offer by Grasim was meant for not only
taking control of UltraTech, but to give a chance to
FIs to bring down their stake, in the process making
heavy capital gains.

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 In acquiring L&T’s cement business, Birla had a
simple motive of ‘growth through acquisition’
 After acquisition the combined capacity of Grasim
and UltraTech went up to 31 mn. tones, making
Grasim the largest producer in India and the eighth
largest in the world.
 While Grasim was strong in the Southern markets,
L&T was strong in the rest of India. L&T’s strong
distribution network was very vital to Grasim to
push its own brands also.

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 On 2004 July 6 Larsen & Toubro and Grasim
Industries announced the completion of the
scheme of demerger L&T’s cement division with
Grasim having acquired a majority stake in the
company for around Rs.2,200 crore.
 Grasim, which has cement brands such as Birla
Plus and Birla Super, was allowed to use the
L&T Cement brand till March 31, 2005.
However, the company decided not to use the
L&T Cement brand anymore and instead has
now chosen the UltraTech brand.
 Along with Birla Plus and Birla Super, UltraTech
is positioned as a national brand ………… AND

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DIFFERENCE BETWEEN A MERGER AND A TAKEOVER
In a general sense, mergers and takeovers (or
acquisitions) are very similar corporate actions -
they combine two previously separate firms into
a single legal entity.
A company that combines itself with another can
experience boosted economies of scale, greater
sales revenue and market share in its market,
broadened diversification and increased tax
efficiency.

28. A merger involves the mutual decision of two
companies to combine and become one entity; it can
be seen as a decision made by two "equals". A typical
merger, in other words, involves two relatively equal
companies, which combine to become one legal
entity with the goal of producing a company that is
worth more than the sum of its parts.
In a merger of two corporations, the shareholders
usually have their shares in the old company
exchanged for an equal number of shares in the
merged entity.
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29. A takeover, or acquisition, on the other hand, is characterized
by the purchase of a smaller company by a much larger one.
This combination of "unequals" can produce the same benefits
as a merger, but it does not necessarily have to be a mutual
decision. A larger company can initiate a hostile takeover of a
smaller firm, which essentially amounts to buying the
company in the face of resistance from the smaller company's
management. Unlike in a merger, in an acquisition, the
acquiring firm usually offers a cash price per share to the target
firm's shareholders or the acquiring firm's share's to the
shareholders of the target firm according to a specified
conversion ratio.
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