Do takeovers create shareholder value for the acquiring, acquired or both the companies? India saw its first ever aggressive hostile takeover bid with L&T bidding for Mindtree stake. Shareholders of Mindtree have gained largely on the takeover bids but this has also added to volatility in Mindtree share prices. L&T shareholders have not seen any benefit so far but it remains to be seen whether in the future the takeover will work for L&T.
Many Companies in recent times have attempted to acquire a company for access to markets, products, technology, resources, or management talent. Acquisition is seen as less risky and speedier than gaining the same objectives through organic growth. Mergers and acquisitions activity increase when interest rates are low and financial conditions are conducive, as money can be raised for ambitious takeovers. This environment is also bullish for stocks in general, as low interest rates enhance the appeal of stocks to investors.
Hostile takeover is a type of acquisition and most often occurs when target company’s management do not want the acquirer to acquire controlling stake in the company. In the past globally, hostile takeovers haven’t worked out very well for the both target & acquiring company. Hostile takeover bid can be accomplished through either by a proxy fight or attempting to buy the necessary company stock in the open market. The key characteristic of a hostile takeover is that the target company’s management does not want the deal to go through. Sometimes targeted company’s management will defend against unwanted hostile takeovers by using several controversial strategies which includes shares buyback or making pro-shareholders policies or making sure institutional investors (who usually have higher shareholding percentage) do not vote in favour of acquisition.
When an acquiring company makes a tender offer to purchase the shares of target company at a premium above the current market price, the board of directors might reject the offer. The acquiring company can take that offer directly to the shareholders, who may choose to accept it if it is at a sufficient premium to market value or if they are unhappy with current management. The sale of the stock only takes place if enough stockholders, usually a majority, agree to accept the offer. Whereas, in a proxy fight, opposing groups of stockholders of target company persuade other stockholders to allow them to use their shares’ proxy votes. If a company that makes a hostile takeover bid acquires enough proxies, it can use them to vote to accept the offer.
Recently, Indian markets have witnessed its first ever aggressive hostile takeover bid. Larsen and Toubro (L&T) made a hostile takeover bid to buy up to 66% stake in Mindtree Ltd for around Rs. 108 billion. L&T has already acquired 20.32% stake on 18th March 2019 in Mindtree Ltd which is worth Rs. 32.69 billion (30% of the total proposed bidding amount).
Shareholding pattern of Mindtree ltd:
On 26th March 2019, L&T has made an open offer to acquire more 31% stake (51.3 million shares) in Mindtree Ltd for Rs.980 per share. If L&T can successfully acquire 31% stake through this open offer then it can gain majority controlling interest in Mindtree Ltd.
Global Top Hostile Takeover Bids:
Following are the few globally successful & unsuccessful hostile takeover bids (Source: Media Reports):
- Vodafone and Mannesmann: Vodafone (UK based telecommunications company) took over Mannesmann, a German mobile phone company, for around USD 183 billion in stock in 1999. This merger was the first time a German company had been taken over by a foreign company. Vodafone and Mannesmann waged an intense battle for about three months before Mannesmann ultimately acquiesced to Vodafone’s demands. Mannesmann shareholders received around 59 shares of Vodafone for each share they owned. This acquisition has helped Vodafone to expand in to new geographical areas as well as different business verticals (Mannesmann had various products starting from various steel products, trading to mechanical & electrical engineering and automotive).
- Mylan and Perrigo: Mylan (America based company) and Perrigo (Ireland based company) which predominantly operates & competes in Pharmaceutical markets. In April 2015, Mylan failed to reach an agreement with Perrigo’s management on a possible acquisition. As those negotiations broke down, Mylan instead attempted a hostile takeover by offering to buy the company directly from shareholders for USD 26 billion. The offer failed as not enough shareholders agreed to sell their stock and costed Mylan millions while coming up empty.
- Kraft Foods and Cadbury: Kraft Foods (America based food company) and Cadbury (UK based chocolate maker company) acquisition was agreed upon with the spirit of creating the world’s largest confectioner. In 2011, Kraft’s management had decided to split the business into two verticals i.e. grocery business and global snacks business which were worth almost USD 38 billion during that period. In order to tap global snacks business, Kraft needed Cadbury to provide scale for the snacks business, especially in emerging markets such as India. The challenge for Kraft was how to buy Cadbury when it was not for sale. Initially, Kraft offered to acquired Cadbury at 740 pence per share but however Cadbury’s management had rejected the bid as Kraft valued Cadbury at cheaper valuations. After four months of continuous resistance Kraft finally managed to take over one of the world’s second largest confectionery manufacturer in a hostile bid of an enormous USD 19.5billion. This deal will be remembered in history as one of the largest transnational deals, especially in the aftermath of credit crunch.
The use of acquisitions to redirect and reshape corporate strategy has never been greater. Sometimes, pressure to close an acquisition deal quickly can prevent managers from considering strategic and organizational fit issues completely and dispassionately and can lead to premature conclusions. Acquiring company must make reasonable efforts to explain the aftermath equations of an acquisition to the targeted company stockholders in order to get the majority vote of approval.