L&T is reportedly planning to buy 20.4 per cent stake of V G Siddhartha, the top shareholder in Mindtree. This aggressive move is looked upon as a 'hostile takeover' of Mindtree by the infrastructure giant. But, what does 'hostile takeover' really mean?
Mergers and acquisitions are inevitable in the corporate world. Acquisitions can be friendly as well as hostile. A friendly acquisition is one in which controlling group of the target company sells its shares to another group wilfully. However, if the management of the target company is unwilling to negotiate, the acquirer can directly approach the shareholders of the company by making an open offer. This is known as a hostile takeover.Hostile takeover attempts in India
There have been very few instances of hostile takeovers in the Indian corporate history. However, only two such attempt resulted in change of ownership:
A company has a host of options through which it can prevent hostile takeover. Some of these options make the takeover expensive for the acquirer. In some cases the most attractive assets of the target company are even sold off, so that the acquiring company may lose interest and back out from the hostile takeover. Described below are some of the commonly employed tactics by the target company to counter hostile takeover bids.
Poison Pills: A specially designed shareholder rights plan is called poison pill; it comes with with certain conditions drafted specifically to thwart attempted takeovers. Poison pills come into play when a hostile bidder acquires a certain percentage of the target's voting shares, following which the target shareholders become entitled to new shares offered at deep discount, making the target company's shares much more expensive to buy.Shark Repellents: To deter hostile takeovers a company may make special amendments to its legal charter which becomes active only when a takeover is attempted. It is commonly known as a porcupine provision. These are put in place largely to reinforce the ability of a firm's board of directors to remain in control. Techniques such as staggered or classified board structures may be implemented through which only specified directors are re-elected to the board while others have a fixed tenure, thereby forcing a hostile bidder to wait until the completion of tenure.
Pac-Man Defence: Pac-man defence is a bold move in which the target company prevents a takeover by buying stocks in the acquiring company and ultimately gaining control of the acquirer.
Sale of Assets: In a move to make the acquisition less interesting for the acquiring company, the target company may sell the whole company or the most important assets of the company. Thereby making the sale less attractive for the acquiring company.
White Knight: Where a hostile takeover seems imminent, the target may seek out other investors which are friendly to the target company, and sell the company or substantial stocks of the company to the friendly investor. Such friendly investor is called a white knight.
Greenmail: Similar to blackmail, greenmail refers to the money paid to an hostile entity to stop or prevent its aggressive behaviour. Greenmail is an anti-takeover tool in which the target company pays a premium, (known as greenmail), to purchase its own shares back at increased prices from a hostile acquirer.