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The Rediff Business Special: Nikhil Faleiro

Charge of the Takeover Brigade

For Tapan Mitra, the genial managing director and vice-chairman of India Aluminium Ltd, Monday, February 16 was like any other ordinary day. A busy schedule and tonnes of work -- after all, it was the first day of the week. Mitra was concentrating on the work at hand till he received a phone call at 1000 hours IST from Anil Aggarwal, chairman of the Rs 10.71 billion Bombay-based Sterlite Industries.

The call stunned Mitra into a petrified silence. Speaking calmly, Aggarwal said that his company Sterlite had decided at its board meeting to make an open offer to acquire a minimum stake of 10 per cent of Indal (Indian Aluminium) equity at a price of Rs 90 per share. It dawned on a cold and fearful Mitra that a raid was being conducted on his company.

To add to his chagrin, Mitra realised that just a month earlier, Aggarwal had envisaged an interest in Indal. And by asking seemingly innocuous questions about Indal's operations and how he (Aggarwal) could help solve them. Aggarwal was, in fact, slowly but surely laying the groundwork for a gradual offer leading to the takeover bid.

Corporate India has been shaken during the last three weeks with a spate of takeover bids on successful companies -- multinational or domestic. For Indian companies, especially family-owned enterprises where the promoter's stake is extremely low, the spectre of a predator appearing one morning and staking a claim has now gone from nightmare to reality. And for sheer audacity, nothing yet can match Sterlite's attempt to take over the 60-year-old Indal.

A haunting fact is that today's predator is not some MNC with pots of money but the average businessman whom one meets every day for lunch at the local club or over a cocktail at the nearby five-star hotel. And often the sudden shock of discovering a predator at the company's doorstep leaves the bosses defenseless until it is usually too late.

Admits Mitra, "I did not even know that Aggarwal had got in touch with our foreign partners Alcan Ltd in a bid to buy out their stake in Indal. I was kept totally in the dark and suddenly out of the blue this offer is made and that is what shook us." Indal is now fighting back.

According to Vallabh Bansali, managing director Enam Securities Ltd, planning for the open offer on Indal was done a month before the public offer. "Stock prices of the scrip have been falling continuously and we felt the need to make our intentions clear," he said.

Anil Aggarwal is not the only person who has suddenly realised the need to make raids on other companies to expand their operations and fuel their growth plans. Says management consultant Coopers and Lybrand vice-president J Rajgopal, "The economy is stagnant and companies can only grow through acquisitions. Moreover, with share prices at a historical low, it is cheaper for companies to target weak companies rather than set up greenfield projects."

In the past, the primary motive for takeovers was to purchase small companies to enlarge operations within the country. Companies also acquired other firms in a bid to enter new markets or globalise their operations. However, today, takeovers are usually to consolidate one's position within the sector. The motto clearly is: "Wipe out the enemy and be the king."

The past also saw takeover attempts by MNCs like Coca-Cola; or expat tycoons such as Manu Chhabria or Swraj Paul; or well-known Indian groups seeking to expand like Hindustan Lever, the Piramal group, and the Godrej group. Moreover, in comparison to the giants of yesteryears, today's takeover tycoons are small. Ironically, the present predators have no qualms in taking on bigger and larger targets.

And last, but certainly not the least, corporate India is feels threatened as it notices men from within its own ranks make brave bids for companies including those with foreign backing. Nothing is sacrosanct anymore and the message had been driven home: even the best companies are vulnerable if the management chooses to take a short nap.

Certainly what has aided the attempts is the recently announced Takeover Code by the Securities and Exchange Board of India, something that brought about transparency and fair play rules for those in the takeover game.

Says Mrityunjay Athreya, management consultant, "The earlier takeover bids occurred because the earlier acquirers had access to undisclosed funds and some political administrative patronage. Now we are seeing a new group of business strategists making transparent bids which is beneficial to the shareholder in the long run and to those making the takeover attempts."

For corporate India, it is a death-knell. Most companies are largely family-held, often with a holding of as low as 15 per cent. Little wonder then that the SEBI code is causing jitters and a gnawing fear that the number of takeover bids in the country can only go up.

One person who sees it differently is Mukesh Gupta, vice-chairman Lloyds Group. "The new code will not increase the number of takeovers in the country since they have always been part of corporate existence," he says, "but what will happen in the country is that there will be greater transparency. This will benefit all because under the new code, genuine offers will have to be backed by sufficient money."

In a bid to ensure discipline, SEBI has ruled that the acquiring company should deposit 10 per cent of the acquiring amount as a guarantee that the takeover bid is serious. According to Rajgopal, the rules have their share of flaws. "What happens to good companies?" he asks, "They are sitting ducks as the new code does not provide any provision for them to fight the takeover threat."

It is transparency that is encouraging the takeovers. Consider the Rs 4 billion Wockhardt pharmaceuticals successful bid on the Rs 1.23 billion Tata Merind. In one swoop, Wockhardt's retail rank rises from 19 to 9, ahead of heavyweights multinationals such as Novartis, Smithkline Beecham, and Pfizer and local heavyweights like Glaxo and Nicholas Piramal.

Says Wockhardt India chairman and managing director H Khorakiwala, "We are on a brand acquisition spree because we are not strong in the domestic market. We are aiming to reach the top five by 2000."

Sterlite Industries too seems to have realised that acquiring a company is the only route available for it to be a leader in the non-ferrous metals and downstream products. However, Sterlite's move appears illogical to many because Indal is not a very highly rated company. Its market capitalisation is just Rs 4.69 billion, profit and sales growth a mere 8 per cent and 10 per cent respectively, and share prices low (till the new offers were made), it is not exactly a prized by acquirers.

The only optimism for those at the receiving end is the commitment of the takeover tycoons to improve the companies they have acquired. Tarun Jain, chief financial officer, Sterlite, points out, "Indal will benefit from our entrepreneurial skills and drive which it currently lacks."

Shareholders earning low dividends will be tempted to sell their stake. Says Jayant Thakkar, chartered accountant, "Small and medium companies are facing very difficult times ahead so why not sell out to a small financially viable company which can inject funds into the ailing company and thus help it gradually improve?"

Recent takeover attempts have been made by Autoriders India on Saurashtra Cement, and India Cements on Raasi Cements. And the Sterlite-Indal case still hangs fire. After Sterlite's first offer to Indal shareholders at Rs 90 per share, Indal's main promoter, Alumunium Canada (Alcan) retaliated by offering Rs 105 per share. Sterlite struck back with Rs 115 per share, and is awaiting a response.

The takeover game in post-liberalisation India has just begun.

EARLIER COLUMN:
Dilip Thakore: Government should stay clear of M&A activities

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