Sometimes, you don't have a choice. When a company makes an open offer to acquire its own shares (or those of a subsidiary) from existing shareholders with the intention to delist from stock exchanges, the only thing that you can do is surrender your shares. That's because if you don't, then the shares you hold will become illiquid. Net effect: while you do continue to be a shareholder and receive dividends, you don't have any leverage in terms of trading of the stock. In such offers, the attraction is the price, which is generally higher than the current stock price, and is often revised (upwards, mostly) too. The downside is that along with the shares, you also surrender any gain that you could have got out of the company in the future if it did well and valuations improved.

However, open offers are not made solely for the purpose of delisting. In general, such offers for shares of a company are generally made by acquirers (which could be the promoters of the company, investors, parent company, etc.) in order to achieve a higher stake in it. For the prospective acquirers, the offer is a statement of the confidence they have in the future potential of the company and the value it is likely to bring to the table. And for the acquired company, it could mean more focus from promoters as they consolidate their holding, access to better technology or better business opportunities in terms of the acquirer's greater reach, and higher funding ability. An open offer could also signal a hostile takeover attempt from an industry rival looking to expand its operations or market share. An example of a hostile bid is the recent move by Vijay Mallya of liquor major UB Group to acquire 25 per cent of rival Shaw Wallace & Co. (SWC) by making an open offer at Rs 250 per share, an 8 per cent premium over SWC's stock price of Rs 231 on the day of the announcement.

The Investor Dilemma

Hostile bid or not, taking a decision on whether to surrender your shares in an open offer can put you in a spot. That's because if you give in your shares, on the one hand you earn a reasonable premium over the existing stock prices (which also tend to move up), but on the other hand, you also lose out on future earnings (unlike a delisting where you don't have a choice) if the company does well. And if you decide not to surrender your shares, the reverse holds true.

A part of your decision, therefore, should be based on an assessment of the future prospects of the acquired entity. Says M. Sundararajan, VP & Group Head (M&A and Advisory), SBI Capital Markets: "Assuming that the open offer is coming from a strong acquirer who has solid plans for the company, investors could hold on. At most times, such acquirers add value to the company." That is an opinion seconded by Rakesh Jhunjhunwala, Partner, Rare Enter-prises, an active equity investor, who feels that investors should look at open offers in the same way they would look at any other stock from the sell or hold angle. "If an investor sees long-term potential in a company, then he should hold on, or else surrender," he says.

While every open offer needs to be considered on its own merit, it makes sense to recognise that a strategic acquirer will pay a higher price than what stock markets under normal circumstances would pay. Therefore, once the offer ends, there is a possibility of the stock price coming down in the long term. Then, there's the question of taxes. The capital market sops given to investors in Budget 2004 (and unchanged in Budget 2005) in the form of zero long-term and 10 per cent short-term capital gains tax doesn't apply to open offers and buybacks. So your strategy should be similar to a buyback (see The Buyback Option, BT, March 13, 2005), where if the profit you earn (the difference between the price you bought your shares in and the price you get when you sell) is less than your tax outflow, you're better off holding on to your shares or selling them in the open market.

Companies In Focus

Among the open offers currently active is one made by international rating agency Standard & Poor's (S&P) to acquire 26 lakh shares of India's premier rating agency CRISIL. S&P's offer, at Rs 680 per share, has been made to increase its stake in crisil from 9.45 per cent to 51 per cent. If the offer is successful, S&P is expected to pump in Rs 240 crore into CRISIL, funded entirely through internal accruals. Institutional shareholders such as LIC, ICICI Bank, UTI and SBI jointly hold 25.47 per cent of the company's equity, while Jhunjhunwala and his wife hold 14.3 per cent. crisil's stock price shot up to a five-year high of 680 after the open offer announcement, matching the offer price, but S&P has maintained that it would revise the open offer price and size up to April 11, 2005. This means that whether you sell or hold, you're likely to gain anyway. Says Rajeev Thakkar, Director and Senior VP (Research), Parag Parikh Financial Advisory Services: "It's a win-win situation for investors. If the price goes down, you have S&P buying out. If it goes up, investors gain." Your move? Well, Jhunjhunwala, for now, is holding on: "I haven't yet taken a decision on whether I will give in to the open offer or not." You could follow his example and hold on for the moment, or sell your shares to take advantage of the stock's current high price.

Then, there's the attempt made by Swiss cement major Holcim, in strategic alliance with Gujarat Ambuja Cements, to acquire majority stake (to the tune of 50.01 per cent) in the second-largest cement manufacturer in India, acc (Associated Cement Companies), through an open offer to its shareholders at Rs 370 per share. The acquisition is to be routed through ACIL (Ambuja Cement India Limited), which holds 13.8 per cent stake in ACC, and in which Holcim recently acquired a 40 per cent stake. With Holcim talking about making India its it and R&D hub as well as a procurement hub, the future looks bright for the merged entity, and ACC's shareholders. The company's stock prices crossed the offer price after the announcement (on account of speculation about a counter bid), but a revision of the open offer price is unlikely to happen here. So, what should you do? Says Sandeep Nanda, Head of Research, SSKI: "We are bullish on the cement sector and expect acc to grow substantially. Our advice to investors is to hold on to the stock and ride the upside."

Finally, we come back to where we started, the delisting option for companies. The SKF Group of Sweden, a leader in rolling bearings and seals, has made an open offer for shares of its subsidiary in India, SKF India, where it already holds 53.58 per cent equity. In a notice to India's stock market regulator, SEBI (Securities and Exchange Board of India), the company commented that "obtaining full ownership of the company and integrating it into its global operations will provide it increased operational flexibility to support its business and meet the needs of its customer", meaning that SKF intended to delist SKF India from the stock exchanges. Stock prices of SKF India have zoomed up since the announcement on speculation that there may be a counter bid, but settled down after it didn't materialise. And what should you do here? Well, sometimes you don't have a choice.