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 Trust
L.N. Mittal to stir up things. Days after completing the acquisition
of Arcelor Steel for $22 billion (Rs 1,03,400 crore), the President
of Arcelor-Mittal, the world's largest steel producer by far,
innocuously let on that growth opportunities from hereon would
be found in emerging markets like China and India. Now, Mittal
does have a small stake in a Chinese steel maker, but he can't
go very far with that. That's because the Chinese government won't
let go of control over a key infrastructure sector like steel.
So where does Mittal look out for further growth, organic or inorganic:
India of course, where the latter option might just prove more
attractive. Two companies with capacities worth the effort are
the state-owned Steel Authority of India or sail, (total capacity:
13 million tonnes per annum, which will go up to 22.5 mtpa by
2011-12), and Tata Steel (5 mtpa, going up to 33 mtpa by 2015).
SAIL and Tata Steel have access to vital mining assets, and Tata
Steel is the lowest cost producer of steel in the world.
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| Tata Steel is just one of Ratan Tata's companies
that is vulnerable. Tata is also shoring up his holding in
other group companies like Tata Chemicals, Tata Motors and
Titan Industries |
It may not be just Mittal who's aware of such
indigenous strengths of the domestic steel sector. Japan's Nisshin
Steel Co. is said to be looking to set up shop in India, and according
to Standard & Poor's equity research, companies with the financial
wherewithal to make global acquisitions (and thereby nudge closer
to Arcelor-Mittal) are Nucor Corp. and us Steel. Now an acquisition
of sail is something that's dependent on government policy and
out of the global steel barons' control. What is within their
control is an acquisition of listed steel major, Tata Steel-a
threat Chairman Ratan Tata sees as very real. The Tata Group has
announced it will up its stake in the steel behemoth by about
7 per cent to 33.6 per cent, from 26.88 per cent. "We will
raise the promoters' holding so that it acts as a deterrent to
takeovers," said Ratan Tata bluntly at the Tata Steel's 99th
Annual General Meeting held in Mumbai last month on July 4.
Targeting Tata Steel
It's easy to see the virtue in an acquisition
of Tata Steel. Building a 5 mtpa plant at today's costs would
call for an investment of roughly Rs 17,500 crore. Now assume
a predator pounces on 15 per cent of Tata Steel stock, and triggers
the takeover code, which makes it mandatory for him to mop up
another 20 per cent via an open offer to shareholders. A 35 per
cent holding would make the raider the single largest shareholder
in the company by far. And the best part: He would have accumulated
those shares for a little under Rs 10,000 crore. The upshot: Acquiring
Tata Steel's capacity makes more economic sense than setting up
a similar greenfield capacity. Note: Tata Steel has also made
acquisitions in Singapore and Millennium Steel for Rs 2,137 crore,
whose capacities haven't been included in this calculation.
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| Temasek's 7.43 per cent stake in K.V. Kamath's
ICICI Bank could become a prized holding by 2009 if consolidation
is allowed in banking by then |
The Indian Story
This isn't just a story about the threat of
a takeover-friendly or hostile-to Tata Steel. India is a market
global giants can't ignore. And low promoter holdings at a score
of India's most respected companies, many of them a part of India's
biggest conglomerates, make them sitting ducks for prospective
raiders, global or Indian. That foreign institutional investors
(FIIs) and private equity (PE) players are sitting on chunks of
shares-in many cases their collective holding is more than the
promoter group itself-makes for a compelling case for a corporate
raid from within or without. And of course there are those blue-chips
that have no promoter, and are deemed to be "professionally-run".
Have a look at the menu on display: HDFC (Housing Development
Finance Corporation), the pioneer in home finance, which has also
spawned a bank. It has no promoter, and a string of FIIs are clutching
onto close to 68 per cent of the institution's equity. Then there's
engineering and construction giant Larsen & Toubro (L&T),
a professionally-run company in which banks, financial institutions
(FIs), mutual funds (MFs) and FIIs collectively hold a little
over 55 per cent. And there's a long list of companies in key
sectors like it services, infrastructure, automobiles, cement,
metals and banking where the promoters' stake is dwarfed by the
holdings of institutional players. "The worry is for companies
whose business doesn't depend on promoters and who have huge assets
and a strong brand name," says Ambareesh Baliga, Vice President,
Karvy Stockbroking. Baliga gives the example of a company like
Grasim, where the promoters need to have a good margin of safety.
Reason: Brand recall would be higher here than that of the promoter.
 |
 |
| Citigroup collectively has a 12.3 per cent
stake in HDFC (Housing Development Finance Corp.), chaired
by Deepak Parekh, by virtue of which it also gets a toehold
into HDFC Bank |
CEO A.M. Naik
may not be too worried about a hostile bid on
Larsen & Toubro (L&T) as his
company boasts a market cap of
close to Rs 34,000 crore |
"Promoters today are more exposed than
they were a decade ago, when institutions like UTI and LIC held
dominant stakes in companies...Their stakes have been replaced
largely by FIIs and Indian MFs, who are less influenced by sentiment
or 'directions from above' and driven more by maximising value
of their stakes," says Puneet Bhatia, Managing Director of
Texas Pacific Group & Newbridge Financial Advisors, a PE firm.
Indeed, the PE bandwagon, which typically looks for exits three-five
years from the date of investment, will play a crucial role in
the consolidation process. Take the example of a PE fund like
the Malaysia-based Navis Capital, which invests in the foods sector-and
also in industries where there is no dearth of multinational interest.
For instance, in Malaysia it bought a baby diaper company, stayed
with it for three years and then sold it to a Swedish multinational.
Eyeing Opportunities
Other PE majors may be hanging on for similar
opportunities. Temasek has a chunky 7.43 per cent of ICICI Bank's
capital and another 13.6 per cent in Punj Lloyd. Actis, another
PE firm, has all of 25.68 per cent in Punjab Tractors (PTL), and
is the largest shareholder after the Burmans of Dabur. Citigroup,
via Citigroup Strategic Holdings (it is an FII), holds 9.27 per
cent in HDFC (through the foreign direct investment route). Citi
totally has a 12.3 per cent stake in the mortgage firm. The implications
of this stake are huge. HDFC also holds nearly 22 per cent in
hdfc Bank. If the Reserve Bank of India (RBI) does stick to its
roadmap of allowing consolidation in the banking sector, HDFC,
HDFC Bank-and ICICI Bank-would be on the radar of almost every
foreign bank worth its corpus. When contacted by BT, ICICI Bank
officials said they "would not like to comment on a hypothetical
situation". Citigroup India CEO Sanjay Nayar says: "It's
a principal investment." Rahul Khanna, Director, Clearstone
Venture Advisors, a venture capital firm, says he does not see
any hostile takeover activity in India in the short term. "However
one can't deny the fact that Indian companies, primarily those
operating in the manufacturing space, are on the radar,"
he adds.
| RAIDERS NOT INVITED |
| Corporate raiders
like Gordon Gekko in reel life and Michael Milken in the flesh
are a rarity in India, but it isn't as if hostile takeovers
haven't been attempted in India. The first high-profile unfriendly
attempt at an acquisition can be traced back to non-resident
Indian tycoon Swraj Paul in the early 1980s when he had a
go at Escorts and DCM. However, he had to beat a hasty retreat
thanks to resistance from startled Indian business houses
and the draconian Foreign Exchange Regulation Act (FERA, which
was finally dust-binned in 2000). The late Manu Chhabria met
with some success, acquiring professionally-run companies
like Shaw Wallace and Dunlop (ironically, another predator,
the UB Group's Vijay Mallya, took over Shaw Wallace last year
after Chhabria's death).
To be sure, the low promoter holdings of Indian family
businesses have invited persistent interest from wannabe
raiders. And that activity has intensified in the past six
years. In 2000, a corporate greenhorn Abhishek Dalmia picked
up 10.5 per cent in Gesco Corp., the real estate arm of
Great Eastern Shipping, via his Delhi-based investment firm
Renaissance Estates. He went on to make an open offer to
acquire 45 per cent of the company, but the Mahindras threw
their hat in with a counter-offer at a higher price. After
a few more offers and counter-offers, the Mahindras and
the Sheths of GE Shipping settled to buy out Dalmia's 10.5
per cent stake. Dalmia didn't get the company, but he made
a killing (a 50 per cent appreciation of his original investment),
as did minority shareholders.
Indeed, Indian business houses have been quick to come
to the "rescue" of their counterparts, thereby
preventing a targeted company from going into the hands
of an "outsider". For instance, when Kolkata jute
trader Arun Bajoria attempted a raid on Bombay Dyeing by
acquiring a 14 per cent stake, none other than good friend
Ratan Tata came to the Wadias' rescue.
Most of the recent corporate raiders aren't typical corporate
honchos-the pinstriped variety seen on the cocktail circuit-which
perhaps explains their lack of success. Two years ago, a
Pune-based investor Ashok Kumar Parmar acquired a 14 per
cent stake in Videocon Appliances. The management of Videocon
Appliances denied him a berth on the board, and Parmar threatened
to make an open offer to acquire 20 per cent more from minority
shareholders. But he couldn't quite follow through and today
Parmar holds just 1.04 per cent of Videocon (the promoters
are sitting pretty with close to 37 per cent). Other similar
unsuccessful bids by unlikely raiders include the Lok Prakashan
Group, which bought 14 per cent of Tata Group company Voltas.
The underdog in most hostile attempts in India almost never
comes up trumps.
|
Promoters' Woes
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| Six years ago, corporate greenhorn Abhishek
Dalmia launched a bid for the realty arm of GE Shipping, but
he didn't get very far, although he did make a killing in
the process |
Are Indian promoters concerned? Says Rajat
Dutta, General Manager (Planning), GE Shipping, in which the promoters
hold 26.09 per cent. "Like any company we are also worried
of being targeted for a hostile takeover. However, the promoters
over the years have been steadily increasing their holding through
creeping acquisitions from the market." Sure enough, the
promoters have propped up their holding by 2.18 per cent, from
23.91 per cent last March. The Sheths of GE shipping aren't the
only ones. Kumar Mangalam Birla, Chairman, Aditya Birla Group,
told BT recently that "the group is constantly increasing
its stake in its companies through the creeping acquisition route".
In the past 15 months, the promoters' holding in Grasim Industries
has increased by 3.11 per cent to 25.07 per cent from 21.96 per
cent. In Aditya Birla Nuvo and Hindalco, the stakes rose to 34.17
per cent and 26.79 per cent from 28.62 per cent and 25.94 per
cent, respectively (see Raising The Bar).
Of course there are those companies that
aren't too fazed by the threat of a foreign raider. Says Shailesh
Shah, Director & Vice President (Corporate Strategy), Satyam
Computer Services, in which the promoters hold less than 10 per
cent. "The hostile acquisition of a software services company
is difficult. At the end of the day, one is buying people related
competencies, capabilities, and access to markets." Adds
R. Shankar Raman, Vice President (Finance), L&T: "Big
bucks will have to be shelled out for acquiring management control
in the company. However, if anyone will add value to the shareholders
and bring in better expertise to the company, the board will certainly
consider giving away management control."
| SAFE ENOUGH, FOR NOW |
|
How easy is it in the current
climes for companies-Indian or foreign-to launch a hostile
bid? If Ambareesh Baliga, Vice President, Karvy Stockbroking,
is to be believed, these could well be the best of times
for predators on the prowl. "Rather than foiling hostile
takeovers, regulations have only simplified them,"
he says, although he adds for good measure, "The only
good thing is that the regulator has taken due care to safeguard
the interests of minority shareholders."
Such safeguards mean that takeover tycoons have to get
their homework right. For instance, guidelines issued by
the Securities and Exchange Board of India (SEBI) do not
allow for off-market deals. Even negotiated deals are done
only on the floor of the exchange such that the investors
and the companies involved are aware about the big blocks
of shares that change hands. Then, every individual has
to report to the exchange and the company within two days
of his shareholding breaching the 5 per cent, 10 per cent
or 14 per cent marks. Shareholders who have more than 15
per cent and less than 55 per cent have to inform the exchange
and the company within two days if their holdings increase
or decline by 2 per cent. Meantime, if the individual holding
in a company breaches 15 per cent, it automatically triggers
an open offer for acquiring another 20 per cent of the equity
capital from minority shareholders. In fact, the acquirer
has to come out with a public announcement for the open
offer within four working days, and has to submit a draft
letter to SEBI for acquiring the 20 per cent stake through
the open offer within 14 days of the public announcement.
However, if SEBI fails to revert within 21 days, the acquirer
can go ahead to acquire shares through the open offer.
Such norms shouldn't deter a determined predator from
making a hostile bid. A disadvantage for foreign acquirers,
however, is the approvals needed from the Reserve Bank of
India (RBI) and the Foreign Investment Promotion Board (FIPB).
It's difficult, but not impossible.
|
Soaring Stocks
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| A hostile bid on Satyam Computer, in which
Chairman B. Ramalinga Raju and family own under 10 per cent,
is a possibility although company officials say it will be
difficult |
If some head honchos are sitting smug, it's
also because the value of their stock has soared in recent times,
along with the market boom (the recent meltdown in June notwithstanding).
In the last three years, the BSE Sensex has jumped nearly four-fold.
Consider a stock like IVRCL, which has jumped 28 times from Rs
8 to Rs 230 in this period. The company has further ring-fenced
itself by widening its equity base by splitting the face value
to Rs 2 from Rs 10. That may be one reason for the promoters being
unperturbed despite having a holding under 13 per cent. As a company
official quips: "We are not worried of takeover. Rather than
assets, we are people-driven. If someone wants to buy our company
they can go ahead, as the promoters can start fresh." The
IVRCL promoters may have other companies in the same vertical
of infrastructure-creation, reveal market men.
More than valuations, though, it is the,
well, hostile reaction all around to hostile takeovers that may
curb a raider's interest in Indian companies. As Bhatia of Texas
Pacific points out: "Given the local sentiments, hostile
takeovers becoming mainstream in India like in the us and Europe
looks difficult. However, hostile takeovers launched by promoters
of Indian origin or NRIs are more likely to succeed than similar
bids by foreign investors." You don't have to be Einstein
to figure out who Bhatia has in mind.
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