The Predator's Brand New Moneybags

By Gautam Chakravorthy

With M&A here, can leveraged buy-outs be far behind? As the first step towards widening the finance options for takeovers, banks and financial institutions are beginning to plan their moves for bankrolling predators. For, North Block may soon give them permission to subscribe to private placements of bonds and debentures made by acquirers to fund their takeovers. While banks still won't be free to lend directly for acquisitions, the roundabout route could prove just as effective.

With money still a major roadblock for CFOs eyeing other companies, this could just breach the dam. Already, banks like Hongkong Bank and Citibank have announced that they are planning corpuses of upto $1 billion (Rs 4,000 crore) each to finance M&A moves in the country. Other foreign banks may follow suit. Their objective: float funds specifically aimed at funding activities in the takeover game, thus drawing investments from those eager to cash in on the high returns--perhaps as high as 25 per cent--that such high-risk funds will have to dangle. Significantly, loans may be available not just for attackers but also for defendants. The outcome may be a series of counter-bids in response to every hostile bid, even as it widens the choice of borrowers for the lending banks. On Wall Street, funds like these play a significant role in ensuring that takeovers aren't stalled for lack of money.

In India, of course, this manoeuvre will offer banks a new way to improve the returns on their assets, since they will not have to classify their investments as performing or non-performing assets, unlike the case of loans. The real windfall, however, will be for predators who can follow the classic technique of pledging part--or all--of the company that they are targeting against the money they pick up. If you plan to play the M&A game, your banker's willing.

Merging For Muscle

By Gautam Chakravorthy

They are banking on being big. The trouble, however, is that megamergers between the country's largest banks and financial institutions, as envisaged by the Union Finance Ministry, to create financial muscle on a global scale may create local giants--but it still won't bring the country's vaults anywhere near international dimensions.

For instance, the combined asset strength of the State Bank of India (SBI) and its seven associate banks--the State Bank of Bikaner & Jaipur, the State Bank of Hyderabad, the State Bank of Indore, the State Bank of Mysore, the State Bank of Patiala, the State Bank of Saurashtra, and the State Bank of Travancore--may stand at Rs 2,04,355 crore after a merger, as suggested by the Narasimham Committee in November, 1991. But that will still take it only to 129th place among the global heavyweights on assets--compared to the SBI's present rank of 160th. Likewise, the envisaged three-way merger between the Bank of India, the Corporation Bank, and the Oriental Bank of Commerce will create combined assets of only Rs 57,658.66 crore. It looks like being a long way to the big time for Indian banking.

Open Offers, Closed Chapters

By Roshni Jayakar

It may be open season on open offers, but punters don't seem to like takeover scrips once the open offer is over. Conventional wisdom dictates that when a company becomes an M&A target, with the would-be pirate going public with his intentions, its share price should soar. That, of course, did happen in the case of 12 of the scrips which faced takeover bids between July, 1997, and February, 1998, as BT's examination reveals. Indeed, the average decline in the pre-offer and post-offer price was 33 per cent.

Interestingly, however, the share prices plummeted shortly after the open offer was completed, proving that investors who held on instead of accepting the bids probably lost out--at least in the short run. At the top of the scale was Vikrant Tyres, whose share price fell by 79 per cent, from a post-offer level of Rs 76 on January 30, 1998 to Rs 16 on March 9, 1998.

Part of the reason, of course, is that the offers were priced at a substantial premium to the prevailing market price, so that the latter immediately closed the gap. For instance, Gresheim GmbH's open offer for Bombay Oxygen's stock was priced at Rs 3,000 per share when the market price was Rs 1,650. Seven months after the open offer, the market price of the scrip has dropped to Rs 1,360, a fall of 54 per cent. But even the high offer price doesn't explain the market's lack of faith in the future of a company after it's taken over. The bulls just don't like conquests, do they?

Cashing In On The Core

By Roshni Jayakar

Primarily, it's a core competence. Sure, public issues continue to suffer, as proved by the measly Rs 1,468 crore garnered by the 56 offerings in the first nine months of 1997-98--compared to a high of Rs 8,034 crore in the same period of 1996-97. But private placements, made by 104 corporations, mobilised a huge Rs 21,589 crore in the same time-frame, with the core sector commanding sizeable support from institutional financiers.

The financial sector, according to the Delhi-based Prime Database, which tracks the primary market, dominated, picking up 40 per cent of the total amount. Or, Rs 8,668 crore. Power companies ranked second, with a 12 per cent share (Rs 2,674 crore). If investors are banking on a surge in infrastructure, is it in expectation of an economic revival? Maybe.

And maybe not. After all, when demand is dampened, investors focus on the long term. And given the country's infrastructural gaps, the core sector must thrive--eventually. This might just be the best time for other core corporations to get their funds. Privately.

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