Hostile takeovers occur when an acquiring company gains control of a target firm without the approval of its management or board. These takeovers often lead to corporate battles, shareholder activism, and legal disputes. Companies use various defensive strategies, such as poison pills and white knight tactics, to resist hostile bids. India’s regulatory framework, including SEBI’s takeover code, plays a crucial role in governing such acquisitions, ensuring fair competition while protecting businesses from unsolicited takeovers.
Hostile takeovers have become a significant concern in India’s corporate sector, leading to aggressive battles for control. A hostile takeover occurs when an acquiring company seeks to gain control of a target firm without the approval of its management or board of directors. These takeovers often result in strategic conflicts, shareholder activism, and legal battles.
Understanding Hostile Takeovers
Unlike friendly mergers or acquisitions, hostile takeovers bypass negotiations with the target company’s leadership. Instead, acquirers use direct methods like purchasing shares from existing shareholders or influencing votes to replace the management. These takeovers usually occur when the acquiring firm perceives the target company as undervalued, strategically valuable, or inefficiently managed.
Methods Used in Hostile Takeovers
- Tender Offer: The acquirer offers to purchase shares directly from shareholders at a premium price, gaining significant control.
- Proxy Contest: The acquiring firm persuades shareholders to vote out existing management and replace it with one supportive of the takeover.
- Bear Hug: A public acquisition offer at a significant premium forces the target company’s board to consider the deal, making rejection difficult.
Notable Hostile Takeovers in India
- Swaraj Paul vs. Escorts Ltd. & DCM (1980s): UK-based businessman Swaraj Paul attempted to take over Escorts Ltd. and DCM by purchasing shares from the stock market. However, strong resistance from Indian regulators and promoters forced him to sell his holdings back.
- India Cements vs. Raasi Cements (1998): India Cements launched a hostile bid for Raasi Cements, offering shareholders three times the market price per share. The acquisition was eventually completed, leaving Raasi’s management powerless.
- Emami vs. Zandu Pharmaceuticals (2008): Emami acquired a 24% stake in Zandu from one of the promoter families, leading to a battle with the remaining promoters. After lengthy negotiations, Emami successfully took over the company.
- Adani Group vs. NDTV (2022): Adani Group acquired a significant stake in NDTV without prior approval from the company’s founders, leading to a high-profile hostile takeover that reshaped India’s media landscape.
Defensive Strategies Against Hostile Takeovers
To prevent hostile takeovers, companies adopt various defensive tactics:
- Poison Pill Strategy: Allows existing shareholders to buy additional shares at a discount, diluting the acquirer’s stake and making the takeover unattractive.
- White Knight Strategy: The target company seeks a friendly investor to counter the hostile bid by acquiring a controlling stake.
- Greenmail Strategy: The company repurchases its shares from the hostile acquirer at a premium to avoid the takeover.
- Crown Jewel Strategy: The company sells its most valuable assets, making itself less appealing to the acquirer.
- Employee Stock Option Plan (ESOP): Distributes company shares to employees, ensuring they hold a significant stake, making it difficult for outsiders to take over.
Regulatory Framework in India
India’s hostile takeovers are governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. These regulations require any entity acquiring more than 25% of a company’s shares to make an open offer to public shareholders. However, the framework does not specifically differentiate between friendly and hostile acquisitions, leaving companies vulnerable to aggressive takeover attempts.
Additionally, corporate laws in India favor promoter-driven ownership structures, where founding families or groups hold significant stakes in companies. This structure often acts as a natural defense against hostile takeovers but does not eliminate the risk entirely.
Conclusion
Hostile takeovers remain a complex challenge in India’s corporate landscape. While some takeovers create shareholder value and improve corporate governance, others disrupt businesses and raise governance concerns. Strengthening corporate defense mechanisms, improving regulatory oversight, and enhancing shareholder protections are crucial to maintaining corporate stability in India’s evolving market.
