TAKEOVER DEFENSES

TAKEOVER DEFENSES - Transcript

TAKEOVER DEFENSES

Oracle Corp vs PeopleSoft Inc
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PeopleSoft s latest customer rebate program could make it prohibitively expensive for the world s second largest software company to complete its 7 3 billion hostile takeover bid Oracle claimed in court papers that the rebate plan which doubles as an anti takeover measure flouts responsible corporate governance and entrenches its board in a ploy to thwart the deal which Oracle launched earlier this year Oracle has said consistently that PeopleSoft s defenses would have to be stripped for it to proceed with its bid Analysts were unsure whether Oracle s latest plea on the cost of the programs was simply a legal tactic to get a quicker ruling from the court or an attempt to lay the groundwork for abandoning its bid

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Oracle said it still wants to buy PeopleSoft PeopleSoft s management entrenchment tactics continue to destroy the value of the company for its shareholders Oracle spokeswoman Jennifer Glass said Oracle remains committed to completing this acquisition PeopleSoft spokesman Steve Swasey said the company s management continues to work in the best interest of its shareholders and he pointed to the company s financial performance in recent quarters as evidence PeopleSoft s shares closed down 43 cents or 2 percent to 21 62 on the Nasdaq Oracle has offered 19 50 a share

Customer assurance program
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After Oracle unveiled its offer PeopleSoft adopted a customer assurance program that provides for hefty refunds to its customers in certain cases if the company is acquired Later it disclosed a new money back offer that is also triggered if control of the company changes The new program takes effect if new board members are elected effectively entrenching the existing directors In the event that new board members are elected it could cost the company as much as 800 million in customer rebates under the two programs Oracle said citing PeopleSoft disclosures PeopleSoft has reached deep into the takeover defense playbook by offering payments to customers in the event of a deal and also by tying the provision to changes on the board

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The question is going to be whether the company is responding to concerns of customers or simply trying to thwart a deal it does not like said Bill Regner an M A partner with Debevoise Plimpton in New York which is not involved with the Oracle PeopleSoft case In its request to expedite the case Oracle argued that it is suffering direct irreparable harm from PeopleSoft s money back offers because they make it difficult to offer an attractive price to shareholders

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Indeed if the PeopleSoft board is permitted to continue to issue selfserving entrenchment motivated contracts under the Revised Money Back Offer Oracle may be forced to abandon its bid as it will no longer be economically reasonable Oracle said Oracle also said PeopleSoft was slow to disclose the rebate programs which it alleges is a breach of the board s responsibility to shareholders In short the Money Back Offers are but another desperate measure by the members of PeopleSoft s current board to hold on to their current positions of power regardless of the costs to PeopleSoft s stockholders Oracle said in its legal filing PeopleSoft s Swasey said the rebate programs are only triggered if an acquirer fails to support and develop PeopleSoft products the same way the company does now Oracle has said it would support existing PeopleSoft products but would not develop new ones

TAKEOVER ETHICS
Friendly Approach Aggressive Approach

Negotiated Settlement

Walk away

Bear Hug

Negotiated settlement

Proxy Fight

Open Market

Tender Offer

Street Swaps

Hostile Takeovers
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Street Sweeps Dawn raid Saturday Night Special

Friendly Takeover
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Voluntary agreement between the two parties Can take the form of a negotiated settlement Bargaining is an important aspect of a friendly takeover Both parties see sense in the deal Indal and Hindalco and Alcan

HOSTILE TAKEOVER
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Acquirer wants to takeover The target resolutely defends Points of appeal
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Board of Directors The shareholders directly The management of the company

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The acquisition of Shaw Wallace by Manu Chabria in 1987

BEAR HUG
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Targeted at the Board of Directors through a mail initiating the tender offer Seeks their urgent response to the takeover proposal Expression of interest in the target Will seek shareholder approval by directly targeting shareholders through a tender offer Some companies do parallel processing with the board and the shareholders The idea being to force them into a negotiated settlement The management must respond because they have a fiduciary responsibility towards the shareholders There are situations when the shareholders have filed law suits to contest the judgment of the management especially when the premium is high

PROXY CONTESTS
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An attempt to unseat reluctant Board members and management who oppose the takeover An internal battle of the existing shareholders aligned to or in favor of the acquirer Process
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Become a part of the company by acquiring shares a Trojan horse Oppose any anti takeover defenses or put a spoke in the critical decision making of the target company Call a meeting to replace management or oppose nominations to the Board Initiate proxy battles Canvass and win over the silent majority and take their assent in the form of voting proxies

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Costly because the legality of the process must be validated through solicitors brokerage firms banks and administrative expenses can be high Can be effective means without owning 51 of the shares Became popular after cash based financing of tender offers dried up

TENDER OFFERS
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Directed at shareholders of the target firm How
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Active widespread and public solicitation of the public shareholders Asking for substantial portion of the issuer s stock Offer price is at premium to prevailing market price Firm terms of offer rather than flexible terms of offer The tender offer is contingent on the tender offer of a fixed number of shares The tender offer is open for a limited period of time There is a pressure on the shareholders to tender their stock

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It too is a costly process because of the legal and administrative processes

TENDER OFFERS
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Tender offers can be for cash or stock Tender offers can be unrestricted or any or all offers
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If the offer is open for an extended period of time The maximum number of shares are not specified The offer will only be taken up if the terms of the offer are met Can be two tiered on the cash plus security blend Restriction on the time period or A certain percentage Number of shares to be tendered All or pro rata pick up in case of oversubscription

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Tender offers can be restricted
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Two tiered offers
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Bidder offers a first tier price for the specified maximum number of shares tendered and a second tier price for the remaining shares It could be a cash plus security blend Normally adopted to put pressure on the shareholders to make up their minds and also resorted to by bidders running short of cash Also called front end loaded offer The first price is always more than the second tier price Normally cash is offered in the first tier and securities of lower value in the second Concept of blended price weighted average of the first tier and the second tier offer

Any or all offer
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The maximum number of shares to be purchased is not specified but the offer will not be taken up if some conditions are not met Front end loading takes place here too

Partial offers
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The maximum number of shares that will be taken up by the bidder is specified What the remaining shareholders will get is not specified Can also be two tiered front end price and back end price

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Advice on the takeover strategy is given by the investment bankers Social acceptance of tender offers for hostile takeovers when the investment banks also participate Initial opposition but today the process is legalized

Open Offers in India
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RIL vs BSES
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Power generation and distribution Skeleton for laying the telecom lines RIL Reliance Power Ventures made an open offer for a 20 stake in BSES at Rs 235 later upped to Rs 255 per share Cost of acquisition Rs 650 cr

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Grasim vs L T

Open Market Operations
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Bidders normally build up stock in the target through the open market route The acquisition price here is naturally lower than the post offer price Shell corporations and partnerships are normally fronts for the acquisition A search for a shareholder with a large chunk of shareholding and wanting to divest is made This is known as the street sweep Sometimes the Open market operations are orchestrated in the morning in a Dawn Raid or on a Saturday in a Saturday Night Special

Takeover defenses
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Preventive
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Before the takeover attempt is made Attempt to reduce the possibilities of a hostile financial takeover attempt After the takeover attempt has been initiated

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Active
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Preventive
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Design features impact the following
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Cash both amount and stability of the cash flows Debt and leverage capacity of the target Share valuations relative the book value of the assets

Poison Pills
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Martin Lipton a lawyer invented the poison pills Triggering event Issuance of a right Exercise of the right Flip in Plan
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Flip over plan
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Shares are issued to existing shareholders in the event of a takeover The shares can be converted at discount if the event is triggered The acquirer does not get the shares The shareholders are given rights to acquire shares or preferred stock at a price higher than the market price These rights are activated when the bidder acquires a certain amount of shares

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Some times preferred stocks are issued to the shareholders in the target on the condition that they will be issued shares in the target company or merged in the event of a takeover These shares in the acquiring firm can be acquired at heavy discounts The key is the trigger point Dangers in the poison pills
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Shareholder might not convert them at the discounted price The time period may be too lengthy Preference shares are counted towards a companies in debtness and hence raise the bar for the leverage ratios

GUCCI LVMH Battle

HISTORY
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GUCCI

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In 1921 Guccio Gucci opened a small luggage and saddling company in Florence In the late 90 s Gucci is named European Company of the Year by the European Business Press By 2001 the Gucci Group had emerged as one of the world s leading multi brand luxury goods companies

HISTORY
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LVMH had been formed by the merger of cognac and champagne business of the France based Moet Hennessy families with the fashion holdings business of Louis Vuitton By 2001 LVMH had become a 23 bn fashion major dealing in leather perfume and champagne

THE BATTLE FOR GUCCI
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By the end of January 99 LVMH s stake in GUCCI had increased to 34 Bernard Arnault Chairman of LVMH proposes to name a director on GUCCI s board GUCCI President Domenico De Sole alleges Arnault plotting a Creeping Takeover De Sole uses Poison Pill in the form of an ESOP scheme

THE BATTLE CONTINUES
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Pinault Printemps Redoute PPR a French financer emerges as a white knight for GUCCI LVMH makes an open offer to acquire 100 stake in GUCCI LVMH accuses GUCCI of violation of the most fundamental rules of transparency while executing the PPR deal and the structuring of ESOP

THE BATTLE ENDS
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The court clears GUCCI on the PPR deal as well as ESOP LVMH gives up on gaining control of GUCCI instead settles for Financial benefits by selling its 20 stake to PPR GUCCI and LVMH agree to release all outstanding claims and withdraw all pending litigations

CONCLUSION
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GUCCI carves out its niche in the market gaining on LVMH However PPR still holds the key for GUCCI with 53 2 of their shareholdings

Back end Plans
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The company offers a back end price in the event of a takeover The target companies shareholders are given rights which allow them to acquire shares or take cash in their company at a back end price which is set at much higher than the market price The trigger is if a certain percentage of share holding is acquired by the acquirer They restrict the effectiveness of the two tier offers There is a problem for the board of Directors who have to explain why the price set is higher than the market price

Voting Plans
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Shares or rights are issued which entitle the target companies shareholders super voting rights Trigger is when a substantial percentage of the shares are acquired by the acquirer Voting control of the target is hard to get under this plan

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Poison Puts
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Bonds are issued with a put option They are exercisable at a price such that if the put is exercised the company will have a cash outflow because it will have to buy the puts exercised Entire management threatens to resign

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People Pill
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Amendments to the MoA and AoA
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Staggered or classified boards
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Reelection of the board members is spread to thwart the entry of a hostile person on the board Limit the size of the Board from adding seats Large voting percentages for approval on key decisions There are also out clauses when the acquirer is not given any rights to decide on a merger Pay a fair price to the minority shareholders Create two separate classes of shareholders with distinct rights

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Super majority provisions
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Fair price amendments
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Dual capitalizations
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Active Defenses
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Recapitalizations PacMan Defense White Knight and White Squire

SEBI guidelines

Takeover Defences
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Poison Pill
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Flip in plan Flip over plan

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Backend Plans People Pill Poison Puts Corporate charter amendments Dual capitalisation Golden Parachute

Anti takeover Defenses
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Greenmail Standstill agreement White Knight White Squire Recapitalization ESOP Litigation Pac man defense Just say no defense Crown Jewels

Takeover Models
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Shleifer Vishny Model Jagdish and Chowdhry Model Fishmen Model Hansen Stulz

ICL Raasi Deal

ICL Raasi Deal
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India Cements Raasi Cements were two major players in the domestic cement industry of Southern India It all started when Raasi suspecting the possibility of a takeover from one of India s big corporate houses Kotak Mahindra sought the help of its southern sympathizer ICL But ICL gradually started increasing its stake in Raasi from the advised 9 to over 18

Poison Pill Raasi s lethal war tactics cost ICL dearly
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Transfer of 40 stake in Sri Vishnu Cement to another group company Transfer of 100 acres of company owned mines to SVCL Diversion of over Rs 300mn of Raasi s funds o various entities controlled by BV Raju Sale of clinker to Matha Visham Cement at prices below the variable cost of production Interest free advances of Rs75lacs to Maatha Cements which were not even repaid in principal Advancing loans to group companies free of interest charges but borrowing at an interest rate of 24 from the same entities

Eventual Blows to ICL
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At the end of the bitter battle the promoters eventually surrendered to the indefatigable raider but did not succumb before dishing out a red eye to ICL which had to shell out a princely sum of Rs445crores to emerge as a winner of the absorbing joust Besides all these blows it suffered ICL had to go through the trauma of another punch on its nose wherein it shelled out an additional sum of Rs115crores to acquire the control in SVCL in an out of court compromise