NEGOTIATED
ACQUISITIONS AND
BUYOUTS – TAKEOVER
CODE
(SESSIONS 17 & 18)
ACQUISITION AND BUYOUT CONCEPTS
Strategic (Non-Control) Acquisition –
A gets to acquire a substantial stake in B (either through primary shares or
secondary shares) by which A gets a strategic investor position.
Control Acquisition (Buyout) –
A gets to own / control B (no change in legal entity but change in
ownership and management of B.
Negotiated and Hostile Takeover –
If control acquisition is made through negotiations with the target
company, it is called negotiated acquisition or „friendly takeover‟. If it is
triggered through an unsolicited bid (hostile bid) by an acquirer, it is called
a hostile takeover.
Buyout, LBO, MBO and MBI –
A buyout is a control acquisition usually made by a large fund or group of
investors.
If a control acquisition is carried out with significant amount of debt
(usually 70-30) it called an LBO
If the incumbent management team of a company buys out the company
with the help of external investors, it is called a MBO
If an outside management team buys into a company with the help of
external investors, it is a case of management buy in.
OVERVIEW OF TAKEOVER CODE FOR LISTED
COMPANIES
Historically, takeovers were sought to be regulated by
the Listing agreement (clauses 40A and 40 B.
Triggered off by an acquisition of shares with voting
rights above 25%. Weak legal mechanism with no
penalties other than delisting.
SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations were first enacted in 1994 providing a
regulated procedure for takeover bids for listed
companies, including mechanisms for counter offers
and counter bids in a transparent manner. The
Regulations were overhauled in 1997 and in 2011 to
include cases of change in control without transfer of
shares.
PRESENT REQUIREMENTS
If a person acquires up to 10% of a company, he has to inform
the company about the same with disclosure of the
beneficiary.
If a person acquires between 10% and 24.99%, he has to
inform both the company and the stock exchange about the
acquisition. The company should also intimate the stock
exchange under the listing guidelines.
For Substantial Acquisition of shares amounting to 25% and
above, the SEBI (Substantial Acquisition of shares and
Takeovers) Regulations 2011 shall apply.
Persons holding 25% or more but less than the maximum
permissible non-public shareholding (25%) shall not acquire
more than 5% per year through creeping acquisition route. No
acquisition beyond 75% is permissible.
Indirect acquisitions and acquisition of control are also
covered.
PRESENT REQUIREMENTS
Voluntary offers are permitted as follows –
Persons holding between 25% and 75% such that the post offer
shareholding does not cross 75%.
Persons who have not acquired any shares in the preceding 2 weeks.
Once offer is announced, no further acquisitions are allowed
other than through the offer and for six months after the offer.
Price stipulation is the highest of the following (as the minimum
offer price) –
Highest Negotiated Price
Preceding 52 weeks weighted average acquisition price
Preceding 26 weeks highest acquisition price
Weighted average market price for the preceding 60 days before the open
offer announcement
For infrequently traded shares, the price arrived at by the offer manager by
valuing the company on established parametres.
PRESENT REQUIREMENTS
The purchase consideration may be paid by –
Cash
by issue, exchange or transfer of listed shares in the equity share capital of
the acquirer.
by issue, exchange or transfer of listed secured debt instruments
by issue, exchange or transfer of convertible debt securities entitling the
holder thereof to acquire listed shares in the equity share capital of the
acquirer.
a combination of the above
Where the shareholders have been provided with options to
accept payment in cash or by way of securities, or a combination
thereof, the pricing for the open offer may be different for each
option subject to compliance with minimum offer price
requirements.
PRESENT REQUIREMENTS
Once an open offer is announced, the board of directors of the
target company have obligations not to obstruct the offer through
the following measures unless a special resolution by
shareholders is passed –
Issue of new shares
Buyback of shares
Alienate any material assets
Effect any material borrowings
Issue any warrants or other convertibles
Rights issue
Terminate material contracts
The independent directors of the target company shall provide
guidance to shareholders atleast two working days before the
commencement of the tendering period.
Competing offers within 15 days of the original offer. Price
revisions possible upto 3 days before the tendering period.
HIGHLIGHTS OF THE TAKEOVER CODE
General Exemptions –
Public and Rights Issues (without change in management)
Underwriting agreements
Interse transfers among promoter group.
Acquisition in the ordinary course of business.
By way of transmission or succession or inheritance.
Transfers from Financial Institutions, acquisitions by State owned
entities.
Pursuant to a scheme under reconstruction of sick companies through a
court or quasi-judicial process or otherwise under any law involving
reconstruction.
In un-listed companies.
GDRs/ADRs without conversion into underlying shares.
Case by case exemptions from Open Offer requirements on
application to SEBI.
METHODS OF NEGOTIATED ACQUISITION
Takeover without Open Market Purchase – This
route applied to a listed target company by an
existing dominant shareholder (Voluntary open
offer).
Under this route, the acquirer announces an open
offer under the Takeover Code for the target
company without there being a need for it.
The promoter stake in a listed company is usually
above 25%. By announcing a voluntary offer, it can
be consolidated further. E.g. Vedanta voluntary
open offer.
METHODS OF ACQUISITION
Negotiated Takeover of Unlisted Target –
The acquirer strikes a deal to acquire a stake in the
target company from one or more existing shareholders so
as to make a substantial acquisition.
The sellers could be the promoters themselves or other
non-promoter shareholders.
In a negotiated acquisition, the sellers are paid the sale
consideration by the acquirers and therefore, the
company does not get any benefit of the consideration.
The expression ‘friendly takeover’ has two dimensions – (a)
it is friendly because the promoters ultimately sell their
stakes willingly and (b) there is a change in management
due to transfer of control to the buyer. E.g. Indal –
Hindalco.
METHODS OF ACQUISITION
Acquisition through Share Purchase and / or
Preferential Allotment –
This route applies both to listed and unlisted
companies.
An acquisition is intended for the benefit of a
company, it is customary to build the stake of the
acquirer through a secondary share purchase. If
desired, it may be combined with a fresh issue of
equity so that the company receives the sale
consideration. Induction of strategic partners into
a company is generally through this route.
CASE STUDIES IN
CONTROL
ACQUISITIONS AND
BUYOUTS
KKR-ALLIANCE TIRE
LANDMARK BUYOUT
KKR – Alliance Tire
One of the largest exits of 2016 was KKR’s sale of Alliance Tire Group (ATG), a global
off-highway tyre manufacturer with a presence in more than 120 countries across
six continents.
KKR acquired the company in a secondary buyout in 2013. By that time, ATG had
scaled to a capacity of approximately 73,000 tonnes annually, yet it had potential to
elevate to the next level with the assistance of the right financial and operational
partner by achieving even greater capacity, further expanding its global reach and
increasing its market share.
In the three years of KKR’s ownership, members of both the KKR private equity deal
team and KKR Capstone—a team whose mission is to create value by identifying and
delivering sustainable operational performance within KKR portfolio companies—
pinpointed a number of early financial and operational initiatives that could
maximise ATG’s potential and position it for growth. These included introducing ATG’s
team to original equipment manufacturers, which could enable its expansion into
newer areas, and leveraging ATG’s strong procurement expertise in Asia to help
streamline some of the company’s sourcing. KKR also focused on enhancing ATG’s
―go-to-market‖ effort in North America, strengthening distributor relationships in
Europe, and unlocking supply chain and manufacturing constraints in India and
Israel—all while maintaining a cost focus.
LANDMARK BUYOUT
KKR – Alliance Tire
KKR and KKR Capstone members further assisted ATG in
proactively sourcing M&A targets to scale the company and
optimised the company’s working capital through the KKR
Capital Markets team. An executive in KKR Capstone served as
ATG’s interim COO for nine months to fill a management gap
while the team assisted ATG in hiring a permanent COO.
In July 2016, KKR completed the sale of ATG to Yokohama
Rubber Company, a top-10 global tyre manufacturer based in
Japan. During KKR’s investment period, ATG’s volume rose by
more than 40%, and production capacity and global market
share rose by approximately two times.
BLACKSTONE - MPHASIS
MPHASIS – A SERIES OF BUYOUTS
Mphasis was a software and IT services company
floated in California, USA by former Citibank executive
Jerry Rao and his associate Jeroen Tas in 1996.
Four years prior to it, BFL Software was floated in India
by the Calcutta based Bangur Group in 1992.
Barings PE, a well known private equity fund, made a
buyout of BFL from the Bangurs in late 1990s by
acquiring a controlling stake of 52%.
Barings revamped the company at a time when it was
facing an existential crisis. Soon, BFL turned around
and had prestigious clients including Compaq and
Federal Express. Barings PE was also an investor in
Mphasis in its US avatar.
MPHASIS – A SERIES OF BUYOUTS
In 2000, Barings being a common investor in both
companies, engineered a merger between them
whereby BFL acquired Mphasis in an all stock deal
and merged it with itself.
In the process, Barings became a dominant
shareholder and Jerry Rao and Jeroen Tas took over
the management of the combined entity which was
headquartered in Bangalore and renamed Mphasis
Ltd.
Soon Mphasis grew into a large company serving
clients in multiple industries and especially strong in
the banking sector.
MPHASIS – A SERIES OF BUYOUTS
In 2006, Barings exited Mphasis by virtue of a voluntary
open offer under the Takeover Code by Electronic Data
Systems (EDS), a NYSE listed leading global technology
services company delivering a broad portfolio of
information technology and business process outsourcing
services.
The offer was made for 51% of the company and pursuant
to it, Barings PE tendered its entire holding and exited the
company. EDS became the new owner and controlling
shareholder of the company. The transaction which was
estimated at Rs 1748 crore became one of the largest in
the IT sector at the time.
In 2005, Oracle Corp. acquired i-flex Solutions Ltd
for ₹ 4,090 crore.
MPHASIS – A SERIES OF BUYOUTS
In 2008, through a global acquisition, EDS was bought
out by Hewlett Packard for US$13.9 billion.
Mphasis thus became a HP company and soon
registered a turnover of US$1 billion. It became a
backend service provider drawing its main revenue
from its parent company.
However, the post-EDS merger integration problems at
the parent company level affected the fortunes of
Mphasis as well and it started to decline from 2013.
Soon HP decided to divest Mphasis as a strategic exit.
MPHASIS – A SERIES OF BUYOUTS
The transaction for buying out HP‟s stake in Mphasis drew a lot
of interest both from strategic acquirers like Tech Mahindra and
buyout funds like Apollo Global Management and Blackstone
PE, the world‟s largest buyout fund.
In 2016, Blackstone entered into a direct share purchase
agreement with HP to buyout 60% of Mphasis out of which 10%
was conditional upon the outcome of the mandatory open offer.
The share purchase was for a consideration of Rs.430 per
share while the open offer was made at Rs. 457.5 per share.
However, the open offer drew a complete blank with the public
not tendering any shares in the offer as they expected the
company to prosper under Blackstone‟s leadership.
Thus, Blackstone ended up with the 60% stake purchased from
HP. The transaction was worth more than US$1 billion and
became one of the largest PE buyouts and Blackstone‟s biggest
investment in India.
MPHASIS – A SERIES OF BUYOUTS
Under the ownership of Blackstone, benefitting partly
from its services agreement with HP for minimum
guaranteed revenue, Mphasis prospered and its stock
grew by more than 300% over the next four years.
In 2020, at a time when Blackstone held just over
56% of the company, according to media reports,
Mphasis was once again put on the block for a buyout
when Blackstone started talks for its exit from the
company.
It had appointed investment banks JP Morgan and
Morgan Stanley to provide sell side advisory services
and audit firm KPMG to conduct a vendor due
diligence.
IGATE - CAPGEMINI
IGATE – STRATEGIC CONTROL ACQUISITION
In 2011, iGate acquired Patni Computer, which was
two-and-half times its size for $1.22 billion through an
alliance with private equity player Apax Partners.
The company had to incur a total debt of $1.03 billion,
which also included the cost of delisting Patni.
At that time, experts felt the acquisition gave the
much-smaller-in-size IGATE scale, greater access to
global customers and the ability to play with larger
deals and take on its larger rivals.
Since then, iGATE saw a decline in margins and its
costs went up considerably. The company’s revenue
increase was a nominal 10%. The company’s valuation
suffered and it became a potential target.
IGATE – STRATEGIC CONTROL ACQUISITION
In 2013, the company sacked its CEO Phaneesh
Murthy who was instrumental in the Patni acquisition
and the company’s ramp up of Indian operations.
Soon the New Jersey-based IT services company was
facing a challenging phase, addressing concerns such
as corporate reputation, sluggish global market, debt
and stock market performance.
In 2015, the French IT-services major Capgemini
announced the acquisition of US-based iGATE for
$4.04 billion in a combination of cash, stock and debt
deal at $48 per share.
IGATE – STRATEGIC CONTROL ACQUISITION
The acquisition was intended to ramp up Capgemini’s key
businesses in application and infrastructure services as
well as BPO and engineering services.
“The combination of IGATE and Capgemini increases the
group‟s revenues in the region by 33 percent to an
estimated $4 billion, making North America its first market
with approximately 30 percent of the pro-forma combined
revenues in 2015. An estimated 50,000 employees will be
servicing Capgemini‟s North American clients,” the Paris-
headquartered IT firm said in a statement, adding that this
transaction would lead to a group with an estimated
combined revenue of 12.5 billion euro in 2015, an
operating margin above 10 percent and around 190,000
employees.
IGATE – STRATEGIC CONTROL ACQUISITION
“IGATE perfectly fits our strategic ambition. It will give
us a new status on the American market. This will also
give a new scale to the group‟s Indian operations,
allowing us to compete on par with the best US-based
and Indian-based companies,” said Paul Hermelin,
chairman and CEO of Capgemini.
With its stable foothold in the financial services sector,
IGATE, which had 42% of revenues from the financial
services space, brought a portfolio of clients mostly in
the bank and insurance space to Capgemini.
IGATE – STRATEGIC CONTROL ACQUISITION
Analysts felt that Capgemini’s had some significant holes
in its portfolio that needed to be filled out, most notably a
more powerful presence in India, a stronger portfolio of US
enterprise clients, and a deeper foothold in the financial
services. IGATE brought these advantages to the table.
However, analysts felt that ―the acquisition was surely a
deal on the expensive side. While this should ideally help
catapult Capgemini‟s business in the US, the output will
much depend on how Capgemini plans to integrate both
the businesses and approach clients for conversations.”
