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Rediff.com  » Business » M&A picks up, white knights are riding into India Inc

M&A picks up, white knights are riding into India Inc

September 28, 2010 16:39 IST

In 2007, Israeli drugmaker Taro Pharmaceutical was in trouble. Inventories and debtors mounted, and it ran out of cash after a string of US acquisitions.

When Dilip Shanghvi, chairman of Sun Pharma, stepped in as a white knight and offered to merge the two companies in a $454-million deal, little did he realise that it would ultimately take a three-year legal battle to gain control of Taro.

Cut to August this year. When an arm of Reliance Industries Ltd (RIL) picked up 14.12 per cent stake in hotelier EIH Ltd, Mukesh Ambani donned a new avatar. As a white knight, Ambani helped EIH owner Prithvi Raj Oberoi counter a possible bid by ITC Ltd.

The cigarette-to-hospitality-to-FMCG major has mopped up 14.98 per cent stake in the hotel company over the years.

By bringing in a strong third shareholder with a large stake, Oberoi managed to shore up his defences against ITC.

"If ITC, with 14.98 per cent stake, executed an open offer, there was no way the Oberois could have countered it. At best, they could have raised their stake by 5 per cent every year,'' explained Himani Singh, an analyst with Elara Capital.

In one fell swoop, Oberoi managed to pit a stronger force (RIL) against ITC, in effect neutralising the marauder, had it decided to launch an open offer. ITC has maintained for a decade that it would not launch a hostile bid for EIH, but its stake was too high for the Oberoi's comfort. Indeed, before inking the deal with RIL, the Oberois had tried to rope in Analjit Singh of Max, who holds 4 per cent stake in EIH.

A white knight – or, a company that thwarts a hostile takeover of a target company by executing a friendly takeover instead - is a common phenomenon in global M&As. When Mittal Steel, for instance, went after Arcelor, the European steelmaker approached Russian peer Severstal to help it ward off the Lakshmi Mittal-led group.

Though it is a relatively new phenomenon in India, there are already a few instances of domestic companies playing white knight.

In many cases, of course, financial institutions like Life Insurance Corporation or government-controlled banks have come to the rescue of Indian companies facing takeover threats. The most celebrated of these cases were attempts by RIL to take over Larsen & Toubro and by UK's BAT to wrest control of local arm ITC.

In a more recent instance, K Raghavendra Rao, the promoter of Orchid Chemicals & Pharmaceuticals Ltd, managed to garner the support of institutional investors to ward off a takeover bid by Solrex (believed to be controlled by brothers Malvinder and Shivinder Singh, erstwhile owners of Ranbaxy Laboratories). Solrex had picked up 12 per cent stake in Orchid. Institutions, which together held 38 per cent, backed Rao.

In 2000, the promoters of realty firm Gesco Corporation turned to the Mahindras to counter a hostile bid by Delhi-based Abhishek Dalmia. The Sheths of Gesco were caught napping when Dalmia's Renaissance Estates used a low share price to buy over 10 per cent stake in Gesco and mounted an open offer for another 45 per cent.

The Sheths turned to master strategist Deepak Parkeh of HDFC. He roped in the Mahindras and its group firm, Mahindra Realty & Infrastructure, to make a counter offer with the Sheths for 33.5 per cent of Gesco. The battle ended after Dalmia sold his 10.5 per cent stake in Gesco to the Sheth-Mahindra combine and made a killing.

Dwijedra Tripathi, a former professor at IIM-Ahmedabad and a business historian, feels that as M&A activity picks up in the country, we could see even more attempts at hostile takeovers and the appearance of white knights.

But sometimes, a white knight could turn predator, as another faction of the Sheth family discovered recently. In 2009, Vijay Kantilal Sheth, the promoter of Great Offshore Ltd (GOL), was in trouble when lenders made margin calls under a share-pledge deal. The promoters of Bharati Shipyard stepped in to help Sheth with the required cash.

Although Bharati Shipyard's PC Kapoor maintained that it was only a strategic investor, it subsequently wrested around 14.89 per cent stake in GOL, making itself the largest shareholder, and launched an open offer for another 20 per cent. This was the first instance in the history of corporate India, where pledged shares were invoked.

The battle to acquire GOL intensified after ABG Shipyard made a counter offer to acquire 33.8 per cent. Both continued mopping up shares from the market and revising the offer price in a takeover battle that lasted over six months. It finally came to an end when ABG Shipyard exited the race and Bharati Shipyard took control of GOL.

A white knight can even be perceived as a black knight -- as Ramesh Vangal's experience at Tamilnad Merchantile Bank (TMB) reveals. In May 2007, when Vangal and his friends stepped in to buy out C Sivasankaran's stake in the bank, he was seen as a white knight. But his attempt to place his nominees on the board met with stiff resistance from the Nadar community, who feared outsiders would take control of bank that it controlled.

Ironically, Sivasankaran himself had come in as a white knight to buy out the Ruias of Essar Group, who had cornered 67 per cent in the bank. When Reserve Bank of India ruled that an industrial group could not run a bank, the Ruias agreed to sell the stake back to the community, but at a high price.

That's when Sivasankaran came in as an investor and bought the Essar stake. He agreed to sell it back to the Nadars at 2.38 times the price, but they could afford to buy back only half the stake.

TMB has been mired in an ownership battle between brothers Sivanthi Adityan, who runs one of the largest Tamil dailies, Daily Thanthi, and Ramachandra Adityan. In January, Sivanthi, with the support of the Nadar Mahajana Sangam and foreign investors, wrested control of TMB's board. Ramachandra had earlier fought to retrieve the bank from Sivasankaran, but later opposed the entry of non-Nadar groups.

Ranju Sarkar in New Delhi
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