It's a different M&A game. There are no predators, white knights or takeover preys. Instead, the players include a regulator cagey about defining what constitutes a change in management control, large institutional shareholders trying to maximise their returns and powerful promoters acting strictly by the letter of the law. The spectators include small investors who can only watch in despair. But what happens now is likely to redefine the art of friendly acquisitions in the country. And probably result in new rules for future takeover tycoons.
Over two years after Gujarat Ambuja Cement picked up a 14.5 per cent stake in the Associated Cement Companies (ACC), and a year after the Aditya Birla Group got 10.5 per cent in Larsen & Toubro (L&T), two of India's biggest corporate deals are caught in a legal logjam. At the heart of the problem is the question of control; about whether the purchases constituted a takeover and a change in management of the target companies. The acquirers say no and the Securities and Exchange Board of India (SEBI) had no problems when the deals happened.
Suddenly, a string of events in the last few weeks changed all that. First, the Special Appellate Tribunal (SAT) asked SEBI to take another look at the Ambuja-ACC pact. That forced the market regulator to stall the similar Birla-L&T agreement which, in turn, forced the Birlas to approach SAT. The tribunal, in its hearing on November 21, gave SEBI four days' time to file an affidavit. In the midst of all this, the investors and professional managers in both ACC and L&T are lobbying to protect their interests. Today, any decision on the matter will need to deal with issues of business ethics, corporate governance and the rights of minority shareholders.
It's all a matter of control. If it can be legally proved that Gujarat Ambuja and the Birlas gained management control of the companies they bought into, it will automatically trigger off open offers to buy an additional 20 per cent each from existing shareholders at the same price they paid for the initial holdings. At the moment, Gujarat Ambuja has not made an open offer. The Birlas' offer, which was triggered off once they increased their stake to over 15 per cent through open market purchases and has now been stalled by SEBI, talked of a price of Rs 190 per share, which is considerably lower than the
Rs 306.60 they paid Reliance Industries for the initial 10.5 per cent stake.
Obviously, both institutional and minority shareholders are peeved that they are unable to get the same lucrative prices the original sellers got. So while the financial institutions, who hold over a third of L&T's equity, have decided not to participate in the Birlas' open offer, minority shareholders have knocked on legal doors to stall the Ambuja-ACC deal. The two acquirers, however, are clear they have done nothing wrong. "We have complied with the regulations and acted with the highest standards of corporate governance. We have been advised we are on strong legal grounds," says a spokesperson for the Aditya Birla Group.
In fact, the two buyers claim there's no question of a change in management control since the sellers were not running the professionally-managed target companies. For instance, Gujarat Ambuja says that the Tatas, who sold their shares to Gujarat Ambuja, never claimed to be at the helm of affairs in ACC. Of course, Reliance was never allowed to dictate the decision-making process in L&T due to the controversial manner in which it acquired the stake in the first place. Moreover, the new owners stayed away from the day-to-day management, apart from appointing two directors each on the boards of the two companies and working towards operational synergies between the acquirer and the target.
What does the Takeover Code say? It defines control as "the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner". None of this, according to the buyers, is happening in either ACC or L&T.
But institutional investors are doubtful about whether they should believe the promoters. Instead, they ask, why can't SEBI lift the corporate veil in ACC and L&T and investigate who's actually running the two companies? Worse, why has SEBI kept the definition of control so vague and, despite a lot of pressure, not redefined it while announcing recent amendments to the code? "SEBI needs to pierce the corporate veil while dealing with amorphous takeovers like these," says a senior manager in a Mumbai-based investment banking firm.
He has a point. For one, the Birlas have themselves admitted that they paid a nearly 50 per cent "strategic premium" while buying the shares from Reliance. So did Gujarat Ambuja, while not stating it publicly. In addition, both the acquirers have chalked out long-term synergies with their target companies in a bid to rationalise cost structures, improve efficiencies and get a grip on product pricing. Finally, if the Birlas' open offer does go through, that is, they mop up 20 per cent more in L&T, their stake will go up to 35.5 per cent. Will that constitute a change in control and trigger off another open offer?
Look at it from another perspective and it could be quite easy for SEBI to come to a conclusion, at least in the Birla-L&T case. In mid-2000, L&T had planned to hive off its cement business into a separate company, where it would invite a strategic partner. Even a company-appointed consultant reached the same conclusion. The reason: the cements division had become a money-guzzler; in the past few years, it had soaked up Rs 5,000 crore and the Boston Consulting Group estimated it needed to add another of 1.5 million tonnes of annual capacity to grow at 10 per cent a year.
Although the L&T management has now clarified that it is still pursuing the demerger option, the process was delayed a bit. Logically, the demerger makes little sense for the Birlas, who see synergy between L&T and their own cement businesses. So, did the Birlas influence the earlier change in mindset? For SEBI, this should be easy to find out from the minutes of the board meetings in the past 12 months.
SEBI chief G.N. Bajpai did not respond to Outlook's queries but stockmarket sources admit the regulator may have goofed up in the matter. According to them, Bajpai still has enough powers at least to influence the price offered by the Birlas in their open offer. Clause 44 of the Takeover Code states that SEBI can "in the interest of securities market or for protection of interest of investors" direct an acquirer "to acquire such number of shares at such offer price as determined by the Board".
That clearly implies that SEBI can force the Birlas to increase their offer price if it feels investors are getting a raw deal. However, corporate lawyers are not so sure. Says Jayant Thakur, a chartered accountant who specialises in corporate law, "SEBI does not have the power to disturb the open offer pricing unless there is evidence to demonstrate that the formula laid down in law was not correctly applied." That evidence, according to everyone involved in the controversy, is lacking as far as the Birlas' open offer is concerned.
The code states that the open offer price has to be higher than either the average of the previous 26 weeks, or the average of the last two weeks prior to the announcement, or the price paid by an acquirer in any other deal in the previous 26 weeks.In the case of the Birlas, their purchase from Reliance happened a year ago and didn't result in management control. So, they don't have to offer Rs 306.60 per share. Thus, while announcing the open offer on November 4, they quoted a price of Rs 190, which was higher than Rs 174.93 (the 26-week average) and Rs 170.08 (the 2-week average).
If this is confusing, there are even more twists to the tale. On November 8, SEBI informed JM Morgan Stanley, the lead manager to the Birlas' open offer, that the offer has been put on hold. For the next 11 days, no one bothered to make that information public. Now, why did SEBI or JM Morgan Stanley act in such a manner? SEBI sources contend that the onus was on the lead manager. Investment banking circles maintain that SEBI, which puts its order on its website (www.SEBI.gov.in), could have done the same thing with the L&T ruling.
Clearly, SEBI has a lot of explaining to do. More important, the regulator needs to take crucial decisions and do something about the takeover laws itself. For, this time if the regulator fails the small investor, who has already fled the market en masse, it will be nearly impossible to woo him back.