As per the Regulation 2(1) (b) of the Takeover Code, SEBI specifies the term Takeover as an “acquisition” as “directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company”

 

Key elements of a takeover

It’s an attempt to take over the control of a company which is already registered.
The shares are purchased from the shareholders of a company to an extent of controlling the interest and thereby gaining control.

 

Types of takeovers as per law

Friendly takeover – Negotiation happens between the promoters of a company and the investors in a friendly manner to further some common objectives as per Section 395 of the Companies Act, 1956.
Bail-out takeover – Takeover of a financially sick company by a finically well-off company to bail them out from losses as per Sick Industrial Companies (Special Provisions) Act, 1985

 

Hostile takeover where the investors actively pursue the takeover without the knowledge of other company attempted through a public tender offer. as per SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

 

Corporate Raiders – Making an offer to shareholders after the board of directors have refused or by completely bypassing them.

 

Types of takeovers as per business context

Horizontal Takeover – Happens between companies from the same industry. The main purpose is increasing the market share or achieving economies of scale. Example Lipton India and Brooke Bond, Bank of Madura with ICICI Bank.

Vertical Takeover – Happens between companies operating at different stages of production within the same industry. Example is Tata Motors acquiring 80% stakes in Trilix Srl

Conglomerate takeover – Happens between companies operating in totally different industries. The main purpose of this kind of takeover is diversification. Example Reliance Industries (RIL) taking over Reliance Petroleum (RPL)

 

Benefits of a Takeover

  • External Growth whereby firms can expand horizontally, vertically and in conglomerate direction.
  • Diversification into alike markets or increase sales
  • Vertical Integration by linking a series of sequentially related input assembly operations
  • Reducing costs and redundancies, enhance economy of scale

Downsides of a Takeover

  • Eliminate healthy competition and fair trade and encourage monopoly
  • At times Goodwill may be paid in excess
  • Culture clash within two companies and retrenchment
  • Dominance of the parent company
  • Hidden liabilities within the target company

Terms in Use

Acquire

A person who, directly or indirectly, acquires the share or the voting right whether by himself or through or with persons acting in concert or control over a target company.

Target Company A company that is listed on any stock exchange and whose shares or voting rights are to be acquired.

Promoter

Any person who is in control of the target company named in the offer document or shareholding pattern.

Control

The right to directly or indirectly appoint a majority of directors on the Board of the target company, control management or policy decisions affecting such company.

Direct Acquisition

Is an acquirer directly acquiring shares, voting rights, or control of the targeted company.

Indirect Acquisition

Where the acquirer indirectly exercises or direct the exercise of voting rights of a target company, the acquisition of which would otherwise attract the obligation of making an open offer as per regulations

 

Open offer

It’s an opportunity to exit their investments in no inferior terms viz a viz their initial investment. It lays down the norms like the pricing, timing, manner, even exemption or relaxation