In simple terms, “takeover” means a company purchasing or acquiring shares of another company, thereby enabling the acquirer company to get management control over the acquired company. For this purpose, the acquirer shall inform the board of the company to be acquired. If the offer suits the best interests of the board, its directors and shareholders then it may be approved by the company.
In the past, there have been several take overs in India. For example, Tata Steel took over Corus, Anglo-Dutch steel maker in October 2006. Previously the Tatas had taken over Videsh Sanchar Nigam Limited, a telecom major providing long distance and internet services in India. Other examples are Reliance taking over BSES (Bombay Suburban Electric Supply, now Reliance Energy Limited) and IPCL (Indian Petrochemical Corporation Limited).
Let us discuss some recent speculations in the media about possible takeovers.
Computer Maintenance Corporation (CMC):
Earlier it was owned by the Government of India. Tata Sons acquired 51% stake in CMC in October 2001 and the Central Government disinvested its 32.31% stake in 2004. CMC specializes in hardware and software maintenance. After the acquisition it was an independent entity within Tata Group and was maintained by TCS (Tata Consultancy Services.)
During January 2007 some abnormal price movment could be observed in the stock as shown below:
The stock had gone up from 696 on 12.01.07 to 1225 on 17.01.07 on a closing basis (76% jump in just three trading sessions.) It is quite possible to explain this technically. But where from this large “driving force” came?
There were media reports that CMC may merge with TCS. However according to NSE web site, this is not true. In an announcement dated 17.01.07 the exchange said:
“News Verification : The media had reports that CMC Ltd may merge with TCS. The Exchange, in order to verify the accuracy or otherwise of the information reported in the media and to inform the market place so that the interest of the investors is safeguarded, had written to the officials of the company. CMC Ltd has vide its letter inter-alia stated, "We wish to inform you that CMC Ltd does not have any plans or its Board of Directors has not discussed anything related to merger with TCS or any other Company till date."
In another announcement dated 28.03.07 it was mentioned by NSE that:
“CMC Ltd has informed the Exchange regarding the news published in The Times of India dated March 28, 2007 under the heading "Tatas set for TCS, CMC merger" that : "At the Outset, we wish to inform that CMC Limited does not have any plans or its Board of Directors has not discussed anything related to merger with TCS or any other Company till date".
Considering these two statements of the company, we may, for the time being at least, conclude that it was the media speculation that led to such a price rise in CMC. If you have read my previous article, “Sectorwise performance – myth or miracle?” in which we saw how the market moves based on expectations, one may get the impression that there was some news to be heard. However, so far there hasn’t been any.
Hindalco Industries Limited:
Owned by Aditya Birla group, it is one of the 50 index stocks in the S&P CNX Nifty. Aditya Birla group holds 27% stake in Hindalco. Foreign Institutional Investors hold 20% while financial institutions hold 12%. 10% stake is with GDRs (Global Depository Receipts) and the remaining is held by retail investors.
On 12.02.07 NSE web site displayed the following announcement:
Hindalco Industries Ltd. has informed the Exchange on February 11, 2007 that:
"Hindalco Industries Limited and Novelis Inc, the world's leading producer of aluminium rolled products today entered into a definitive agreement for Novelis to be acquired by Hindalco in an all cash transaction at approximately US$ 6 Billion, including approximately US$ 2.40 Billion of debt. Under the terms of the agreement, Novelis shareholders will receive US$ 44.93 in cash for each outstanding common share. The agreement is subject to customary closing conditions, including shareholder and regulatory approvals, and is expected to close by the third quarter of 2007".
What was the market reaction? See the chart below.
On the day the announcement came, the stock had lost 14.13% on closing basis. We can see that the “good news” announced by the company was “badly” received by the market.
On 04.06.07 there were reports that Canadian company Alcan may team up with Sterlite for a hostile takeover bid for Hindalco. The stock was up almost 15 rupees (previous close to high) eventually to settle 4% up at the end of the day on closing basis.
Interestingly, Hindalco itself was rumoured to be in talks with global mining giant BHP Billiton for a joint bid to acquire Alcan earlier. US aluminium giant Alcoa had offered USD 73.25 per share for Alcan on May 7. On May 23, Alcan rejected the USD 27.6 billion takeover bid from Alcoa, which could have created the world's largest aluminium company.
The market reacted very badly to Hindalco’s acquiring Novelis Inc. whereas for Alcan’s possible bid to Hindalco it reacted positively. But experts feel that they do not foresee the deal going through, as it was an Aditya Birla group company and taking over a company of this size and stature would be very difficult.
However nothing can be considered final unless officially confirmed or denied by the company authorities.
Patni Computer Systems Limited:
This Mumbai based software major was among the media speculation last month. On 19th May 2007 some media reports suggested that Patni Computer Systems are planning to sell 25% stake to IBM. There was another report suggesting that former Wipro vice chairman Vivek Paul was willing to take a stake in the company. The stock probably had already run up expecting some news as displayed in the chart below:
It can be noted that the stock had gone up from 375.40 on 02.04.07 to 514.75 on 17.05.07. When the media was speculating about the stake sale, the volumes were not much; nor the prices were spurting reasonably well. This indicates that the market was probably aware of something happening.
On 22.05.07 NSE web site made an announcement:
“News Verification : The media had reports on May 19, 2007 that Patni Computer Systems Limited IBM may acquire around 25% stake in the company. The Exchange, in order to verify the accuracy or otherwise of the information reported in the media and to inform the market place so that the interest of the investors is safeguarded, had written to the officials of the company. Patni Computer Systems Limited has inter-alia replied. "We wish to clarify that the Company has not received any intimation from any large shareholder to offload any stake to any of the companies referred in the said news article."
The Patni family holds 43.97% stake in the company according to shareholding pattern made available to public on NSE web site. The media speculated that “there were some differences between Chairman Narendra Patni and his brothers Ashok Patni and Gajendra Patni and as a result some senior management people have left”.
Finally the Chairman sent an email to the employees saying that the company had no plans to sell stake to anyone. It also said that the company policy was not to comment on media speculations.
Conclusion:
Media always speculate. It is very hard to find the truth in these rumours. It is the company which is aware of all facts and they do publish them in the media as well as communicate to the stock exchanges as and when it is needed. The investors need to be careful while acting based on media reports.
Takeovers, mergers etc. will have to be approved by the board and will eventually be known to the public officially.