The Hindu Business Line : Grasim's open offer: Will the L&T board stand up now?

IN ALL the hectic activity surrounding Grasim's open offer for Larsen and Toubro, what stands out is the rather timid approach of the L&T's board of directors. The open offer at Rs 190 per share by Grasim was put on hold by the Securities Exchange Board of India (SEBI) pending investigations into the deal including "change in control''.

As soon as the open offer was announced, there was a widespread, and well-founded, view that the price was low.

In general, in takeover situations, the premium for corporate control has been anywhere between 100 per cent and 150 per cent of the market price levels in most deals of consequence. Significantly, Grasim had paid Rs 306.6 per share to Reliance to pick up its initial stake of slightly more than 10 per cent.

One would have expected the professional board of directors of L&T (which also has two Birla group nominees) to have felt similar outrage on the price. Even the normally staid financial institutions were quick to dismiss Grasim's open offer. In this backdrop, one would gave expected a more active approach by the part of the L&T board. It had a clear option open before it even when SEBI had not yet stayed the offer. It could have announced that a committee of directors was being constituted to evaluate the open offer price and provide more informed guidance to shareholders.

SEBI's Takeover Code allows for a recommendation by the board of directors of the target company in a takeover situation.

It can possibly lead to a revision in the price. In the Grasim open offer instance, there were several issues which the L&T board could have taken up for examination and informed shareholders. Some are:

Was the price appropriate? If so, the reasons should have been clearly expressed to the investors, who had received the offer price in an extremely lukewarm manner.

What were the implications of Grasim getting a 35.5 per cent stake (even if one were to assume at face value Grasim's intent declared in the open offer that it did not want control)? And what would be the implications if Grasim starts calling the shots from a firmer footing than is the case now?

The de-merger of L&T's cement business has been in the pipeline for long. After a serious approach to getting this process actively moving, it seemed to go into cold storage following the acquisition of stake by Grasim in November 2001. L&T was planning to offer a 37.5 per cent stake to a strategic investor and 25 per cent to L&T shareholders. A few MNC majors had showed interest. It is quite possible that this exercise would have unlocked value for shareholders and freed cash flows. It may also have improved the valuation of L&T's other businesses as cement has been a drag on earnings. In a takeover situation, the shareholders clearly had a right to know what the L&T board's position on this issue was. If indeed the de-merger plan is still alive, what were the implications of a competitor's nominees sitting on the L&T board?

After the Grasim stake acquisition, what were the nuts and bolts of the co-operation between the two on the ground and what were their implications for the de-merger plan?

Shareholders also deserved to get a view on what the L&T board thought on the price differential between the one offered to Reliance and that for the open offer.

Till SEBI stayed the open offer, there was enough time to announce a board committee to critically examine these issues. Such an approach would have at least had the effect of signalling that the L&T board was indeed independent and would view any takeover offer in an objective manner.

Takeovers happen rarely in the lifetime of big companies and every such occasion should be used to secure the best possible benefits for shareholders from the would-be acquirer. Thanks to SEBI, the L&T board still has time to show some gumption and try and get a better price for its shareholders.

If SEBI rules that an open offer is not triggered on change in control, Grasim's announced offer at Rs 190 per share would be activated. The L&T board must gear up to face this situation. It must constitute a committee of independent directors with the best possible expertise to put this offer price through the wringer and tell shareholders what they think of it.

The actual communication can be done after SEBI announces its decision. But there is no harm in getting started at least now. Finally, it is for the shareholders to decide. Will the L&T board stand up and be counted? If it does, it would do a world of good to the manner in which boardroom matters are carried out in India Inc.

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