The Hindu Business Line : Takeovers: Tale of three knights

In a market on the downtrend, the stock of Orchid Chemicals has given investors 30 per cent returns in a week! Reason: It might be a plausible domestic acquisition target.

If rumours are to be believed, Solrex Pharmaceuticals, a group company of a domestic pharma major, has accumulated a large chunk of Orchid’s shares to pave the way for a takeover. Even as terms such as hostile takeover, white knight and poison pill fly around, to the young investor like you, they remain largely unexplained. To truly understand the wacky world of takeovers, read on.

Bid to win

In takeover parlance, Orchid Chemicals could be best described as the ‘target’, while the company that is trying to acquire it, is labelled as the ‘bidder’.

Compelling synergy, financial savings and strengthening competitive advantage are some of the strong factors that drive companies to go for acquisitions. Before the bidder makes a formal offer to the shareholders of the target company, it usually informs the management. If the management of the target company agrees with the offer, the takeover is considered ‘friendly’.

It helps common shareholders to know that the management is fully backing the takeover bid. In a sense, takeovers of companies, where promoters hold majority stakes, have to be friendly. However, management of companies whose promoters’ stake is low cannot expect the same kind of treatment.

Hostile takeover

In bear markets or when prices of smaller companies’ shares fall rapidly, attractive takeover opportunities crop up. Equally, there are many instances where the management of the target rejects a takeover proposal. A situation where the target firm rejects the offer does not alone qualify as a hostile takeover.

When the management of a target firm rejects a takeover offer, it could mean two things. One, it considers the offer price to be too low. In mergers and acquisitions, disagreements over price are common and it is, perhaps, both in the interests of the target and, also, the acquirer that the ‘right price’ be paid.

A hostile takeover is a situation wherein the target firm does not want to be acquired at all and strongly resists any takeover attempts. A company that makes a hostile takeover offer on a target company is called Black Knight.

Knights in armour

In the ensuing drama that is often repeated in acquisitions, the entrance of a second suitor/bidder is always possible. When, in fact, a second and unsolicited bidder enters the takeover saga, that new entrant is the classical example of what is called a grey knight in the wacky world of M&A. Often, a competitor of the first bidder finds the same value in acquiring the target and hopes to take advantage of any conflict between the first bidder and the target company.

But knights are supposed to be chivalrous, aren’t they? Yes, in fact, a white knight is exactly the type that we are looking for. A company that has a low promoter holding is bound to look for support and may even be willing to make a small compromise.

Enter white knight — a company that makes a friendly takeover offer to a target company that is facing a hostile takeover from the black knight. Often, the white knight appears on the scene at the behest of the target company. Maybe the promoters have conceded to the fact that they, if they have to get acquired after all, might as well choose a better suitor that suits them!

In the high-profile international takeover drama surrounding Yahoo! — software giant Microsoft at first tried to sell itself as a friendly bidder. However, Yahoo found the offer a gross undervaluation of their company, which sent the ball back into Microsoft’s court. Search engine behemoth Google and AOL appeared as white knights to help Yahoo brush off Microsoft, if it were to become a black knight as it has reportedly threatened to go ahead with a hostile takeover.

According to latest reports, Rupert Murdoch led News Corp is also keen in Yahoo! which makes it the grey knight. The situation could get real interesting if black knight and grey knight get together!

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