It is a bit unfortunate that Larsen & Toubro Ltd’s bid for a relatively well-run company like Mindtree Ltd, a software firm that has rewarded its shareholders well over the past 10 years, has come to revive lost interest in the business of hostile takeovers in India. Given the poor track record of many Indian promoters and the consistently poor returns they have been giving their shareholders, India needs more such buyouts, though it obviously helps if they are congenial. Over the last 20 years, the compound annual growth rate of the National Stock Exchange’s Nifty has been only 13.4%. Lurking in the list of companies that compose this index are laggards that have made lousy use of scarce capital, not to speak of other publicly listed duds. The threat posed by a barbarian at the gates is often well deserved; it serves lazy bosses a warning to either shape up or ship out. What holds good for acquisitions in general applies to hostile ones as well. Successful takeovers result in better use of an acquired company’s resources, higher profitability and enhanced returns for shareholders. To the extent that a shift in command infuses a firm with new ideas, generates dynamism and ups efficiency, it is to be welcomed.
The West woke up to the excitement of hostile takeovers in the 1980s, after the leveraged buyout of RJR Nabisco by investment bank KKR. In India, however, the idea has taken a long time gaining approval. In the pre-liberalization era, government policy rendered hostile takeovers well nigh impossible. The government’s role has since been reduced to ensuring adherence to India’s Takeover Code, but unsolicited buyout bids remain few and far between. This is partly because most Indian companies are closely held by promoters, so acquiring control is difficult and minority shareholders stay largely passive. In most family-run Indian companies (and that’s over two-thirds of all businesses), for example, the family retains a controlling stake. Moreover, many provisions of the Takeover Code work in support of existing owners. This being so, would-be acquirers prefer to negotiate win-win deals with those in charge of their target companies rather than threaten them by going directly to their shareholders. With ownership dispersal, however, that could change.
The dim view taken by some citizens of corporate aggression has also gone against forced shifts . They got off to a bad start in the 1980s, when Rajan Nanda of Escorts Ltd and Bharat Ram of DCM appealed to nationalistic sentiment to ward off the London-based businessman Swraj Paul’s designs on their respective companies. While Paul was thwarted with a little help from the government of the day, the affair seemed to have cast a voodoo spell on hostile takeovers in the country, with only half a dozen such instances in the last 25 years. In most of these cases, notably the 1998 acquisition of Raasi Cements by India Cements or the failed takeover of IVRCL by the Essel Group in 2012, the absence of a dreaded “outsider" made matters easier. A true test, however, would be upon us if and when a large multi-national or a non-resident Indian were to make a predatory advance on a big homegrown company with wide ownership that’s considered almost genetically swadesi(several examples come to mind). For now, if L&T does get to acquire Mindtree, it might kickstart an activity that could shake Corporate India up—for the better.