L&T : Story of hostile takeover and rescue

( As the story was so old, it is hard to find the information about it. But this is very important in the history of Indian corporate world as it is one of the few incidences, where Reliance industries failed in whatever it decided to do. The source for this post are Business Standard, Wikipedia and a Blog post which helps a lot. There are so many peoples including in it and all the names are real.)

Larsen & Toubro Limited, also known as L&T, is an Indian multinational conglomerate headquartered in Mumbai, Maharashtra, India. It was founded by Danish engineers taking refuge in India, Henning Holck-Larsen and Soren Kristian Toubro, with the help of Indian Financial Institutions Like LIC, UTI etc. It was one of the biggest Conglomerates in India which was on Nifty from Day one. One of the best company operating in such a diversified business. From Finance, Defence to IT, from Infra to Shipbuilding, Switches, Real estate. As Usual, in business world, too much good is best story for growth. It is what happen with L&T. In its first days, the company if performing best, then the possibility is that Any other big company will try to acquire it. If target was ready to accept the bid, then most of the time it was good for both. Both of them work with each other and make synergies. But if target is not ready then it comes to hostile takeover. Most of the time it is bad for bidder as they don’t receive full information and possibly end up paying excess for Goodwill. Hostile takeover is hard to see in India due to many reasons and only one was successful. It was Rassi Cement acquired by India Cement. All because of this; This story is important.


Manohar Rajaram aka Manu Chabriya

It all started in a day in 1987. Manu Chabriya, Dubai based NRI businessman acquire one per cent shares in L&T. It is not only with L&T, but he was buying stake in some more companies. There is one more story about it as Mr. Vijay Mallya was claimed that he was partner in this. But that was different story. Mainly with Shaw wallace. But it was different. Even though Mr. Mr Mallaya make one engineering company under his UB group.

That time, L&T was not so big. It was a small firm but having a huge potential for growth. Chabriya’s entry was not welcomed by Indian corporate world. Reasons are many. One is he don’t have faith on any one. Even on his own firms managers. So the then chairman of L&T, Mr. N M Desai, realise that it is difficult to work with him if he acquire them Fully. It was difficult for market to forget 1982 instance where Dhirubhai Rescued Reliance from a bear raid. So, Mr Desai ask for help from Dhirubhai and request them to act As WHITE NIGHT. For Dhirubhai, It is a chance to work on his strategy of Acquisition of Supplier which was one big reason why Reliance success upto certain limit. There was no Promoter on L&T, No one have holding big Stake personally in it and it was ran by state linked Institutions. He made many acquisitions like it before. It is same for him as L&T that time was a Supplier of Reliance. So he agreed for help. Reliance acquired 12.4% shares from open market. In next couple of months, it went on 18.5%. Reliance spent 190 Crore in nearly one year. ( Securities and Exchange Board of India was not exist that time).

In next few days L&T realise that it is not a picnic and Mr Dhitubhai Ambani is not that person they was thinking who fits in the definition of White Night. Dhirubhai make seats for his son’s and himself as board of director. April 1989. Dhirubhai became chairman. Mr. N M Desai Paid the price for his defensive strategies. L&T was not only important for Reliance as supplier, but also The cash on balance sheet is big asset. (L&T WAS BUILDING THE HAZIRA PETROCHEMICAL PLANT. AFTER THIS ALL THE COST IS REDUCED.) As chairman of L&T, one of Ambani’s first decisions was to ask the company to grant RIL supplier’s credit of Rs 570 crore. The cash-rich construction company was also asked to buy RIL shares worth Rs 76 crore from the market from entities close to Reliance. Another controversial decision by Dhirubhai Ambani was to make L&T take on more debt. But the party soon ended for the Ambanis. Democracy show its strength…

Democracy is very great thing. It make changes very easily. And Ambanies knows it very well.

1989. It was that year where Congress face one of the big defeat. Janata Dal come on power. Vishwanath Pratap Sing takes Charge as Prime Minister. He was that person who start the process of liberalisation in the India after Congress gets massive mandate in 1984 general election. He was appointed as finance minister, in that time, he oversaw the gradual relaxation of the Licence Raj (governmental regulation) as Gandhi had in mind. He was that person who raided Reliance and Gave huge power to Enforcement Derectorate under Finance ministry. It is sure that it’s not easy for ambanies to acquire L&T. After coming as Prime Minister,The V. P. Sing government immediately asked state-owned Life Insurance Corporation, the dominant shareholder, to make sure that the Ambanis were out of L&T. Dhirubhai Ambani was forced to resign from the board and former State Bank of India chairman D N Ghosh (Writer of No regrets) was asked to replace him as Chairman of L&T. At the same time, The indian Express, Newspaper ran by Ramnath Goenka, start a series in which it expose many frauds. L&T case was one of it. It found that the take over had been effected by financial Institutions like Life Insurance Corporation, General Insurance Corporation, Unit Trust Of India sold their shares. As it is not allowed to sell to private parties that time, Indian Express alleged that whole operation was fraudulent. Mr Arun Shouri, Disinvestment Minister in Atal Bihari Vajpai government, was also working on this case. Meanwhile, New chairman D N Ghosh start his work and start Offloading the shares of Reliance which Dhirubhai told previously to L&T to buy from peoples nearby Dhitubhai. It also withdrew the suppliers Credit to Reliance. Even though, Anil and Mukesh was on Board of Director, Dhirubhai Realise that it is impossible to win against such a hostile Government, as Government Owned Institution’s was Holding majority stake.

I think ambanies are one of the luckiest family on earth. In 1990 V P Sing’s minority government was collapsed and Chandrasekhar became Prime Minister. He was that person who linked closely with Ambanies. All because of it, Mr ghosh, Chairman backed by government, was asked to resign. The matter went to Supreme Court but Supreme Court also ruled in Ambani’s favour. Again Democracy played it’s role. In 1991, P. V. Narsimha Rao led Congress government come into power. Ambanies at that time have sufficient Holding and Proxies to make Dhirubhai as chairman and Mukesh Ambani as Managing Director. But as the Government is in minority and Big issue was economy. India was facing Balance of Payment Crisis and hence, Rao decided not to play active role in this issue. In fact, following orders from the then finance minister Manmohan Singh, LIC sought an adjournment of the Extraordinary General Meeting in August 1991 which was to vote on bringing Ambanis back to L&T. Shareholders close to Ambanis, however, refused to vacate the hall.By then, the Ambanis also realised that it would not be possible for the Congress-led minority government to openly support them. Hence, by September they decided to stay away from management of L&T and dropped resolutions to be installed as chairman and managing director. But even after this all, Ambanies maintain their stake in company and remain as Passive Investors for a decade. Nothing big happen up to 2001. In 2001, November. Ambanies shocked the market with the decision to sold their remaining 10.5% Stake To K M Birla’s Grasim, competitor of L&T in Cement business. But now, nothing was similar this time, L&T was ready to fight. They have a great leadership Named A M Naik… A M Naik, the doughty CEO & MD of the company appointed only three year before. Born and educated in a Gujarat village, Naik was not to be cowed down by the corporate raiders. He soon rallied L&T employees behind him and exhorted them to take destiny in their own hands. Instead of remaining servants to others, Naik asked his employees to become owners of the company. “We should perform so well that it should become impossible for anyone to buy shares in our company because good results will make the stock expensive,” Naik told them. Third Part of the drama Wa ready to start.

Grasim, one of India’s largest private sector companies and is an Indian building materials manufacturing company based in Mumbai, Maharashtra. It was started in 1948 as a textile manufacturer. Now working in 12 countries among 4 continents. But that time it was not that much big, neither it was a big name in Cement Industry. The company was planning to grow and expand its business. No issue that everyone else, company decide to grow inorganic way and was finding a target for acquisition. And they find one in L&T. But they forget that now the time has changed. Now there are 2 Super hero’s protecting L&T. First is, of course, Mr Naik. Chairman of the Company. He was started to change the company with his ways. Before Him, L&T was only operating in Infrastructure, He was the man who started many other Business. With all of it, now L&T is much stronger then before. Another hero is not a human, but a Regulator of Capital market. SEBI. Setup by Government for regulating capital market in India and protecting investors from any bad practices. With all of it’s Rights, the controller, was ready to stop anyone who affects the atmosphere in capital market.

The fight in between Birla and L&T started when Ambanies sold their stake. It does not make any issue if they sold it near the market price of L&T. But they sold at 46% Premium. Game changed….

Mr. Naik realise that Birla want to acquire the company all because of their cement segment and possibly cash. It is not impossible for Birla’s that after the acquisition, they accept the strategy of Asset Stripping. Possibly Employees will told to leave. Naik fought Birla’s entry into the company tooth and nail and made representations to everyone from the prime minister to LIC to let L&T retain its professional management culture. But the big battle is going on in between SEBI and Aditya Birla group. As the price was so high, SEBI told to Birla’s that don’t go ahead with the plans. From Reliance entry, this issue was favorite with Journalist also. Some of them came up with saying that Birla group is breaking the Takeover code set up by SEBI. According to SEBI ‘s takeover code norms, the acquirer company (Grasim) is supposed to make an open offer to the shareholders of the target company (L&T) at the average prevailing stock price of the company in the last 26 weeks. The price at which Grasim purchased the Reliance stake in Grasim was Rs 304/share, which was 47% or nearly ?100 high then average. But by the time the open offer came up, the L&T stock was trading much cheaper and the Birlas could make a bid for the additional stake in L&T (Held by shareholders) at a much cheaper price. Small shareholders cried foul and moved heaven and earth to make K M Birla, The Raider pay more – the same Rs 304/share it paid to Reliance. On November 21, Grasim’s lawyers sought an interim stay on SEBI ‘s November 11 order putting on hold its plans for an open offer of up to 20 per cent of L&T’s shares that had been public announced on October 13 – interestingly, at a time when both Naik and Ramakrishna, top management peoples, were out of the country. Whereas the public offer was to open on December 9, Sebi’s lawyers claimed before the SAT on 21 November that it had fresh evidence to justify its direction to Grasim to stay its public offer of L&T shares. On 24 November 2001, Kumar Mangalam Birla and Rajshree Birla were inducted on the board of directors of L&T. On 27 December that year, Sebi sought details of the Grasim-Reliance share deal following allegations of ‘insider trading’. After all this battle, finally Financial Institutions also realised the value of this company. And they decided to increase their stake. But after some time, there was a fiasco of UTI. So UTI splits into 3 parts. Government acquire shares of L&T. So only LIC raised its stake. Here fight with Birla went in front of Securities Apiliate Tribunal. But there was no effect. It was reversed by SAT.

Finally Naik achieved the success. He successfully talk with Birla’s and make them ready for a deal. Spinoff, or Restructuring, or Vertical De merger takes place. After all this, L&T Make its Cement making decision and make it as different entity with name of CEMCO. IT GIVES SHAREHOLDING ON THE BASIS OF % SHAREHOLDING IN PARENT. Grasim evaluate Cemco and come up with open offer for increasing its stake in Cemco. After that Grasim sold their stake in Parent L&T to L&T employee association. All this deal valued at ₹2200. Next is the declaration from both companies, during the deal. The complex deal has been structured in different phases and envisages the spin-off of L&T’s cement division into a company first, followed later by the acquisition of control by Grasim.L&T will first spin off its profitable cement division into a separate company, in which it will own 20%. Grasim and the other shareholders will hold the remaining 80%, in proportion to their current shareholding in the parent company. As a result, Grasim, which now owns 15.74% in L&T, will see its stake in the cement company drop to about 12.6%. Grasim will then buy 8.5% from L&T at Rs 171.30 and make an open offer for 30% of the cement company at the same price. The offer price values the cement business at Rs 6,051 crore. If the offer is successful, Grasim will end up owning 51% in the company, which has been tentatively called CemCo. L&T’s stake will drop from 20% to 11.5% as it would have sold 8.5% to Grasim.Grasim will also sell its existing 15.7% stake in L&T engineering to employees’ trusts or foundations. L&T SOLD IT’S REMAINING STAKE IN 2009. AND A FIGHT FINISH WITH WIN WIN SITUATION. CURRENTLY L&T IS ONE OF THE BIGGEST BUSINES IN INDIA, HAVE OWNERSHIP WITH EMPLOYEE TRUST, FINANCIAL INSTITUTIONS, GENERAL PUBLIC. A M NAIK IS VERY RESPECTED NAME IN INDIAN INDUSTRY. ULTRATECH, formerly known as CEMCO, IS ONE OF THE WORLDS LARGEST CEMENT COMPANY WITH 74+ MN tonnes AND READY TO INCREAS IT UPTO 100. ENDING IT WITH A CHINESE SAYING ANYTHING WHICH NEVER KILL YOU, WILL MAKE YOU STRONG.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter