The investing theme

Krishnan Thiagarajan

THE year 2001 was dominated by three trends - open offers by MNCs to take companies controlled by them private; hostile takeovers; and disinvestment. Another key trend - share buybacks - failed to generate much interest in the market as most of these were open-market buybacks in which the timing of the stock market purchase was left to the discretion of the management.

In a significant measure, these trends truly reflected the bearishness of the market. And the poor valuations of most of the bellwether and second-rung stocks listed on the Bombay and National Stock Exchanges (BSE / NSE) triggered some of the trends in the different constituents of the market. Most of these stocks featured under different heads in this article figure among the top gainers or losers in 2001. But practically all of them witnessed inspired price surges and robust trading activity following the announcement of these events. However, the stock price movements were a mixed bag, post-event, sustaining in some and petering out in others.

Outright acquisition by MNCs

After being on the backburner for almost three years, the trend of outright acquisition of 100 per cent equity stake in MNC stocks in India by their parents (or persons acting in concert) made resurgence in 2001. The spate of 'voluntary' open offers, set off by Philips India late last year, gathered momentum during the year, averaging almost one a month. Citing the corporate philosophy of their parents and the limited liquidity of these stocks at the Indian bourses, some of the high profile MNCs that have announced open offers include Wartsila NSD, Sandvik Asia, Otis Elevators, Carrier Aircon, Cabot India and ITW Signode. In most of these cases, the offer price was at over 50 per cent premium to the current market price, andd in some even 75-80 per cent higher. With such steep premia, there was active trading and a sharp ramp up in most of these stocks in the run-up to the public announcement of these offers.

For instance, on May 10, the Carrier Aircon stock traded at Rs 54.90. Around this date, a formal intimation was made to the BSE by Carrier Aircon that its parent, Carrier International Mauritius, was planning to enhance stake from 49 per cent to 100 per cent at an offer price of Rs 100 per share. As the stock was trading at an 82 per cent premium to the current market price, in four straight trading days, this price differential was narrowed down considerably. By May 15, the stock was trading at Rs 95.90. Similarly, even in the case of Wartsila India, the open offer by its Finnish parent, Wartsila Corporation, elicited similar response. Between August 29 and September 03, the stock rallied from Rs 69.05 to Rs 116.35 in response to the open offer. The Finnish parent had made an open offer to raise its stake from 49 per cent to 100 per cent at an offer price of Rs 120 per share.

Hostile bids to unlock value

The bearish sentiment in the stock market set the stage for a few hostile bids by corporate raiders seeking to exploit the poor valuations and unlock value for shareholders. As several companies traded below their book value and the stock prices did not reflect the true intrinsic value, the market was ripe for hostile bids. And the raiders did not disappoint. The first major takeover battle was by Renaissance Estates (represented by Abhishek Dalmia) for GESCO Corporation. This battle started in early 2000 but played itself out in early 2001. This deal marked a watershed as the GESCO stock witnessed a three-fold appreciation by early January, in less than three months from the start of the takeover battle.

This was followed by a hostile bid for VST Industries by Bright Star Investments (represented by Damani Brothers). This battle started in February this year and by the time this takeover battle ended, the VST Industries stock had surged from Rs 92 in February to a high of Rs 160 in late June, a week before the offer closed. These takeovers impacted such stocks as Jaiprakash Industries and Ballarpur Industries, seen as takeover candidates.

But interest in them soon fizzled out. Towards the end of the year, Forbes Gokak became a hostile takeover play, with the powerful Shapoorji Pallonji group locking horns with a low-profile businessman, Pawankumar Sanwarmal, for a 20 per cent equity stake.

But the number of active hostile takeover offers was limited because in most corporate groups, a chunk of the equity was held by promoter-families. And there was hardly any activism on the part of the financial institutions - the other major shareholder in most of these companies - to make the bidding process active.

Finally, following the first wave of hostile takeovers, Corporate India began intense lobbying to keep raiders at bay. And SEBI capitulated by enhancing the limits for creeping acquisition to 10 per cent till March 2002 and relaxed the buyback rules to slow down the hostile takeover market.

The disinvestment hope

The disinvestment exercise was progressing in fits and starts till late 2000. The year 2001 was expected to be different, with the disinvestment slated to gather steam. Announcing the 2001-02 Budget, the Finance Minister set a ambitious disinvestment target of Rs 12,000 crore for the year; never mind that the 2000 target of Rs 10,000 crore was not achieved.

Apart from some key government-owned unlisted companies, such as Air India and Indian Airlines, some high-profile listed companies lined up for disinvestment this year included CMC, VSNL, IPCL, IBP and Hindustan Zinc. Though the problems associated with the Balco valuation came as a dampener to the disinvestment process, the expectations ran high. Since speculation has been the lifeblood of the market, every time these companies figured in the news, either positive or negative, their stocks saw active trading.

Starting with the successful disinvestment of a 51 per cent equity stake in CMC to Tata Sons: In line with the expectation, the CMC stock remained firm and an active trading counter through the year. In early October, Tata Sons entered into a share purchase agreement to acquire 51 per cent share of CMC at Rs 196.73 per share.

However, CMC had to come out with an open offer at Rs 281.26 per share as the average of the 26-week price, according to the SEBI Takeover Code, was higher than the negotiated price of Rs 196.73. This 43 per cent premium to the negotiated price offered a bonanza to the shareholders of CMC.

Unlike CMC, the VSNL disinvestment has been a roller-coaster. Early on in the year, the Government was committed to offering a 25 per cent stake to a strategic partner and relinquish management control.

But in May it appears to have suddenly realised that VSNL was sitting on reserves and surplus of Rs 5,000-5,500 crore which would be handed over the strategic partner on a platter.

Most of the year passed in draining out VSNL's reserves. In two tranches of special dividend - one in July of 400 per cent and the other in December of 750 per cent - VSNL was stripped of some Rs 3500 crore of reserves. And these changes had an impact on the stock price movements. Most other disinvestment candidates, such as IPCL, Hindustan Zinc or IBP, have also been caught in the policy changes.