The Hindu Business Line : The how and why of open offers

Accepting an open offer will depend on attractiveness of the price, average price of the unaccepted shares, business prospects after a new owner comes in and tax-implications.

To accept or reject…that’s the question. — Bijoy Ghosh

S. Hamsini Amritha

India Inc’s brush with mergers and acquisitions has resulted in many open offers being made in recent times. In the last one year alone, there have been as many as 100 open offers. Most recently, Tech Mahindra too will be joining the open offer bandwagon, after its 31 per cent acquisition of Satyam Computer Services.

Hence it becomes imperative that investors educate themselves with the nitty-gritty of open offers so as to make informed decisions on tendering or retaining their holdings in a company. Read on to find out what open offers are, what triggers them, and how investors should assess them.

Open offer is an exit route given to the existing shareholders by the acquirer of shares through a public announcement.

Why open offer?

Whenever there is a takeover or a substantial quantity of shares (15 per cent of outstanding shares) or voting rights of a listed company being acquired, SEBI’s regulations require the acquirer to provide an exit option to the target company’s shareholders.

As there may be a management change post-acquisition, investors are given a right to exit in case they perceive risks to the business that they didn’t bargain for when they bought the stock. The acquirer makes an open offer to buy shares to the extent of 20 per cent of the share capital from the public, at a particular price, during a defined time period.

Japanese pharma giant Daiichi Sankyo had agreed to buy a 34.8 per cent stake in Ranbaxy Laboratories. But soon after it acquired the stake, Daiichi, in keeping with regulations, made an announcement to mop up an additional 20 per cent. It offered to do so at an offer price of Rs 737 per share to Ranbaxy’s public shareholders.

Offer Price

The offer price at which the acquirers buy shares from the public is typically the higher of the rate at which shares were acquired from the promoters or the average price at which shares of the acquired company traded over a six-month period preceding the offer. But in the case of Tech Mahindra’s recent acquisition of 31 per cent stake in Satyam Computers, the dynamics of pricing may be a tad different.

Wondering why? Well, if Tech Mahindra were to follow the usual mandate, the offer price cannot be below Satyam’s 26-week average share price. And if this is strictly adhered to, then the price would work out to Rs 262, way above the stock’s current market price.

This problem has been sorted out with special permission from the regulators even before the bidding was done, and Tech Mahindra’s bid price (Rs 58 for a share) would be the open offer price.

While most open offers announced in 2008 were priced at a premium to their then prevailing stock market prices, they have largely failed to prop up the stock price. For instance, take Ranbaxy whose stock was trading around Rs 520 before the announcement of open offer at Rs 737. By the time Daiichi wrapped up the offer, the stock price had plunged to Rs 480.

Why the disparity?

The movement of share prices after the announcement of an open offer depends upon the acceptance ratio that the market computes for the open offer. Acceptance ratio is the ratio of shares that are likely to be accepted by the acquirer mopping up shares through the open offer route.

In the case of Ranbaxy, non-promoter holding was over 60 per cent when Daiichi announced its intent to purchase a 20 per cent stake. The acceptance ratio was just around 33 per cent, a low figure, which meant that if an investor tendered three shares, one may have been accepted. Since the buyer would have to hold on to the other two shares that were not accepted, the current market price reflected this reality.

On the other hand, a high acceptance ratio of about 55 per cent improved the performance of NDTV stock during the offer period (June 2008) by 20 per cent. Similar is the case with the Indo Tech Transformers in which Mexico-based Prolec-GE, which recently offered to buy 20 per cent stake through an open offer priced at Rs 406. An attractive acceptance ratio of 43.8 per cent has helped the stock move from Rs 299 (March 31, 2009) to Rs 320 (April 17, 2009).

The bull market rallies in 2006 and 2007 saw many successful open offers, where the market price went well over the open offer price.

One such stock was Alfa Laval’s. Its Swedish parent, Alfa Laval AB, was forced to revise the open offer price to Rs 1,300 after a lukewarm response to its previous offer price of Rs 875 in May 2007.

But do remember, open offers come with high tax liability. This is because an open offer is like a private deal between you and the acquirer (your shares aren’t offered for sale in the open market such as BSE and NSE).

So since you don’t pay security transaction tax on the sale, long term gains become fully taxable, short term gains are taxed at slab rates for individuals (as against the flat rate of 15 per cent).

Accepting an open offer will depend on a variety of factors such as the attractiveness of the offer price, the average price of the unaccepted shares, the business prospects after a new owner comes in and tax-implications. Do a thorough analysis of all these before taking a call on tendering or holding back.