Last month, Veteran banker and Kotak Mahindra Bank founder Uday Kotak created a stir when he said that it was time for some hostile takeovers to happen in corporate India. Of the half a dozen odd hostile bids in the last couple of decades, only one—India Cements’ acquisition of Raasi Cement—has succeeded. According to Kotak, a truly developed capital market was one in which there were “people ready to do hostile takeovers of entrenched Indian groups.”
Moneycontrol spoke to Abhishek Dalmia, Chairman, Renaissance Group, who in October 2000 had made a hostile bid for Sheths-promoted realty firm GESCO. Dalmia, then 31, accumulated 10.5 percent in GESCO, and made an open offer for an additional 45 percent in the company at Rs 23 per share. In a week, Dalmia & co raised the offer price to Rs 27.
Faced with the embarrassing prospect of losing control of the company to a young upstart, the Sheths frantically scouted for a white knight. They found support in HDFC chairman Deepak Parekh, who brokered a deal between Mahindra Realty and Infrastructure Developers and the Sheths.
A bidding war ensued, with the Sheths-MRID combine making a counter offer at Rs 36 per share, and then upping it to Rs 44 per share. Not to be outdone Dalmia raised his offer to Rs 45 per share. Finally, a truce was called in January 2001, under which Sheths-Mahindra bought out Dalmia's 10.5 percent stake in GESCO at Rs 54 per share.
Nearly 17 years on, Dalmia reflects on the takeover battle and how the end game did not play out the way he would have liked it to.
Edited excerpts from the interview:
Q: What made you zero in on GESCO as an acquisition target?
We were already shareholders in GE Shipping and this was the real estate division of GE Shipping which got divested for a vertical split as a result of the family arrangement where one of the brothers got the real estate division as part of his settlement. So, we got free shares and and the balance sheet of the new company, GESCO Corporation. When we saw the balance sheet, the numbers were quite interesting. That is what started the whole process of digging deeper and seeing are there any aspects that are not visible on the face of the balance sheet. As we went deeper we found that it was an open-shut case.
Q: You said the numbers were interesting; could you elaborate?
Back in the 1990s, a company which had an Rs 500 crore market cap was regarded as a large company. GE Shipping approximately had Rs 500 crore market cap. The promoters only had about 12 percent in the company. For Rs 500 crore company to have a 12 percent promoter share holding was fine. But if you de-merge a small division whose market cap is only Rs 30 crore, and you still have only 12 percent promoter stake then things are completely different.
Secondly they had Rs 150 crore of assets and about Rs 10 crore of free cash flow every year, which was basically rental income from two buildings in New Delhi. They were reporting Rs 5 crore of profit but that was after significant depreciation which was basically a non-cash charge. Rs 10 crore cash flow, Rs 30 crore market cap, Rs 150 crore assets, doesn’t take a genius to figure it out right?
Q: Did things play out the way you had anticipated?
A: For most part it did, except the end game. We wanted to acquire a controlling stake – when I say that I mean 51 percent because promoter himself had 12 percent and 88 percent was in the market. We were indifferent to whether promoter has 12 percent or 20 percent, as long as the promoter continues to run the business because we did not have real estate industry knowledge. We wanted the promoter to continue to run the business and continue to hold his stake. Had we reached 51 percent, we would have asked for some board seats and we might have had influenced the direction of the company to some extent, of course in consultation with our partner.
However, at an operating level we had no view. Even when we started acquiring the shares, the plan never was that we will ask the existing promoter to leave. From that point of view it panned out the way we had planned because we wanted to acquire a certain stake and then talk to the promoter and say why don't we run the company together wherein we only have views on long-term and on a day-to-day basis you run the company as you deem fit. Let us just agree on what we plan to do and beyond that you run it. It sounds good on paper but the mistake was that we did not take him into confidence and it was viewed as a hostile bid and therefore it took a different turn and the end game was different from what we hoped it to be.
Q: Had you taken the promoter into confidence early on, would things have played out differently?
A: Perhaps. The promoter may still have said, look you shouldn’t be buying my shares because I will not want to work with you. I can’t say that today as to what his view might have been. What I can say is that we should have probably taken him into confidence spoken to him, understood his views and then said look this is what we intend to do. It is completely friendly, you will not have any issues, you can check out our credentials. We are third generation entrepreneurs coming from a business family which is very old and established. So, you can check our track record and derive comfort from the fact that we have no interest in real estate per se. Therefore we have no view on the real estate industry. You can continue to run the business and we continue to jointly own it. We could have had that conversation and hoped that the outcome would have been as desired.
Q: In hindsight, do you think you had cashed out a little sooner than you would have liked too?
A: No, not at all in fact by the time we reached the final position the bid had crossed Rs 150 crore market cap. which was the book value. Book value was Rs 52 per share and the finally bid was Rs 54 or maybe Rs 58. So, it was beyond book value. Basically it had two buildings in Delhi one in Bhikaji and one in Nehru Place which were earning rent. So, the value of those properties was similar to book value because they were reasonably new properties. So, once you are paying more than replacement cost then what are you buying? So we didn't think it was worthwhile to acquire a company at a premium to book value.
Obviously if you take the long-term view which the Mahindra’s did and they said that look we are in this business and we would like to use this as a platform to grow the real estate business. For someone like that it becomes an interesting platform. However for us, we were not real estate guys and we had no view on the industry at that point of time as to what can or cannot be done. So, for us it was a value play and from that point of view we sold out when we thought it was beyond value, we didn't hold on to our guns - that we have to take the company at any price, etc.
Q: Would you ever consider an attempt like this in future?
A: I would not simply because you don't end up getting what you intend to.
Q: We have not seen too many hostile corporate takeovers in India succeeding; what do you think is the main reason for that?
A: The answer simply is that we are first of all a very tolerant society; we have been ruled for 1000 years by outsiders and we still never went through a serious revolt at a national level. So we are a very tolerant society. Having said that, things are changing now, where a poor voter, does vote for a government that has a track record of good governance.
That has been a big reason why we have not seen much shareholder activism in the past. No shareholder ever raises his voice beyond the AGM to get a few gifts or dividend cheque. Even the institutional shareholders in India have basically voted with the promoter. That is partly because they are mostly government institutions with very little accountability to produce a certain quantum of return. Individual shareholders don’t have a wherewithal to fight the system especially given what the justice system is in India – you don’t get very quick justice, if you get it at all--as a small shareholder fighting an institution.
So, what incentive does a small shareholder have to stop doing what he is doing and go after a company where he may have invested some amount of money. I may be wrong but I do not know of many instances where the agencies which are meant to protect the minority investors have taken action against any company for defrauding the minority shareholders.
While we have provisions in the Companies Act for prevention of oppression and mismanagement and we have a strong regulator like SEBI, we have not seen much in the way of true protection of minority interests. Historically, even the banks, despite being secured lenders have got hurt, but not much harm has come to the promoters. So that’s just how things have been historically.
There are so many hurdles for people to get justice that they mostly prefer to sell their shares and walk.
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