Value-Stock-Plus

Informed Investing!

Investing is most intelligent when it is most businesslike - Benjamin Graham (1894-1976)

____________________________________________________________________

Value-Stock-Plus stands at No. 50 in the list of Top 100 Finance Blogs  by ValueWiki

Recognised by The Economic Times as one of the most popular financial blog

Updated! Compilation on Warren Buffett, Rakesh Jhunjhunwala & Charlie Munger
____________________________________________________________________

« Home | P/E ratio: Look beyond it! » | Of poison pills and white knights! » | Back to Basics Click here to download the report. » | Magic of Equity + Power of Compounding = ??? » | Why there is variation in global stock returns? » | Pantaloon: Double or Quits? » | Murky World of Stock Forecast » | Investing: Hare or tortoise? » | Are you buying an infrastructure story? » | The good news has been priced in: Sharekhan »

Of poison pills and white knights!

Wait! These words are not from the plot of a James Bond flick, neither they form part of the Superman's dictionary. Rather, they are part of daily parlance for M&A executives - a breed that is involved in leading the consolidation process across industries, across the global economy.

As investors in equities, you are in fact part owners of companies you invest in. And as India Inc. sees greater consolidation across sectors, these are key terms that you should be aware of. Consolidation generally happens through mergers, takeovers and acquisitions by companies. Those of you who tracked the recent consolidation deal in the steel industry, between Arcelor and Mittal Steel, a few of these terms came to the forefront. In this article, we dicsuss the two most classical ways of disrupting a takeover threat - poison pill and white knight.

Poison pill This is one of the classic anti-takeover strategies adopted by the target company. Through this strategy, the target company aims at making its own stock less attractive to the acquirer, who attempts to obtain a controlling stake in the former, and thereby gain control of the board and, through it, the company's management. In the initial stages of their parleys, in order to fend off Mittal Steel's takeover bid, Arcelor tried to use this strategy. It involved the Canada based Dofasco Group, one of the Arcelor companies. In order to prevent Mittal Steel's sale of the firm following any takeover, Arcelor had transferred ownership of Dofasco to a Netherlands-based trust.

In its most original avatar, the poison pill strategy allows existing shareholders (except the bidding company) to buy more shares at a discount. This is by way of making a rights issue of stock to existing stakeholders. The main goal of this kind of a poison pill is to dilute the holdings of the bidder and make the takeover bid more difficult and expensive.

In its most effective use, a poison pill is intended to increase the cost of negative outcome for the acquirer, thus making its target look effectively a lot pricier than what it was in its original state.

White knight This is a company that makes a friendly takeover offer to a target company that is facing a hostile takeover from another party, which is indeed called a 'black knight'. The white knight offers the target firm a way out with a friendly takeover. Severstal of Russia was supposed to be the 'white knight' for Arcelor against the takeover pitch of Mittal Steel. As per the arrangement, Arcelor purchased the 90% stake of Severstal owned by its CEO, plus all of his other steel and mining assets. Severstal's CEO, in return, received Arcelor shares and purchased more with cash, ultimately giving him a 32% stake in the world's second largest steel maker.

While these anti-takeover tactics have borne fruit in many instances in the past, they have failed in several cases as well. Arcelor's attempts to ward off the takeover are the recent examples of failed anti-takeover strategies. However, it is still to be noted that the entire exercise definitely increases the effective cost of acquisition for the acquirer company. In the above example, Mittal Steel paid almost 80% more (US$ 50 per share) in June 2006 than its initial proposal for the acquisition of Arcelor in January 2006. Also, while the Mittal family will be by far the largest shareholder in the combined entity, people associated with Arcelor will remain highly influential in the company (12 out of 18 board members are from Arcelor).

Conclusion Consolidation is the name of the game, be it in 'old economy' industries like steel and automobiles, or in 'new economy' growth industries like technology and telecommunicat ions. So, the next time you read a release that says that your (invested) company is using a poison pill or a white knight strategy to ward off a takeover attempt, you will definitely know what it is actually up to. More importantly, you may then have the opportunity to purchase more shares at cheap prices!

Source: EM

Additional Readings:
  • FIIs, MFs investments picking up, post-crash
  • Mid & small-caps maintain winning momentum
  • Long-Term Investing vs. the Hot Product
  • IT stocks reaching uncomfortable valuations: Brics
  • India better value bet; safest haven in Asia: CLSA
  • Infosys market cap hits Rs 1 lakh cr mark
  • Stability is returning in mkts: Prabhudas Lilladher
  • Analysts conflict over oil at $50 per barrel
Additional Reports:
  • Midcaps - Karvy
  • Technical Analysis - MS
Off-Topic Readings:
  • Airtel ties up with Microsoft to offer MS Office on mobile
  • Solve this case, win Rs 25,000!
  • Where India's beating China
Parting Thought:
  • It's easier to create money than to spend it. - Warren Buffett

Posted by toughiee on Tuesday, August 22, 2006 at 2:27 PM | Permalink

Post a Comment

Search


Compilations

  • Warren Buffett
  • Charlie Munger
  • Rakesh Jhunjhunwala

Previous posts

  • P/E ratio: Look beyond it!
  • Of poison pills and white knights!
  • Back to Basics Click here to download the report.
  • Magic of Equity + Power of Compounding = ???
  • Why there is variation in global stock returns?
  • Pantaloon: Double or Quits?
  • Murky World of Stock Forecast
  • Investing: Hare or tortoise?
  • Are you buying an infrastructure story?
  • The good news has been priced in: Sharekhan

Archives

  • November 2005
  • December 2005
  • January 2006
  • February 2006
  • March 2006
  • April 2006
  • May 2006
  • June 2006
  • July 2006
  • August 2006
  • September 2006
  • October 2006
  • November 2006
  • December 2006
  • January 2007
  • February 2007
  • March 2007
  • April 2007
  • May 2007
  • June 2007
  • July 2007
  • August 2007
  • September 2007
  • October 2007
  • November 2007
  • December 2007
  • January 2008
  • February 2008
  • March 2008
  • April 2008
  • May 2008
  • June 2008

About This Blog

  • Get on Mobile
  • Atom Feeds
  • Disclaimer
  • Email to Owner

Blog Directories

  • Stockblogs

Related Blogs

  • DeepWealth
  • Dardashti
  • Ridgewood Group
  • Trading Day by Day

Business Papers

  • Economic Times
  • Business Standard
  • Business Line
  • Financial Express
  • DNA Money

Business News

  • Capital Market
  • Equitymaster
  • India Infoline
  • Moneycontrol.com
  • Yahoo! India Finance
  • ICICIdirect

Results

  • India Earnings

Quotes & Stats

  • Asian Indices
  • All Indian Quotes
  • Indian ADRs
  • Indian GDRs
  • Arbitrage
  • Sector Classification
  • FII Trends
  • MF Trends
  • NSE Heat Map
  • Insider Trading
  • BC/RD
  • BM (Company)
  • BM (Date)
  • BSE Bulk Deals
  • NSE Bulk Deals
  • NSE Block Deals
  • US Indices
  • US Pre-Market
  • US After Hours
  • CBOE VIX
  • European Indices
  • Commodity/Currency
  • Nymex Light Crude Oil
  • Nymex Natural Gas
  • Nymex Gold
  • Nymex Silver
  • Nymex Copper
  • All In One

Equity Analysis

  • Kotak Street
  • Moneypore
  • Geojit
  • IDBI
  • Naviamarkets
  • ET Big Bucks
  • BS Smart Investor
  • FE Investor
  • BL Investment World

Screeners

  • Equitymaster
  • ICICIdirect

Research Reports

  • Moneycontrol

Technical Analysis

  • ICICIdirect
  • Yahoo! Finance

E-Books

  • Value Investing
  • Trading & Technicals
  • Gann
  • Elliott Wave
  • Risk Management
  • Derivatives

Misc. Links

  • BSE
  • NSE
  • SEBI
  • SEBI Edifar
  • Corp. Filings
  • WatchOutInvestors

Global Research

  • Morgan Stanley GEF
  • Hussman Funds

Interactive

  • Online Chat
Subscribe to this blog's feed
[What is this?]
Powered by Blogger