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Takeovers: Essential for a healthy market

Nov 23, 2000

The recent takeover attempts in Bombay Dyeing and GESCO Corporation has raised many a debate and much lobbying by interested parties. While much of that has centered on the promoters or the raiders, the small investor appears largely sidelined. Value investors, small or big, essentially view takeovers as a catalyst to realising or unlocking the ‘hidden or unrecognised’ value in a company. Essentially, they have two clear options in a takeover:

  • Cash out at an opportune level as the promoter and raider bid up the prices either through the open market or through the open offer route.
  • Stay with their investment if they see either the raider or the promoter whoever has been successful, taking corrective measures to address the undervaluation of the stock.
In India, value investors have not had a very smooth ride, especially in the recent years with shares of even blue-chip industrial companies languishing at low prices. Promoter groups who are now crying foul have done precious little to correct the undervaluations that have persisted for a long, long time. Infact, many Indian promoters have actually benefited from the undervaluation, as the cash rich promoters have been able to increase their stake in their respective companies at very low prices, through the creeping acquisition route. Meanwhile, the small investor has had to go through the pain of seeing the value of his investment deplete to levels that often leads to despondent selling.

When share buy backs were cleared, there was much fanfare and enthusiasm. Much was talked about returning excess money to shareholders, boosting return on equity etc. Many companies even went ahead and moved enabling resolutions. However, there has hardly been any serious buy back programme to really talk about.

Whether Bajoria or Dalmia are successful in their attempts is immaterial – but this is a clarion call to Indian promoters who have cared little for minority investors in the past. The message on the wall is crystal clear – 'shape up or ship out'. Hopefully, we will see a renewed vigor in investor friendly share buy back programmes, proactive restructuring and all such measures that will unlock the value in many of our undervalued so-called ‘old economy’ stocks. But for that the regulator has to ensure that takeovers and especially hostile takeovers reach their logical end through a fair transparent process.

In the Indian context, hostile takeovers may not turn out to be a bad thing! Till such time, we may continue to see the market polarised towards a few ‘growth’ stocks.

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