Rules of M&A Game

I am regularly watching Rules of M & A Game from last few weeks on CNBC. Its scheduled time is 9.30 pm Sunday.

Yesterday Arun Gandhi (ED Tata Sons) was in the HOT seat. He explained the various scenarios wherein they have done the acquisitions in the recent past, the most interesting being Corus deal.

Out of the entire discussion on Corus here are few points which I find more interesting from Business point of view:

- In October 2006 there were media rumors going on in UK that Tatas are interested in Corus because of which share price of Corus was fluctuating heavily in UK stock market. As per the UK takeover code rules and regulations in such scenarios the acquiring company has to make statement clarifying its stand that whether it is really interested in the target company or not. If the statement is “not delivered” then it would be deemed as if Tatas are trying to create favorable market for Corus based on false rumors and the company may have to suffer legal penalties.
And if the acquiring company makes a statement that it is not interested in the deal at this particular moment then it is not allowed to show any kind of interest in the target company for next 6 months time span. So Tatas had to come up with diplomatic statement that they are looking for several options to acquire few steel sector companies world wide and Corus is definitely one of them. Had they made statement that they are not interested then they wouldn’t be allowed to show any interest for next 6 months. And at the same time few Russian steel giants were going through fund raising through IPO so the entire steel sector scenario would have been completely different than what it is today. Perhaps Russian giants would have entered into the game and could have successfully spoiled the party for Tatas. So the timing was crucial for Tatas when they came up with statement of their interest in Corus.

Why Tatas paid 608p per share?
- There were total 9 rounds of auction after CSN and Tatas entered into tussle to take over Corus. In first 8 rounds each bidder has to bid atleast 5p more than the previous bid. Corus’s bids were fluctuating heavily…like some times they were bidding too high and sometimes just 5p above Tatas. But Tatas always restricted there bidding to 5p more than what Corus was bidding. However in the last round i.e. 9th round there was no any compulsion to bid 5p more. The bidders were allowed to come up with suitable price based on their formulas. In the last round Corus bid 603p as their highest price they can offer while Tatas came up with 608p. Now the question is how Tatas come up with the figure 608p since the minimum limit of 5p was not applicable in the last 9th round.

Arun explained that the acquisition of shares under UK take over code has to go through the scheme of arrangement wherein all the significant shareholders like hedge funds…pension funds…mutual funds who have considerable holding in Corus will have to sit with Tatas and Tatas have to convince them and acquire shares from them. This entire scheme of arrangement process has to be completed within 6 weeks after the takeover bid.

Based on time value of money Tatas came up with the price 608p to ensure that the share price of Corus does not go below 603p in next 6 weeks. If it could have gone below 603p Corus could have started acquiring significant shares from the market directly and could have created problems in scheme of arrangements for Tatas. As per the UK takeover code Corus cannot acquire even a single share above its highest bid 603p. Similarly neither Tatas can acquire even a single share above its highest bid 608p. So to ensure that the share price does not go below 603p Tatas came up with this figure of 608p based on time value of money for next 6 weeks period. And Tatas acquire all the shares required right from 604p to 608p.