Last Days of the Industrial Raj? (int'l edition)
India's dynasties may lose control of their empires--thanks to hostile-takeover fever

For the scions of India's sleepy, Old-Guard companies, the last six weeks have been most unpleasant. On Oct. 10, Arun Bajoria, an upstart jute dealer from Calcutta, revealed that he had bought 14% of languishing textile maker Bombay Dyeing & Manufacturing and would seek a board seat. Bajoria hasn't disclosed his plans, but the 121-year-old group is now more attractive for the pricey land its Bombay mills sit on than for its cloth, analysts say.

The market has only gotten scarier since. On Oct. 13, Renaissance Estates, a young New Delhi construction company, revealed that it had accumulated more than 5% of Gesco, a real-estate spin-off of venerable Great Eastern Shipping Co. and would bid 60 cents a share for a 51% stake. Gesco's share price has since nearly tripled to 90 cents.

CHEERING SHAREHOLDERS. Then, in early November, news broke that cigarette maker and hotelier ITC Ltd. had bought 5% of posh East India Hotels Ltd. since the start of the year. ITC coolly called the buying ''routine treasury operations.'' Aware of ITC's moves, the Oberoi family, East India's founders, has boosted its stake to 39%, from 36%, in the past few months.

Hostile-takeover fever has finally hit India, and long-abused minority shareholders are cheering. The three ambushes have helped boost the benchmark Bombay Sensex index 13% since Oct. 20, its first good bounce since February. How far would-be raiders will get is still uncertain. India's takeover regime is still largely untested, and the old industrial families retain great power. But if raiders have their way, the Bombay market could witness a wave of takeovers that rocks the establishment.

Technically, hostile takeovers have been legal since securities regulators adopted a new merger and acquisition code in 1997. But upstart companies didn't bother with India's industrial elephants until now. Hot tech stocks were everyone's preoccupation. As those stocks have fallen, however, aggressive Indian businessmen have taken a new look at the national champions that have long dominated their sectors via government-granted monopolies. Many of these companies' share prices are below their net asset values per share--sometimes drastically so. That makes takeovers a cheap way to buy real estate, ships, factories, and dominant, if often poorly run, businesses.

Hostile raids are especially tempting because few founding families own more than a small part of their shares. Instead, big blocks are held by family allies in the state financial institutions such as the Unit Trust of India and Industrial Development Bank of India. The rest, usually 40% to 60%, is in public hands.

The banks and fund companies, which hold some 40% of Indian share capital, are the key to cracking the dynasties' grip--or at least boosting returns for other shareholders. For decades, the families have run the companies like fiefdoms, giving scant attention to share price. The financial institutions, which together with family nominees dominate corporate boards, seldom question decisions.

However, should they decide to break ranks and sell to a top-bidding raider, a takeover could succeed. That's more likely now because some financial groups have non-state shareholders--including foreigners--to whom they must also answer, and those new shareholders are showing growing signs of restlessness.

No wonder the investment bankers-- including those at big Western banks-- now consider all top Indian groups vulnerable, including industrial conglomerate Mahindra & Mahindra and the Tata and Birla groups, which are leaders in the truck, chemical, and cement markets (table). Tata unit Telco, India's largest truckmaker, for instance, has a market cap of about $430 million, down from more than $1 billion early this year. But its book value is $645 million. ''Anyone who owns less than 20% of their company is a potential target. They had better worry,'' says Jay Daniel, head of research at Corporate Database, a Bombay data analysis firm.

The recent ambushes have jolted the family-run concerns. Gesco's Ghanshyam Sheth, the nephew of the company founder, and Nusli N. Wadia, the head of Bombay Dyeing and the grandson of Mohammad Ali Jinnah, founder of Pakistan, rushed to India's securities regulators, alleging that their companies' potential acquirers had violated the takeover code by disclosing their intentions too late. They also claimed that the code was unfair and demanded that it be changed. The regulators don't seem to have been swayed, so far.

Covering all their bets, on Nov. 7, Gesco's Sheth family countered Renaissance Estates' move. The family announced it will team up with Mahindra on a tender offer for the shares needed to build a stake of 51% in Gesco. The deal would give Mahindra control but let Ghanshyam Sheth keep running the company. This is not a sellout, says Sheth: ''[It's] a joint venture that will enable us to become a huge player in the real-estate market.''

But Renaissance Estates isn't showing any signs of backing off. ''This is a test case for India,'' says Abhishek Dalmia, a managing director of the company, who says he has a $50 million war chest to play with.

Even if the raiders' bids are unsuccessful, minority shareholders--individuals and funds--benefit from increased demand for the shares. The Ambani brothers, who run Reliance Group, which has $5 billion in annual revenues, said they'll increase their stake to 51% from 40%. The Tata group has been buying back shares in its 43 quoted companies. The share price of loss-making Telco has risen more than 20% in November.

CORPORATE ARISTOCRACY. Minority shareholders can't resist counting their chickens. ''Shareholders will make money in a hostile takeover,'' says Mahesh Keswani, a private investor from Bombay who has held a block of Great Eastern Shipping shares for 20 years. He watched helplessly as his shares in Gesco's parent company sank from $6.50 in 1994 to about 70 cents now. That includes a recent 20% bounce after Great Eastern announced a buyback.

Is this the dawn of a period of forced consolidation? Some skeptics doubt it. After all, financial institutions watched passively for five years as their holdings in the old corporate aristocracy lost up to 75% of their value. And even if India's blue-blooded industrialists wanted to sell, they probably wouldn't out of snobbery, says Kayu Mehta, head of private equity at Bank of America in India. Selling to a mere jute trader from Calcutta would be intolerable. ''Dupont may have been more welcome,'' he says. For the moment that's not an option, since foreign companies still can't make takeover bids in India.

For all that, the taboo against challenging the industrial rajahs is shattered. The next test will come when regulators rule on the validity of the bids for Gesco and Bombay Dyeing. If they go through, the game will have truly begun--and the old families will ignore the market at their peril.

By Manjeet Kripalani in Bombay

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Last Days of the Industrial Raj? (int'l edition)

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