A Takeover Battle - Grasim vs. L&T

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Case Details:

Case Code : FINC024
Case Length : 19 Pages
Period : 2002 - 2003
Pub. Date : 2005
Teaching Note : Available
Organization : Grasim, L & T, SEBI
Industry : Financial Services
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"We are not the buyer who would naturally look for the lowest valuations. We are the seller looking for the best valuations. As a seller, getting funds at the current time at the best future valuations is what the shareholder is looking for and that is what L&T has done."¹

- An L&T spokesman, speaking in favor of potential buyer CDC's proposal, in December 2002.

"It is obvious that the whole purpose of this exercise is to create confusion in the minds of the shareholders of L&T and change the very structure of the target company, L&T, so that essential features of our clients' offer would be greatly prejudiced and jeopardized."²

- Grasim's solicitors, commenting on L&T's demerger proposal, in December 2002.

A Bitter Corporate Feud

In October 2002, Larsen & Toubro Ltd. (L&T), a leading Indian business group, announced plans to spin off (demerge) its cement unit into a separate company. According to L&T sources, the company had been considering the demerger since late-2000. There was sufficient reason for demerger because though the cement division generated 26% of the group's revenues, it consumed over 75% of its total investments.

As per the demerger plan, called the Structural Demerger, it was ruled that L&T along with financial institutions (FIs) would hold 76% in the new cement company, while the remaining 24% would be distributed among the existing shareholders of L&T. L&T would later sell 6% of its share to the FIs, retain the control in the company for the following 4 or 5 years and subsequently, sell half of the 70% stake to a strategic partner. However, the reason for the demerger was not as simple as it was stated. Analysts had a different version of the L&T demerger story. According to them, though L&T had been seriously considering the demerger plan for years, the reason behind this sudden rush to do so was something else.

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L&T reportedly was trying to protect itself from a possible takeover by Grasim Industries Ltd. (Grasim), flagship company of the Aditya Birla Group,³ a leading Indian business conglomerate. Since late-2001, Grasim had acquired over 15% stake in L&T and had also made an open offer to L&T shareholders to further increase its stake.

Grasim's stake in the cement business would come down to 3.75%, if L&T's demerger plan went through. Since Grasim had spent over Rs 10 billion⁴ in acquiring its L&T stake, it was not ready to let go off the latter's cement business (one of its own core businesses).

Grasim charged that L&T, through the demerger plan, was trying to retain control of the business division with itself, without focusing on overall shareholders' interests. Grasim claimed that under L&T's demerger plan, L&T shareholders would only get a 24% stake in the new cement company, as a result of which individual shareholders would not have much control over the new cement company.

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1] 'Grasim Faults CDC Proposal to Invest in L&T's Demerged Biz,' www.blonnet.com, October 20, 2002.

2] 'Grasim Charges on Demerger Move,' www.blonnet.com, December 10, 2002.

3] The Group operated in various businesses through its companies including Grasim, Hindalco Ltd. (aluminium), Indian Rayon (cement, carbon black, insulators), Indo Gulf Fertilizers (fertilizers), Tanfac Industries (chemicals), Bihar Caustic and Chemicals Ltd. (caustic soda/chlorine), Hindustan Gas Industries (gas products) etc.

4] August 2003 exchange rate: Rs 46 = 1 US $.