another takeover battle in early nineties.

In the late 1980s, Reliance

Industries Limited (RIL) had acquired 10.05 percent stake in L&T. Armed with
this, RIL was aspiring to acquire L&T as a whole, and not just its cement
business. Established in 1923, L&T had been (and even today is) a truly
professionally managed company with core competence in turnkey
engineering projects. Acquiring L&T very well fitted in RIL's plan that was
setting up mega projects one after another.
For L&T management, however, it was a life and death issue for had RIL
taken over L&T, the top management of L&T would have certainly lost their
freedom and control over the company and in all probability their jobs too. So
L&T management fought back tooth and nail and managed to successfully
ward of RIL attack.
The story of that battle is quite thrilling but not the subject matter of this
case. It may be sufficient to say that RIL could not manage to get support
from the government, public at large and financial institutions. At that the
time, the largest shareholders of L&T were financial institutions which
collectively held 40 percent stake in L&T. LIC and UTI held approx. 27 percent
and the rest was held by other FIs. FIs backed L&T management and RIL had
to step back.
MAIN STORY
Finally, on November 18, 2001 RIL sold its entire 10.05 percent stake
(25000000 equity shares) to Grasim, an A.V. Birla group company for Rs.
766.5 crore, The price of Rs. 306.6 that Grasim paid was approx. 46 percent
higher than the then prevailing market price of around Rs. 208 210 per
share.
Thereafter, an investment company that was a subsidiary of Grasim acquired
another 4.48% stake (1.112 crore equity shares) at an average price of Rs.
176.75 per share taking Grasim's stake to 14.53 percent.
Thereafter on October 13, 2002 Grasim made a public announcement of
open offer to acquire 20% stake (4.973 crore shares) in L&T at Rs. 190/- per
share. While Grasim had paid Rs. 306.6 per share to RIL, it had waited for
more than six months to make an open offer. The highest price paid by
Grasim for L&T's shares in twenty six weeks prior to October 13, 2002 was
only 188. 15 and the average of twenty six weeks and two weeks was 174.93
and 170.08 respectively. Grasim filed the draft letter of offer with the SEBI on
October 24, 2002.
On November 8, 2002 the SEBI asked the merchant bankers JM Morgan
Stanley (JMMS) not to proceed with the open offer since it (i.e. the SEBI)
wanted to investigate the matter of an alleged violation of Takeover
Regulations in regard to Grasim's acquisition of 10.05 percent stake from RIL.
Grasim, ON November 18, 2002, preferred an appeal the Securities Appellate

Tribunal (SAT) against the SEBI order and gave a public notice to that effect
on November 20, 2002. Thereafter the investigation by the SEBI went on till
almost third week of April 2003.
Meanwhile in December 2002, L&T management tried to outsmart Grasim by
mooting a proposal to carve out its cement business into a subsidiary
wherein L&T would have retained around 75 percent stake and the
shareholders of have got balance 25 percent or so. This would have brought
down Grasim's direct stake in the cement business to about 3.75 percent as
against its 14.53 percent stake in L&T. Grasim managed to get a stay from
the court on this proposed de-merger.
Further, on January 27, 2003 Grasim made a counter proposal of vertical demerger of cement business to L&T board, Grasim valued L&T's cement
business at Rs. 130/- per share and engineering and other businesses at Rs.
162.5 per share thereby valuing L&T as a whole at Rs. 292.5 per share.
Grasim also proposed that upon de-merger it would like to make an open
offer to acquire control the cement business / company.
By April 2003, the SEBI came to conclusion that Grasim had not violated
Takeover Code, and that its offer was valid subject to making some additional
disclosures. The SEBI then offered its comments to the draft letter of offer of
Grasim on April 22, 2003. Finally Grasim's open offer for L&T's 20 percent
stake opened on May 7, 2003 and closed on June 5, 2003. Grasim,
accordingly, withdrew its appeal before SAT.
The offer failed miserably and Grasim could get only 9.44 lac shares or
0.38% stake in the open offer. However, post announcement of open offer,
Grasim, through its subsidiary, had purchased another 20.56 lac shares or
0.83% stake from the open market thereby taking its total holding to 15.73
percent of L&T's equity capital. This paved way for Grasim to make creeping
acquisition without making an open offer as also to get board seats on L&T's
board.
Thereafter, in June 2003 itself the L&T management and Birlas hammered
out a deal to carry out a structured de-merger of cement business of L&T and
about further terms and conditions of Grasim's takeover of control of the
resultant cement company.
THE DE-MERGER DEAL

With effect from April 1, 2003, the cement business of L&T was vested in a
separate company (UltraTech Cement Limited). It was decided that post demerger, Grasim will acquire the control of the resultant cement company.
However, L&T managed to retain certain key assets like L&T brand, ready
mix cement (RMC) business, the gas power plant in Andhra Pradesh, and the
entire residential and office property of the cement division.

As a part of the scheme of de-merger / arrangement, L&T's equity capital of

Rs, 248.67 crore, consisting of approx. 24.88 crore shares of Rs. 10/- each
was reduced. L&T's paid up capital was brought down to Rs. 24.88 crores
consisting of 12.44 crore shares of Rs. 2 each. Accordingly shareholders of
L&T received one share of Rs. 2/- face value of new L&T for every two shares
of Rs. 10/- face value of old L&T.
UltraTech's paid up capital was fixed at Rs. 124.91 crores consisting of
approx. 12.49 crore shares of Rs. 10/- face value. L&T was allotted 20
percent of UlraTech's equity.
The remaining 80 per cent was allotted to shareholders of L&T in the same
proportion as the stake held by them i.e. for every five shares held in L&T
shareholders got two shares of UltraTech. With this Grasim would receive
approx. 12.5 percent stake in UltraTech against its 15.73 percent stake in
L&T.
It was decided that out of L&T's 20 percent stake in Ultra Tech, L&T will sell
8.5 percent stake to Grasim at a price of Rs. 171.30 per share as against the
earlier offer of Grasim at Rs. 130/- per share. With this, Grasim will hold
approx. 21 per cent in UltraTech. Grasim would then make an open offer for
30 percent of the UltraTech's equity at the same price and would take its
stake to 51 per cent.
The open offer by Grasim was meant for not only taking control of
UltraTech, but to give a chance to FIs to bring down their stake, in the
process making hefty capital gains.
In subsequent developments, Grasim bought L&T's stake actually at Rs.
342.60 per share and made an open offer at the same price. Grasim, thus,
had to shell out Rs. 362 crores to L&T and Rs. 1298 crores in the open offer.
It was also decided that the residual stake of L&T in UltraTech of approx.
11.5 percent would be liquidated by L&T in small trenches and to non
cement entities by 2009, if Birlas do exercise their right of first refusal in
negative.
In turn, Grasim sold approx. 14.93 percent of its 15.73 per cent stake in
L&T to an employee's trust of L&T at Rs 120/- per pre de-merger share or Rs.
240/-per post de-merger share. The remaining approx. 0.8 percent would be
sold when the employee trust would dilute its stake by 1 percent or so.
BIRLA'S MOTIVE
Why were Birlas so desperate to acquire L&T?
As on 31st March 2003, the total cement capacity in India was approx. 135
mn tonnes. There were over 400 plants in the country consisting of 120 or so
large plants and the rest mini cement plants. In terms of company wise
capacity, L&T had the largest capacity of 18mn tonnes, followed by ACC at
15 nm tonnes, Grasim at 13 mn tonnes and Gujrat Ambuja at 12.5 mn
tonnes. In acquiring L&T's cement business, Birlas had a simple motive of
growth through acquisition'. After acquisition the combined capacity of

Grasim and UltraTech went up to 31 mn tonnes, making Grasim the largest

producer in India and the eighth largest in the world.
L&T was also considered as a premium brand and used to fetch higher price.
Though this brand would not be available to Grasim in the long run, L&T
allowed Grasim to use it for more than a year post acquisition. Later on,
through an ad blitzkrieg Grasim managed to transfer brand equity of L&T
cement' to UltraTech cement'.
While Grasim was strong in the Southern markets, L&T was strong in the rest
of India. L&T's strong distribution network was very vital to Grasim to push
its own brands also.
Last but not the least, around 2002-03, the economy had just started coming
out of woods. Stock markets were still bearish and valuations low. A look at
Exhibit 1 tells us that in 2003-04, the first post de-merger year, on the gross
turnover of Rs. 2700 crore, UltraTech posted a PBT of just Rs. 49.20 crore. In
fact, considering that other businesses of L&T grew by 32 percent in 200304, engineering division turnover in 2002-03 would have been around Rs.
7500 crore and that of cement division around Rs. 2000-2100 crore. Cement
division must have made losses in 2002-03. However, Birlas were aware that
in the next immediate 4 to 5 years cement business would turn highly
profitable and valuations would skyrocket. So they were in a hurry to acquire
while they could still get it cheap.
WHY L&T SURRENDERED
The first and foremost reason was survival. At the time RIL tried to takeover
L&T, FIs had backed L&T management to control over L&T. However, this
time around the situation was a bit different. It is believed that while the
open offer for L&T was going on, Birlas had succeeded in convincing FIs
about the structured vertical de-merger and about FIs selling their shares in
the resultant cement company either directly or through open offer. It is also
believed that, if L&T management had continued to be adamant about not
agreeing to vertical de-merger, FIs were willing to sell their stake in L&T to
Birlas provided the price was right'. Also, now Birlas could up their stake
in L&T through either creeping acquisition or through another open offer. So
in order to keep their control over L&T, which by then was a ten thousand
crore empire even sans cement, L&T management had no choice but to
agree to give away the cement business.
However, having accepted this fate accompli, L&T management did a very
good job of negotiating. They managed to retain ready mix cement business
and other key assets of the cement division as stated earlier. They also
managed to allot to L&T 20 percent of the new company's equity and sold
8.5 percent stake at a whopping Rs. 362 crore. Considering that the first offer
of Birlas was for Rs. 130/- per share of cement company (including RMC

business and all assets), the price of Rs. 346.60 per share was extremely
good at that time. They also got for themselves time upto 2009 to sell the
balance 11.5 percent. Considering that during October 2007, UltraTech share
crossed Rs. 1100/-, this was a very good negotiation on behalf of L&T
management. Also they made Birlas sell approx. 14.95 percent stake at Rs.
120/- per share to employees' welfare trust, in the process achieving two
things getting Birlas off their backs permanently and increasing their
own stake without having to shell out any money from their own pockets.
L&T management also used de-merger to strengthen L&T balance sheet.
(See Exhibit 2).
In de-merger, L&T's paid up capital was reduced to 10 percent of what it was
prior to de-merger. The number of equity shares was reduced to half and
face value to one fifth. This resulted into EPS shooting up.
In de-merger, while L&T had to transfer reserves worth approx. Rs. 790 crore
to UltraTech, and L&T also suffered loss of paid up capital of Rs. 225 crore,
debts amounting to Rs. 1900 to 2000 crore got transferred to UltraTech, due
to the formula of splitting common loans specified under section 2 (19AA) of
the Income Tax Act, 1961 which is mandatory if the de-merger has to be tax
neutral. Due to this L&T's Debt: Equity ratio sharply improved to 0.5: 1.
All in all the deal had a lot of positives for L&T and its management.
However, a look at the performance of UltraTech for the year 2007-08 (see
Exhibit 1) will show that the real winners were Birlas and not L&T.
NEWS
PRESS RELEASE
6 July, 2004
Mumbai
L&T completes cement restructuring; Grasim acquires majority stake in UltraTech
Larsen & Toubro Limited (L&T) and Grasim Industries Limited (Grasim) today announced that the
implementation process of the demerger of the cement division of L&T has been completed, and Grasim
has acquired majority stake in UltraTech CemCo Limited (UltraTech), the demerged cement business of
L&T.
The scheme of arrangement for the demerger of the cement business, sanctioned by the Honorable High
Court of Bombay, became effective from Friday, 14 May, 2004. Accordingly, the cement business
undertaking was transferred to and vested in UltraTech CemCo Limited.
Grasim had made a successful open offer bid for 30 per cent of the equity of UltraTech with a view of
taking management control. Concurrently, Grasim acquired 8.5 per cent equity stake of UltraTech from

L&T, and Grasim and its associates have sold 14.95 per cent of their holding in the demerged L&T to the
L&T Employee Welfare Foundation.
Speaking on the occasion, Mr. A.M. Naik, Chairman & Managing Director, L&T, said " This transaction,
one of the biggest in corporate India, has helped to unlock value for its shareholders and position the
demerged L&T as a more focused engineering and construction co."
Says Mr. Kumar Mangalam Birla, Chairman, The Aditya Birla Group, "This transaction reflects our
commitment to build a leadership position in cement. We believe that it will take about two to three years
for UltraTech to provide a competitive return on the aggressive price offered to its shareholders."
The transaction is expected to provide UltraTech an opportunity to leverage synergies with Grasim and
strengthen their ability to compete in the Indian and overseas markets.