L&T-MindTree: A hostile takeover battle that could become a template
Takeover battles are uncommon in India, especially those of the hostile kind. So, when the news broke out in mid-March that infrastructure company, L&T had offered to buy up to 66.32 % in the Bengaluru-based IT services company MindTree for ₹10,733 crore ($1.6 billion) through a combination of open market purchase and an open offer, its co-founders immediately closed ranks to mount a counter-operation to stall such a takeover.
L&T’s sudden interest in a company which at best is growing at a languid pace got triggered after MindTree’s largest shareholder, V G Siddhartha better know for running Cafe Coffee Day restaurant chain, sold off his entire 20.32% stake to L&T for ₹3,269 crore. The 59-year-old Siddhartha had been in talks with various PE Funds like KKR and Barings earlier to sell off his stake as he urgently needed to raise money to pay off a loan worth ₹3,000 crore he had raised pledging his shares in the IT services company.
A hostile takeover is one when a company tries to acquire or acquires another company (target) after making an offer directly to the shareholders of the targeted company. If the board of directors oppose such a bid, then it is termed as hostile.
However, while the co-founders including Subrato Bagchi, chairman, Krishnakumar Natarajan and CEO, Rostov Ravanan have termed the bid as hostile, not many are in agreement with them. One school of thought is that it cannot be one because the co-founders own a mere 13 % in the company while the largest individual shareholder himself holds 20.32 per cent but the co-founders claim that the rest of the 80% odd shareholders are opposed to the bid, though it remains to be seen whether they actually are once the open offer to acquire 31% stake is floated.
Takeover or consolidation?
Definitions apart, the IT industry is keenly watching the developments at MindTree as it could end up becoming the template for any future hostile takeover bids of information technology companies triggering off consolidation in a sector which hasn’t seen much of such activities. There are smaller and mid-tier IT services companies which are ripe for takeovers and MindTree could be the trigger for all those who are waiting on the sidelines.
Natarajan in a recent interview to a business daily said that his company had enough “weapons’’ to stall such a takeover but the point is how long will the resistance last as the Competition Commission of India has given the go-ahead to L&T to bid for MindTree lending legitimacy to its action. While both the sides hold on to their arguments, it is important to separate the wheat from its chaff.
Why is L&T keen on taking over MindTree? With a cash reserve of ₹15,000 crore, L&T has two options to exercise for itself. It could either offer to buy back shares from its shareholders thereby transferring much of the cash reserve to them or go ahead and acquire another company. The former option was struck down by the regulators and hence L&T was now left with only one option which is to make an acquisition. But what has surprised the markets is its intention to buy an IT services company rather than another infrastructure company and it is probably because L&T is the leader in its sector and there aren’t any other companies whose acquisition can help the company grow. Therefore, it zeroed in on acquiring an IT services company and with Siddharth approaching them to sell off his stake to them, the decision became much easier to take.
Need a bigger investor to avert L&T
Once both the companies merge, the combined entity will have a turnover of ₹12,321 crore allowing it to bid for larger projects because of its scale and employee strength of over 38,000.
