L&T-MindTree: A hostile takeover battle that could become a template

Could the L&T's offer to buy IT firm Mindtree's stakes be a new template for hostile takeover in India? Representative image. A view of the Mindtree office in Chennai. Wikimedia Commons

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. 

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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

What makes MindTree a far better fit is the fact that its bidder is dominant in areas which are different from itself. In a note to the investors, L&T CEO and managing director, SN Subrahmanyan said L&T Infotech is predominant in banking, manufacturing, oil and gas, and insurance businesses, whereas Mindtree is into consumer packaged goods, retail, hospitality, travel and technology IT services.

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.

Hence, shouldn’t MindTree co-founders instead of opposing the bid, negotiate for themselves a bigger role in the running of a combined entity but such thoughts are far from their minds as they believe that a takeover will destroy the company’s culture which they have built  so assiduously since 1999, the year the company was formed. There are other challenges for the co-founders too. They will have to find another investor who can offer a higher price than the 980 L&T paid to buy Siddharth’s stake. That is a tough job in itself as there aren’t many who would be ready to offer such a high price to a company which has been unable to cross the $1 billion revenue mark even after 19 years of its existence. The target has been reset several times during the past several years and the co-founders have still not been able to crack the code to take the company past that mark. 
 
The co-founders’ response to the takeover bid has been an emotional one with Bagchi going to the extent of saying that he wants to protect the Tree from people who have arrived with bulldozers and saw chains to cut it down so that in its place, they can build a shopping mall.
Right now the co-founders are trying to hold back their employees as well as their company by making an emotional appeal but in a few more months, that won’t be enough. They will have to bring a strong investor to the table or else they will have to go let go off, an eventuality they will be forced to face sooner than later.
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