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BW Businessworld

Anatomy Of A Takeover

There is no room for hostilities in the Mindtree takeover saga. Acquirer L&T too must do everything to make the deal a win-win for all stakeholders

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When Larsen & Toubro (L&T) announced the deal to buy 20.23 per cent stake amounting to Rs 3,269 crore in Mindtree from long-term investor V.G. Sidhartha of Coffee Cafe Day on March 19, it triggered a rage amongst the promoters. Subroto Bagchi, Co-founder and former COO of Mindtree Consulting pressed the panic button and termed the stake buy as a hostile takeover bid by L&T. He tweeted and called L&T a bunch of marauders arriving at the gates of Mindtree’s Eden with “bulldozers and saw chains” to mow it all down “so that in its place, they can build a shopping mall”. L&T Chairman A.M. Naik immediately got back saying that he was being painted as a villain but, in fact, he was a hero salvaging the minority shareholders. He said: “Khalnayak nahi nayak hoon main (Not a villain, am a hero instead)”. However, he made no bones about the fact that there was an acquisition bid.

He also disclosed the other contours of the takeover. That through its software services subsidiary L&T Infotech the company will make an open offer to Mindtree shareholders for another 31 per cent stake and would make open market purchases of 15 per cent.  

Mindtree’s promoters Subroto Bagchi, K Natarajan, Rostow Ravanan, and Parthasarathy N.S. decided to take a last-ditch stand against the hostile takeover by L&T. In India, even though there have been instances of hostile takeover attempts, only two have succeeded in changing ownership. And if L&T’s takeover of Mindtree happens, it would be the first in the IT services industry space.

Rationale For Takeover 
L&T saw value, business logic and opportunity in the move and so went ahead. The reasons are not difficult to fathom. Mindtree offers services that L&T has not been able to effectively tap through its IT services arm. It has a global workforce of almost 20,000 people, and technology, media and telecom (TMT) and financial services industries form the core base accounting for almost 60 per cent of the company’s revenues.

In comparison, L&T’s own listed IT services arm has not managed to tap the TMT segment effectively, despite having been around for nearly as long as Mindtree. The acquisition could offer operational synergy in addition to its marquee service offerings. Additionally, L&T has a war chest of more than Rs 10,000 crore that begs utilisation.

In a recent media interaction L&T CEO S.N. Subrahmanyan, CEO, L&T while soothing the tempers of the promoters affirmed L&T’s interest in acquiring Mindtree. “We are looking at Mindtree with pyaar (love) and want to do this deal from our dil (heart),” he said, adding, “There are certain emotions and trepidation involved, but business is business. Emotions do play a part, but have to be overcome as we go forward.”

Analysts Not Enthused
Analysts, however, say this takeover may not generate any significant value for either of the two companies. They say that IT services is a people’s business, in a hostile takeover scenario, Mindtree is likely to lose its management and many senior resources — this implies disruption to clients and possibly, revenue loss over the next one year.

Aniket Pande, Lead Analyst, IT & Telecom, Prabhudas Liladher says, “We believe that attrition control and handling resources will be very critical as hostile bids are uncommon in professional services business. We will also like to note that Mindtree has high exposure to discretionary spending where project cycles are of short duration. This obviously requires strong communication with the clients making people continuity more important.”

Pande further adds that Mindtree’s attrition is one of the lowest in the industry and its salary levels are higher than peers. Besides, the top client contribution is 20 per cent of revenues. A hostile takeover needs to be watched because any change in these metrics could go against Mindtree’s business prospects.

L&T Plans An Open Offer
Even though, L&T has sought to play down apprehensions of the acquisition being a ‘hostile takeover’, simultaneously however, the company seems to be pressing ahead with plans for an open offer to Mindtree’s shareholders despite the board’s stated disapproval.

L&T is well within its rights to directly approach the shareholders of Mindtree for the share purchase. The ultimate success of the current takeover bid rests on multiple factors, including providing an attractive premium to investors (mutual, venture, and private equity funds), pacification of employee, shareholders, etc. Particularly, the investors may demand that the company sweetens the deal, since the current price offers a seemingly low premium (about 10 per cent).

On the other hand, Mindtree is not going ahead with the buyback proposal. A board meeting held on March 27 rejected the proposal. Rostow Ravanan, one of the main promoters of the company said, “Based on the legal advice that we got, in case there’s an open offer and a buyback is announced at the same time, 75 per cent shareholder approval is needed to launch the buyback.”

Mindtree has also changed its tune from that of outright outrage to one of conciliation. Krishnakumar Natarajan while addressing a press conference towards the end of March said, “There is an opportunity to create long-term value” by working together, but to achieve that, both sides need to engage in conversation and “work out something like a common minimum programme.”

Common Middle Ground

While Mindtree is seeking a “common middle ground” with L&T that will benefit shareholders of both companies, its chairman said, Mindtree awaits the recommendations of a committee of independent directors on the open offer announced by the engineering giant.

Apurva Purohit, who heads the panel of independent directors, in an email interview to BW Businessworld said, “A committee consisting of the four independent directors of Mindtree has been created as per SEBI’s Substantial Acquisition of Shares and Takeovers Regulations 2011 (SAST Regulations 2011). This committee will discharge the legal obligations placed on the independent directors under the prevailing regulations with respect to providing reasoned recommendations on the offer.”

She further said, “The committee held its first meeting on April 2 and has appointed Khaitan & Co. as its independent legal counsel and ICICI Securities as its independent financial advisors to provide assistance in the matter. The written reasoned recommendations on the open offer shall be provided within the timeline and as per the guidelines laid down by SEBI.”

L&T looks well poised to succeed in the takeover bid with its war-chest of over Rs 10,000 crore. So what is this “common middle ground” that Mindtree is looking at? According to analysts, L&T should formally commit to retain Mindtree as a separate entity in the near future. Also, the clients of Mindtree need to be dealt with very carefully, assuring them that there is no conflict of interest involved. Of course, scale will be achieved, but L&T will do well to remember that in a people-oriented business, a hostile takeover can bring more harm than synergies unless merger is accomplished without hostilities.

(By Manika Gupta)

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