L&T’s Hostile Takeover Bid For Mindtree Is Unprecedented: 3 Reasons Why This Doesn’t Make Sense
This is 1st major hostile takeover bid in Indian IT space
Larsen & Toubro, the 74-year-old business conglomerate having Rs 2.27 lakh crore of assets has triggered a hostile takeover bid for Mindtree, the 19-year-old IT services company worth Rs 16500 crore, and this is unprecedented in India.
Infact, this takeover attempt by L&T for Mindtree is first such instance in the IT sector in India, and the market is abuzz with speculations: Can L&T cut the deal and acquire Mindtree? Or the corporate giant will have to accept defeat, and retreat?
The plan of L&T is simple and sharp: L&T will buy out 20.4% stake of V G Siddhartha, who is the largest shareholder in Mindtree by paying Rs 981 per share, which values Mindtree at Rs 16,500 crore. Siddhartha is also the founder of Coffee Day.
Once this happens, L&T will make an open offer for controlling 51% share, and they are ready to shell out $1 billion for that.
Mindtree’s current 4 founders own 13.3% stake in the company: Krishnakumar Natarajan, Subroto Bagchi, N S Parthasarathy and current CEO Rostow Ravanan.
Here are three reasons, based on our observations, which tells us that this hostile takeover bid by L&T doesn’t make sense:
Reason #1: Cultural Mismatch (Corruption Mainly)
Mindtree’s history dates back to 1999 when 10 professionals pooled in their resources and launched an IT Services and Outsourcing company from scratch.
Due to the strong ethical foundation, and focus on the code of conduct, Mindtree was has been able to weather several storms and proved that a passionate bunch of IT professionals can create a great company. In 2010, UIDAI chose Mindtree for their Aadhaar project, and things have been going uphill for the company.
On the other hand, L&T is a massive conglomerate having primary interests in engineering, construction, and manufacturing, along with a recent focus on information technology, and financial services.
No, it’s not that L&T is a corrupt company with no moral standards, but their names have been dragged into controversies and scandals.
And this has been consistent: In 2015, it was ‘financial mismanagement’ of some employees, in 2016, World Bank banned L&T for forgery, in 2019, L&T officials were caught giving bribes; and last year, The Serious Fraud Investigation Office (SFIO) received some major complaints against the company which included money laundering as well.
L&T employes more than 1 lakh employees, and such minor scandals may not affect them that much, but for Mindtree, their USP has been honesty and transparency.
There is a clear mismatch of cultures here, and it won’t work in the long-term.
Reason #2: History Is Repeating Itself for L&T, And This Ain’t Fair
Way back in the early 2000s, both Reliance and Birla Groups attempted a hostile takeover bid for L&T, which was thwarted by A M Naik, who the current Group Chairman of the company.
And now, Naik led L&T is attempting a similar coup against Mindtree, and thus, history is repeating itself.
Just like Naik resisted the takeover bid by Reliance and Birla, and stood to his ground and enabled L&T to grow and nurture, and became what it is today, Mindtree founders too are resisting the bid with every possible force.
On L&T’s defense, the deal is certainly lucrative: Mindtree has made a name in emerging digital technologies such as AI, Machine Learning, Analytics, Big Data and more, and their clients love them.
Theoretically speaking, L&T’s takeover of Mindtree will add immense value to their shareholders, but the same cannot be said for Mindtree.
On different levels, this seems an unfair takeover bid: For the first time ever, a company will be using a rare section of the takeover code stipulated by the Securities and Exchange Board of India (Sebi), and this makes this takeover bid as hostile.
Reason #3: Mindtree Will Give A Strong Fight, And This Is About Guts
Mindtree management is strongly resisting this hostile takeover bid by L&T, and they have made it clear.
Subroto Bagchi, one of the co-founders of Mindtree has immediately quit his role with Odisha Skill Development Agency, and have joined back to save the company.
In a scathing attack against L&T, he tweeted:
An imminent threat of hostile takeover of Mindtree has made me to resign from the Government to be able to go, save the company. I must protect the Tree from people who have arrived with bulldozers & saw chains to cut it down so that in its place, they can build a shopping mall.
— Subroto Bagchi (@skilledinodisha) March 17, 2019
On March 20th, Mindtree’s Board will meet and consider a proposal to buy back its fully paid-up equity shares from the market, and possibly end this takeover attempt.
We will keep you updated, as more details come in.