After several twists and turns in a months-long battle for control of Mindtree, co-founders of the IT-services firm eventually decided to call it quits as infrastructure major Larsen & Toubro (L&T) takes control of the Bengaluru-based company built over two decades.
In a filing to the stock exchanges on Friday, July 5, Mindtree said that executive chairman Krishnakumar Natarajan, executive vice chairman and COO N. S. Parthasarathy, and CEO and managing director Rostow Ravanan have resigned as members of the board and as employees of the company. “They will stay as board members till July 17 and as employees in line with their employment contracts to ensure smooth transition,” the statement noted.
“L&T taking over Mindtree is a hostile takeover and not a friendly merger. So, It is inevitable that the current management of Mindtree will leave. I am sure L&T would have planned well in advance for such a situation,” says V. Balakrishnan, chairman, Exfinity Venture Partners, an early-stage technology fund.
“It is important for L&T to quickly appoint a CEO for Mindtree, meet with senior management and customers of Mindtree and give comfort on continuity of both business and culture. If for some reason, the second rung management also start leaving then it will de-stabilise the company,” explains Balakrishnan, who is also former chief financial officer and board member of Infosys.
The resignations of Mindtree’s top management come within a few days of L&T taking a majority stake of 60% in the IT-services company.
“The co-founders of Mindtree may not have seen that L&T would garner such a huge shareholding in the company. The history of open offers in India has been such that only 20% of what is targeted is achieved, so they may have estimated that L&T would get only about 6% to 8% of the shares in the open offer. However, L&T ended up with the entire 31% being tendered,” says Shriram Subramanian, founder of InGovern Research Services, a corporate governance advisory firm.
On March 18, Mumbai-based L&T first entered into a definitive share purchase agreement (SPA) with Cafe Coffee Day founder V. G. Siddhartha and his related entities: Coffee Day Trading and Coffee Day Enterprises to acquire 20.32% stake in Mindtree. This was followed by picking up a 9% stake from the open market.
Earlier this week L&T completed buying the additional 31% stake in Mindtree through an open offer, taking its total holding in the company to over 60%.
Mindtree in a statement on Friday pointed out that along with the other co-founders of the company, they [Natarajan, Parthasarathy and Ravanan] have asked to de-classify them as promoters under applicable laws. It further added that the company will announce a new leadership team in due course.
Subramanian says, “It is in the interest of both parties (L&T and Mindtree co-founders) to ensure that there is smooth transition and clients, employees and other stakeholders are assured about it.”
Mindtree’s acquisition is said to be the first hostile takeover in the Indian IT-services industry. The promoters of the IT firm, who together owned 13.32%, tried to counter L&T’s takeover by buyback of shares through the open market but they failed in their effort to save the company.
T.R. Madan Mohan, managing partner, Browne & Mohan, a management consulting firm, points out that there is always a fear in working under someone else. “Pursuing someone else’s agenda looks challenging. Most founders leave after merger and in this case it was a hostile takeover,” says Mohan.
Mindtree, founded in 1999, is one of the first venture capitalist-backed software-services companies in India. With an illustrious team of ten co-founders from Wipro, Cambridge Technology Partners and Lucent, Mindtree had witnessed rapid growth in its first ten years. Industry watchers say that the leadership of Mindtree always imbibed a very people-centric philosophy and it is the hands-on attitude of its senior management that has fuelled the growth of the IT-services company. While it earned the reputation of a highly execution centric company with a strong track-record with clients, a solid team, and a focus on delivering work, it has not managed to leapfrog into the league of the top-tier Indian IT firms.
Balakrishnan also points out that Mindtree is the first hostile takeover of a reasonably large IT service company in India.“It is going to be a tough task for L&T and I am hopeful they will be able to manage it successfully as they already run similar business with deep management strength,” he says.
Shares of Mindtree closed at ₹888.05, down 1.17%, on the BSE on Friday, while shares of Larsen & Toubro closed at ₹1,557.10, down 0.94%. The sensitive index, Sensex, ended the day 0.99% lower.