Mindtree is considering multiple options to ward off the hostile takeover bid by infrastructure major Larsen & Toubro (L&T), says Krishnakumar Natarajan, executive chairman of the Bengaluru-based IT firm. In an interview with Fortune India, Natarajan talked about what the company plans to do next, and why the promoters feel combining the entities will be a major disappointment to all involved. “We respect L&T as our potential shareholder. However the board, employees and shareholders stand united with the Mindtree management against any hostile takeover,” he said.
After the board decided not to proceed with the share buyback, what would be Mindtree’s immediate step to counter L&T’s hostile takeover bid? Is there a legal or regulatory recourse?
The board will evaluate options keeping in mind the interests of shareholders, clients and Mindtree minds [employees of the company]. Until the time any decision is taken, it is inappropriate to make any assumptions or comments.
What will be the key role of the committee of independent directors (IDC)?
The formation of IDC is a statutory requirement. They will evaluate all the dimensions of the open offer and make a recommendation. We have raised the bar on governance by making the IDC with the participation of all independent directors. The IDC will also seek independent expert counsel from outside. The Mindtree management has complete support from our board. By every important measure, this proposed deal does not make much sense. Our growth prospects are as strong as ever. Mindtree has enjoyed an 18x appreciation in market cap in the past 10 years. A report this year by J.P. Morgan analyses IT services companies over different time periods: one, three, eight and 10 years. On seven key parameters by which listed companies are judged, Mindtree is No. 1 or No. 2 in every time period. The stark mismatch between Mindtree and LTI (Larsen & Toubro Infotech) seems to guarantee that combining the entities would be a major disappointment to all involved—a point that has been widely reinforced by industry experts via the media.
It was mentioned in the statement issued by Mindtree that IDC will be supported by independent legal and financial advisors to help it with its deliberations. If you could help us understand what kind of legal and financial support and in what context?
Under the law, there is a very specific obligation that is levied on the independent directors to form a committee among themselves and make a recommendation to the shareholders on the open offer. The sole objective of the committee is to evaluate across all dimensions and make a recommendation to the shareholders. The external support will help them arrive at the right recommendation to the shareholders after considering various aspects of the unsolicited offer.
Did the deal announcement by L&T on March 18 come as a surprise to you all?
The Mindtree management has always believed that our largest shareholder will do what is best for Mindtree. Most experts agree with us that this takeover attempt would end in failure and be a disappointment to all involved, especially the shareholders. Mindtree primarily competes with companies 10-20 times its size. We compete rather effectively because of our “Fast Beats Large” approach. We have grown twice as fast as the market by winning more than our fair share, because our scale plays to our advantage.
Over the last several months there have been multiple reports on Mr V.G. Siddhartha’s stake sale in Mindtree. Why didn’t the promoters then decide to buy his share with the help of other investors or private equity players. Do you think that could have worked in your favour?
As far our knowledge is concerned, Siddhartha had multiple options. Probably, he must have received certain important support from the acquirer which other financial investors were not offering. Ultimately, it’s up to him to take the call on the stakes he owns. We respect L&T as our potential shareholder. However the board, employees and shareholders stand united with the Mindtree management against any hostile takeover.
Are the promoters of Mindtree considering bringing in a white knight to counter L&T’s hostile bid?
At this point, Mindtree is considering multiple options, but it would not be prudent to make a premature comment.
What are the major disadvantages for Mindtree as an organisation if L&T acquires it?
Mindtree has established its position as a frontrunner in new-line digital services, establishing service excellency and industry leadership. On the other hand, 60% of LTI’s (Larsen & Toubro Infotech) revenues include traditional application development, maintenance and enterprise solutions. At an incremental growth stage when we are competing with enterprises 10-20x our size, such a regressive restructuring will be highly detrimental to our attempts at maintaining our leadership position in the digital [business]. During FY19 we will grow around 18.5% which is twice the industry average. We have embodied the “Fast beats large” adage, and doubling our size overnight by associating with a conventional-solution-focused company makes us lose the natural speed, integrated solutions and culture that have been our winning formula.
How are the employees of Mindtree handling the current crisis? What is your advice to them?
The outpouring support from Mindtree Minds on social media under the hashtag #MindtreeMatters provides a transparent view of how they feel. They are very supportive of an independent Mindtree and opposed to this hostile takeover. Without question, the expertise and dedication of “Mindtree Minds” is one of the primary underpinnings of our success and while this often sounds like a cliché, it is not at Mindtree. We have stood apart for 20 years thanks largely to our nurturing, collaborative, learning oriented culture, which makes them feel valued. Our amazing culture is reflected in our lower than industry attrition levels. We are in continuous conversations with our teams—both in small group meetings as well town halls. We are encouraging Mindtree Minds to remain focused on their primary objective—adding real and measurable business value to our clients and delivering a truly different experience of working with Mindtree.
How do you see the future of Mindtree?
We hope to see Mindtree growing with uninterrupted momentum and consistent upward curve. Mindtree has enjoyed an 18x appreciation in market cap in the last 10 years. Mindtree grew at CAGR of 14.2% in the five years from 2014 to 2018. Industry grew at 10.2% in the same period. During the financial year 2018-19 for the three published quarters, Mindtree grew at about 18%—double of market growth. Mindtree plans to improve profitability over the next six-eight quarters. During the current financial year about 100 basis points improvement will be delivered. In the future Mindtree will be a leader in the IT services and will lead with thought leadership, best in class operational performance and top quartile returns for our stakeholders.