Engineering conglomerate Larsen and Toubro’s (L&T) intentions of acquiring a majority stake in Bengaluru-based information technology (IT) company Mindtree may come across as hostile to the promoters of the mid-tier IT firm, but the way L&T’s CEO and MD, S.N. Subrahmanyan sees it, his company is approaching this with pyaar (love) and from their dil (heart).
On Monday, March 18, Mumbai-based infrastructure major announced its deal to acquire a 20.31% stake in Mindtree from one of principal shareholders, V.G. Siddhartha, for ₹3,269 crore. L&T, which seeks majority control of the IT firm with a stake of around 66%, also said that it will make an open offer for an additional 31% of Mindtree’s share capital. It has also placed an order with its broker to acquire up to 15% of Mindtree’s shares from the market. The purchase of Siddhartha’s shares, the open offer, and additional market purchase are all envisaged at a maximum price of ₹980 per share.
The pushback from Mindtree’s founder promoters was almost immediate. Terming L&T’s move as a hostile takeover attempt, they said that there was no strategic advantage that would accrue to Mindtree and its shareholders from the proposed transaction and it would be “value destructive.”
One of the company’s founders, Subroto Bagchi, joined the Odisha Skill Development Authority as its head announced his resignation from the government body and his intention to return to Bengaluru to help ward off the unsolicited takeover. “An imminent threat of hostile takeover of Mindtree has made me to resign from the government to be able to go, save the company,” Bagchi tweeted. “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.”
Given the rhetoric in the air, it was hardly surprising that L&T senior management, represented by Subrahmanyan and whole-time director and chief financial officer, R. Shankar Raman, met the media in Mumbai on Tuesday to make an impassioned case for the business rationale of Mindtree aligning itself with L&T.
In an obvious response to Bagchi’s Twitter barb, Subrahmanyan responded by saying that L&T may be using bulldozers and cranes for work, but it was in the course of nation-building and executing the “tallest, biggest and most complex” projects. “We are a national company that makes the country proud. Therefore when we take significant money from the company’s balance sheet and invest it somewhere, we are very conscious of what are doing and equally emotional and sentimental about it,” Subrahmanyan said. “To protect this money and earn a return on investment on it is extremely important for us.”
Despite the response to Bagchi’s comments, Subrahmanyan maintained that L&T would continue to engage in dialogue with Mindtree’s founders and management to convince them that they only stand to benefit from L&T’s balance sheet size and scale, which would come in handy as Mindtree would look to bag larger contracts in the course of its business.
With a firm intent of soothing frayed nerves at Mindtree’s headquarters in Bengaluru, Subrahmanyan said that not only was L&T’s intent towards Mindtree not hostile, it would in fact prevent Mindtree from a real hostile takeover staged by someone else who could potential come with capital but not the value system and governance that Mindtree would be comfortable with. Subrahmanyan, who took over L&T’s reins in July 2017, even referred to another Mindtree co-founder, K.K. Natarajan as a “personal friend,” who would continue to remain so.
Despite its desire to acquire a majority stake of around 66% in Mindtree, L&T’s stated intention has been to keep Mindtree as an independent company in the medium-term with its own management running the show. This naturally gives rise to a question of potential conflicts of interest between Mindtree and L&T’s other IT services firms, L&T Infotech (LTI) and L&T Technology Services (LTS). Answering a query around this potential conflict of interest, Subrahmanyan said that if it would successful in acquiring a majority stake in Mindtree, L&T wouldn’t be the only business house that had multiple IT companies in its fold. Other groups like the Tatas, Hindujas and Mahindra and Mahindra also have multiple IT companies for “purposes of focus, technology, or other business reasons,” he said. “There are mature minds around to sort out any such conflicts of interest,” Subrahmanyan said.
Though the actual quantum of stake that L&T ends up with Mindtree depends on the response to its open offer and offer for purchase of Mindtree’s equity through the stock markets, Subrahmanyan was clear that L&T would looking at a minimum of 26% stake in the company.
Shankar Raman stated that L&T has demonstrated the management capability of helping an IT firm like LTI grow its Ebitda (earnings before interest, tax, depreciation and amortisation) margin to around 20% at present from a 4-6% range earlier, and there was no reason why it couldn’t help improve Mindtree’s earnings profile as well.
He stated that, despite the promoters not being on board with L&T’s proposal at present, it was unlikely that operations at Mindtree would come to a grinding halt. Even if there is status quo, L&T’s investment would be “RoE (return on equity)-neutral,” Shankar Raman contended. He added that if in the future L&T was in a position to implement its strategy for Mindtree, there was every chance that this RoE could even double in five years.
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