In a first, and months in the making, Larsen and Toubro (L&T) completed its hostile takeover of software developer Mindtree, raising its controlling interest in the Bengaluru-based company to 60% on Wednesday. Although such takeovers are common in case of service businesses, this was the first such acquisition of an indigenous software firm.
The open offer came into effect on June 17. When L&T completed the offer, it still had two days to go before the June 28 deadline.
L&T reportedly targeted acquisition of the software company for Rs 4,988.82 crore. So far, L&T has purchased shares from the open market, worth Rs 10,000 crore at Rs 980 a piece.
Towards the end of May, L&T had acquired 26,974 equity shares of Rs 10 each of Mindtree. By 3 PM on Wednesday, the offer to purchase 50.9 million shares of Mindtree from public shareholders was 120% subscribed, Livemint reported citing sources.
If all goes according to plan, the engineering firm stands to hold up to 66% shares in the mid-sized IT firm, worth as much as Rs 10,800 crore.
When did it start?
In January, when co-founder Siddhartha decided to sell off 20.3% shares he’d held in Mindtree for two decades to L&T, market observers feared it would expose the company to the risk of ownership change.
In fact, even chief executive Rostow Ravanan and co-founders Subroto Bagchi and Natarajan, who along with VG Siddhartha had founded the firm in 1999, sounded the alarm in a joint statement.
Bagchi tweeted in March his decision to resign from the public sector job he then held, saying, “Mindtree has not been designed as an asset to be bought & sold. It is a national resource. It has a unique culture that humanizes the idea of business. It sets the standards of corporate governance. I need to be there in its time of difficulty. Hence the hard decision to return.”
After acquiring a 20.4% stake in Mindtree in March from coffee baron VG Siddhartha and two Cafe Coffee Day affiliate firms, the Mumbai-based engineering firm released a hostile bid, also known as an open offer, to buy additional shares of Mindtree from the open market.
Siddhartha had reportedly sold his shares in CCD, recently acquired by Coca Cola, to L&T in a bid to reduce debt and focus on his consumer-facing business.
Following the L&T offer, large investors, including nearly all the large institutional one, rushed to sell their holdings.
Shareholders propel takeover
Despite opposition from promoters, including key figures like Bagchi and Rostow, L&T managed to buy out enough public shareholders of the IT outsourcing company.
Among Mindtree’s shareholders that sold off their Mindtree shares to L&T were Singapore-based Nalanda Capital, UTI Asset Management Co Ltd, Arohi Asset Management Pvt Ltd. L&T, Amansa Holdings Pvt. Ltd, and Franklin Templeton Asset Management (India) Pvt Ltd.
L&T has the option to buy a total of 15% of Mindtrees shares from the open market. This week, L&T completed buying the 31% additional stake from public shareholders, needed to total off 60% controlling stake. It still has 6% more to buy off the company from the open market.
Besides Bagchi and Rostow, Mindtrees erstwhile promoters N Krishnakumar and NS Parthasarathy along with their families collectively own 13.32% in the company.
Possible structural changes
This marks the culmination of a year-long effort by L&T and gives the firm complete control over Mindtree’s board and management. Sources later suggested that the top management of Mindtree is likely to undergo a change.
“Some of the top officials, who were hired by the erstwhile promoters, could be replaced,” the person told Mint. “L&T does not need to have an AGM for making management changes. L&T can directly call for a board meeting and make the changes,” they said.
The boards decision to give shareholders a special dividend of ?20 a share may also be overturned.
Last week, Mindtrees board agreed to induct three of L&Ts executiveschief executive SN Subrahmanyan, chief financial officer RS Raman, and senior executive vice president of L&Ts defence business Jayant Damodar Patil.
Improving the companys performance will be the key aim. Even though the company has said it intends to keep Mindtree separate now, eventually, L&T will look at a possible merger of L&T Infotech and Mindtree after two financial years, according to the source.
Dalal Street Investment Journal also corroborated that the hostile takeover will foresee L&T using Mindtree as a cash reserve to buy a mid-cap company that will benefit its listed subsidiary.
End of the Mindtree era
In a profile of Mindtree, Livemint reported, “The downside risk is in the cultural mismatch. Mindtrees informal culture, where many employees call members of the founding team by their first names, is in contrast with command-and-control and top-down management at L&T.”
The analysis also showed how their inability to buy the shares of the five co-founders, who exited the company over the years, left current founders with just 13.32%, cost them dearlyperhaps even their control over the company. “Thus, when [co-founder Ashok] Soota exited in 2010, he sold his substantial 11.61% stake to Siddhartha. Ditto for [two other co-founders] Kalyan Banerjee and Anjan Lahiri, who together sold 2.06% in the open market,” it said.
As per L&T, the acquisition will be value-accretive to shareholders, just as fellow consulting and tech service Capgemini’s US-based IGATE corporation proved to be. For the IT industry, the deal is in line with the need for consolidation in the software sector.
Mindtree is a global IT servicing company that works with over 300 clients in 17 different countries. It went public in 2007 after crossing the $24 million milestone, and marked its 20th anniversary this April after raking in $1 billion in revenue.
Mindtree offers application development and maintenance, infrastructure management services, independent testing, package implementation, consulting, and intellectual property products-related solutions.
The company played an instrumental role in the Unique Identification Authority of India (UIDAI) and Aadhaar rollout along with Narayan Moorthy’s Infosys. The verification database was linked to the NRC database to record the biometric data, including fingerprints and iris scans, of about 30 lakh applicants who have filed claims to be included in the National Register of Citizens (NRC), after having been excluded from the final draft published last year.
Prarthana Mitra is a Staff Writer at Qrius