On Tuesday morning, March 19, Larsen & Toubro (L&T) began an attempt to buy a controlling stake in Mindtree Ltd., a technology consulting company. Claiming to expand its business, L&T is seeking to buy equity from existing shareholders and the open market to increase its stake in Mindtree, to become its major shareholder.
Mindtree issued a strong statement opposing L&T’s actions.
“The attempted hostile takeover bid of Mindtree by Larsen & Toubro is a grave threat to the unique organization we have collectively built over 20 years”, said Mindtree’s leadership in a statement.
L&T is a global engineering, construction, and technology servicing firm with clients in 30 countries. It generates approximately $18 billion in annual revenue.
How can L&T get majority share of Mindtree?
In a statement, L&T said that it has entered into a Share Purchase Agreement (SPA) with V G Siddhartha’s Coffee Day Trading Limited and Coffee Day Enterprises Limited. This SPA gives L&T a 20.32% stake in Mindtree.
Siddhartha, the single largest shareholder in Mindtree and decade-long investor, is selling each of his shares to L&T for Rs. 980 each, making this agreement worth Rs 32.69 billion or approximately, Rs 3,269 crore.
L&T also announced its plans to buy up 15% of Mindtree’s share capital in the open market at the same price of Rs 980 per share.
Once those moves are made, L&T will have a 35.32% stake in Mindtree. However, L&T has decided to go even higher.
The company has offered Mindtree’s public shareholders the opportunity to sell their shares of Mindtree at Rs. 980 per share.
L&T plans on purchasing an additional 31% from public shareholders, bringing its hold in Mindtree to a staggering 66.32%.
L&T said that its actions are in compliance with the Securities and Exchange Board of India’s (SEBI) Takeover Regulations. The company is also waiting for formal regulatory approvals from the government.
The company added that it has the financial wherewithal to fund this all-cash takeover from its existing resources and will not be borrowing from lenders.
Additionally, KPMG Corporate Finance is the lead advisor for this acquisition. Axis Capital Limited and Citigroup Global Markets are the financial advisors.
Mindtree is a global IT servicing company that works with over 300 clients in 17 different countries.
Mindtree executive chairman Krishnakumar Natarajan, co-founder Subroto Bagchi, CEO Rostow Ravanan, and COO Parthasarathy N.S. issued a joint company statement addressing the issue.
The company leadership said, in no uncertain terms, that it strongly opposes any takeover bid by L&T.
The company even called this a “hostile takeover”, meaning L&T bypassed Mindtree’s leadership entirely and went straight to the shareholders.
“Our collective success depends on building and nurturing relationships with our clients and partners. This unexplainable transaction will bring disruption to those relationships and impair Mindtree’s ability to differentiate itself in the market and continue to deliver client value and great shareholder return”, said the promoters.
The leaders further reiterated that they want Mindtree to be an independent company that serves customers and shareholders in the way its been doing for the past two decades.
They added that a takeover bid by L&T serves no strategic purpose to the company and could instead put a stopper in the growth and progress of the company.
“A hostile takeover by Larsen & Toubro, unprecedented in our industry, could undo all of the progress we’ve made and immensely set our organization back. We don’t see any strategic advantage in the transaction and strongly believe that the transaction will be value destructive for all shareholders”, said the company.
To fend off the takeover, Mindtree will need a white knight investor, a friendly actor who will buy up the stock in place of L&T. Another option Mindtree has is to make itself an unattractive acquisition by selling off its assets.
Bagchi has resigned as head of Odisha’s Development Authority to tackle this issue, along with other members of the leadership.
“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”, Bagchi tweeted metaphorically.
What does this mean for the future of India’s IT industry?
L&T clarified that its attempt to takeover Mindtree is motivated by business strategy.
L&T said that a collaboration between Mindtree and L&T will benefit both companies because they each have different strengths to contribute—L&T has solid manufacturing infrastructure while Mindtree has the latest digital advancements.
“The acquisition is in line with L&T’s stated strategy of focusing on services and asset-light businesses to drive profitable future growth”, said the company statement.
L&T also said that Mindtree will continue to run as an independent company, in line with its original leadership’s vision.
As both, L&T and Mindtree are Indian multinational companies, their success will benefit the Indian economy, as well. The current power struggle between the two companies is for control within the company, but the takeover itself poses no risk to the Indian economy.
Consolidating IT resources might even make India an even larger and stronger hub for IT and technological support than ever before.
Rhea Arora is a Staff Writer at Qrius.