The engineering conglomerate Larsen & Toubro (L&T) has signed a deal with Café Coffee Day founder VG Siddhartha to buy his 20.32 percent stake in mid-sized IT services firm Mindtree Limited (Mindtree). It has also announced plans to make an open offer for an additional 31 percent in Mindtree to have a majority stake in the IT firm.
With the signing of the deal, the battle lines have been drawn. The desire for a friendly takeover appears to be dim though it is an ideal option. L&T could potentially spend $1 billion to acquire controlling stake in Mindtree, in a hostile takeover that would be a first in India’s IT industry. The hostile bid is a new normal that the promoters of other IT companies and the industry need to live with as it cannot be isolated from this phenomenon.
For Mindtree’s promoters, who hold nearly 13 percent of the company, there are fewer options to avoid the hostile takeover. The company is considering a share buyback move that could push up the price that L&T might have to pay. Further, the board of Mindtree can also file a report or confirm whether the said acquisition by L&T is good or bad for the company.
The founders of Mindtree claim the support of a large institutional investors, which between them hold 20.25 percent, implying that shareholders with 33.52 percent of voting rights are opposed to L&T hostile takeover bid. All these will play out over the next few weeks.
Given the fact that the promoters have belatedly become aggressive is nevertheless a good tactical move so as to create confusion in the minds of existing shareholders of the company.
This attempt may escalate the flight of existing shareholders to L&T. One cannot rule out a contentious approach before the Karnataka High Court and how ugly the same would lead to
L&T has as of now confirmed that they have not thought about integrating Mindtree with L&T Infotech. For the time being, Mindtree will be run as an independent entity, whereby L&T will provide board oversight. However, keeping Mindtree as a separate company creates two IT services entities in the L&T stable, which focuses on separate industry verticals.
It is time for Mindtree to sit back and properly analyse if such an acquisition would create a better value for the company and its stakeholders or how it would be riskier for it as being part of L&T, other than cultural issues.
India has experienced only a handful of hostile takeover attempts. Further, hostile takeovers are difficult in India as due to the the prevalence of founding families (promoters) with dominant shareholding positions in most Indian corporations and the regulatory protections.
The takeover code makes it difficult for the hostile acquirer to just sneak up on the target company. Historically, India has witnessed only a handful of hostile takeover attempts. Foremost amongst these (predating the takeover code) is the highly contentious and unsuccessful attempt by Swaraj Paul to take over Escorts Industries. Thereafter, and after almost 15 years, corporate India witnessed the only successful hostile takeover of Raasi Cements by Indian Cements in 1998.
This stake buy would be a good example for the corporate world in India as to how will such takeover play out given the stressed assets situation under the new Insolvency and Bankruptcy Code (IBC) regime.
(Rajesh Begur is founder and managing partner, Ankit Agarwal is associate at ARA LAW)
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Updated Date: Mar 20, 2019 20:01:17 IST