Winter had set in by the middle of last December when Mindtree’s management agreed to meet executives of Baring Private Equity in Bengaluru. The founder-managers, with a 13.2% stake, were looking for a white knight to save them from a predator. In the middle was a passive investor, with a 20.4% stake, who wanted to cash out.
The meeting at The Leela Palace was cordial to start with. Mindtree was represented by three of the four founders — chairman Krishnakumar Natarajan or KK, NS Parthasarathy and chief executive Rostow Ravanan — along with chief financial officer Pradip Menon.
Café Coffee Day founder VG Siddhartha, known to friends as VGS, was present. With liquidity pressure on his diversified business portfolio, he’d been looking for a buyer for his one-fifth stake for the past few months. He stayed for introductions and left soon after.
Also present at that Bengaluru meeting were Jimmy Mahtani and Hari Gopalakrishnan, the two managing directors representing Baring’s private equity practice in India. The buyout fund had always been bullish on Indian tech services and was on the lookout for its next big bet after acquiring Hexaware. NIIT had been on its radar but Mindtree, if available, would be a preferred pick.
The Mindtree management’s search for a benign buyer for Siddhartha’s stake would ultimately fizzle out and they would be pitted against a powerful adversary in the kind of hostile takeover battle that’s rare for India. (Swaraj Paul launched unsuccessful raids against Escorts and DCM in 1983.) ET spoke to more than a dozen people to piece together a narrative — one of bruised egos, threats and social media outrage. Mindtree didn’t respond to ET emails seeking specifics of negotiations.
Baring was not the first private equity fund the Mindtree management engaged with. At least two months earlier, KKR had been in discussions to buy out Siddhartha, but didn’t make headway.
Baring, though, made clear it was looking for board seats, management information system (MIS) statements, affirmative rights and a proactive role, similar to KKR’s demands. “Private equity can’t be like Siddhartha,” said one of the people cited above. “We can be friendly, but we too have investors to answer to and they seek a particular IRR (internal rate of return) on our investments.”
Team Mindtree wanted to know if Baring would want to merge the company with Hexaware. Despite assurances that both would be run independently, the Mindtree team wasn’t too flexible on the Baring demands at that point.
COFFEE, DINNER, CONVERSATION
There are said to be few dealmakers as savvy as Siddhartha south of the Vindhyas. From buying plantations in South America to logistics companies at home, driving a hard bargain with landlords for his coffee chain or with marquee funds, he knows a good deal when he sees one. But he had always been the silent partner in Mindtree. Siddhartha had profitably backed Infosys when it went public and didn’t hesitate when a team of 10 professionals, led by former Wipro vice-chairman Ashok Soota, wanted to start a next-generation IT services company in the late 1990s.
He initially took a 6.5% stake and provided office space. The firm went public in 2007, when it hit a revenue of around $100 million.
“Even when the Mindtree management would miss its quarterly targets, it’s unlikely he would criticise them,” said a Bengaluru industrialist. “During this takeover tussle, both parties would still meet over coffee at least once a week at the Coffee Day headquarters.”
But by 2018, Siddhartha wanted cash to pay off debt and expand other businesses. Monetising his tech and real estate investments seemed the best way out. “Siddhartha had committed to be a long-term investor. Now it’s nearly two decades,” said a person close to him. “His core business has been under pressure and (he) wanted to give adequate time to sell his stake,” added another associate.
When Siddhartha stepped down from the Mindtree board last March, it presaged the exit, but Ravanan said it was because the former wanted to focus more on his own businesses. Then, on February 7 this year, Siddhartha went public with what had become an open secret.
“The board, at its meeting held today, has given in-principle approval to sell the equity shares held by the company, its subsidiary and the promoter, respectively, in Mindtree Ltd,” Coffee Day Enterprises, founded and chaired by Siddhartha, said in a statement to the bourses.
Siddhartha had prepared the Mindtree founders for the news in September, letting them know his reasons over dinner at his residence. The Mindtree founders heard him out but opposed any deal with a peer such as L&T Infotech. Instead, they suggested selling blocks in the secondary market or to a clutch of PE investors with no board seat or rights.
“Everyone knows that would have destroyed value,” said an investment banker privy to the discussions. “How can you sell such a large block without dragging the share price down?”
More than five years ago, Mindtree approached Larsen & Toubro (L&T) for a deal, but the latter had passed on it at the time. But by April 2018, it began eyeing Mindtree as a possible investment target. Chief executive SN Subrahmanyan and chairman AM Naik saw in Mindtree an opportunity to ramp up the services business.
L&T is initially believed to have offered Siddhartha a nonbinding offer of Rs 1,150 per share, close to Mindtree’s all-time high of Rs 1,183. But this came with a caveat — get the management on board to ‘bless’ the deal. The concern was that in a people-centric business, going against the management might alienate staff and investors. Nonetheless, L&T was regarded by the founders with suspicion and as inimical to the company’s culture. A friendly PE was the safer choice, they felt.
AT THE GATE
According to the people cited above, the Mindtree founders hadn’t expected L&T to attempt a hostile takeover. “There was a large shareholder who wanted to sell and we did not have a problem if he sold to somebody who did not have a strategic interest like L&T has,” said Ravanan on Tuesday. “If there was anyone else who had bought it, it would not have led to this hostile reaction from us.”
Yet, over several Chinese meals, meetings and emails, right through December and the new year, L&T chief executive SN Subrahmanyan tried hard to convince the four founders to see reason.
Some of what transpired was revealed by Natarajan in his letter to the L&T board on Saturday. “I also recollect many email exchanges between us in January-February 2019, where we had expressed our concerns based on data relating to previous integrations of large IT services providers, that any transaction with you would be value-destructive to Mindtree and all its stakeholders,” he wrote.
It had been assumed that L&T was keen on the Mindtree management’s support. “When we met, you had categorically stated that your organisation does not support ‘hostile’ acquisitions,” he wrote. “But unfortunately, we could not see eye to eye on various business and governance matters, and in good faith, expected you to cease pursuing Mindtree as a potential target. The continued news reports since then are leading us to believe otherwise.”
L&T’s leadership disagreed. “Our meetings were very cordial,” Subrahmanyan said. “Even this morning (Tuesday), I called Mr Natarajan. He came for my son’s wedding. They have never raised any issues about business or governance with us (at the meetings). And these have been long three-hour ones.”
A PERFECT BRIDE
In 2006, Mindtree had internally set a revenue target of $1 billion by 2012; one that it has missed twice and is likely to achieve only this fiscal.
Of late, it has aggressively transitioned to digital revenues (almost half in the third quarter of FY19) by leveraging exposure to large technology customers and its background in product engineering. “Revenue grew strongly in the past six quarters, pushing the company to industry-leading revenue growth in FY19,” said Diviya Nagarajan, analyst with UBS. This has helped stock re-rate meaningfully in absolute terms — up 52% since January 2018 — and relative to the sector.
A deal with L&T would create a $2.4-billion IT services firm with four verticals of reasonable scale — BFSI, retail, consumer packaged goods and manufacturing, and technology media and service. The combined entity also brings down client concentration significantly, with no client accounting for greater than 8.5% of revenues. Microsoft alone contributes around a quarter of Mindtree’s billings.
“We do believe that compared to the big boys like TCS, both L&T Infotech and Mindtree have enough headroom to grow. They are still sub-scale. Other than one or two clients, there is hardly any overlap,” said R Shankar Raman, chief financial officer, Larsen & Toubro.
By December, Naik and the L&T top brass had been getting restless. L&T’s board passed an enabling resolution to buy Siddhartha’s stake and entrusted Subrahmanyan with entering into negotiations early in January, said people with knowledge of the matter.
Sensing the threat by late January, Mindtree’s founders intensified their search for a white knight. KK met bankers, PE funds and corporates in Mumbai. Investment bank Avendus was brought in as an adviser to plan the defence. Several approaches were said to have been made to leading family offices such as PremjiInvest and Patni, although this could not be independently verified. The response from most was simple — why are you not engaging with Baring PE when they are willing to offer a premium?
Avendus resumed discussions with Baring, KKR and even ChrysCapital. Meetings were held in Bengaluru, Mumbai and Hong Kong. Of the three, Baring and ChrysCapital were more aggressive on price and other terms, said people close to Mindtree. But time was not on the Mindtree management’s side.
At Tuesday’s press meet, the Mindtree CEO refused to divulge details on why PE discussions failed as well. “It could have been averted under different circumstances,” said Ravanan. “In the way it finally turned out, it was a surprise. I am not going to comment on how long we were in discussions, whether it was eight or nine months. Whether we spoke to A or B. All of that is water under the bridge.”
Most of January and February was lost as income tax authorities had staked claim on over 4.2% of Siddhartha’s Mindtree holdings. He had to offer bank guarantees and other holdings to release those shares. Subsequently, with a Rs 3,000-crore line from Standard Chartered Bank, he consolidated his pledged shares — held by a dozen-plus financial institutions and banks — to put it in one escrow account for easier transfer.
The wedding and evening reception of Subrahmanyan’s son were the first time some of the key dramatic personae — namely, KK and Siddhartha — were appearing in public together. But this was no sign of tensions easing. The next day, the buyback plan was announced, followed 24 hours later by the letter to the L&T board, warning against an acquisition bid.
Late on Monday, L&T responded to Mindtree’s gambit. It was acquiring Siddhartha’s stake and would make an offer for another 46% from public shareholders in a deal that could potentially cost over Rs 11,000 crore. L&T was launching a hostile takeover.
Source: Economic Times