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L&T’s new tactic in Mindtree war: Charm offensive

MUMBAI | BENGALURU: Top executives of Larsen & Toubro resorted to charm in an attempt to win over the irate promoters of Mindtree, a day after mounting a hostile takeover bid for the Bengaluru-based IT services firm, even as both sides clung to their positions in an extraordinary acquisition battle that marks a first for India’s $150-billion IT outsourcing industry.

“We are looking at Mindtree with pyaar (love) and want to do this deal from our dil (heart),” said SN Subrahmanyan, CEO, L&T, on Tuesday. “There are certain emotions and trepidation involved, but business is business. Emotions do play a part, but have to be overcome as we go forward,” he told reporters.

The board of Mindtree is scheduled to meet on Wednesday and discuss a share buyback that is under threat after the open offer made by L&T on Monday.

Mindtree’s long-term investor VG Siddhartha has signed a deal to sell his 20.3% stake in the company for Rs 3,269 crore to L&T.

Founders Question Merit of Plan, Price Offered

The engineering giant said it would increase its stake in Mindtree to 66.32% by spending as much as Rs 7,464 crore through a combination of an open offer and purchase of shares from the market.

In a concerted campaign that unfolded both on social media and in an address to reporters, Mindtree’s founders questioned both the merit of L&T’s buyout plan as well as the price it is offering.

“The independent directors will set up a committee and evaluate it (L&T’s open offer) on merits,” said Krishnakumar Natarajan, chairman, Mindtree.

“What I would like to state is, our 52-week high is Rs 1,183 (per share), the deal has happened at Rs 980. That itself reflects the value of the company,” he told reporters at the company’s headquarters in suburban Bengaluru.

The Mindtree scrip closed 2.03% down at Rs 943 on the BSE on Tuesday.

Experts are of the view that Sebi regulations prohibit a buyback before an open offer is completed.

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“The moment an open offer is announced, the company cannot go ahead with a buyback plan at the board level,” said Shriram Subramanian, managing director at InGovern Research Services, a proxy advisory services firm.

The visibly angry Mindtree promoters said they would fight the acquisition bid with help from institutional investors. They claimed support of Nalanda Capital — the Indian private equity firm that backs listed companies — which owns 10.6% stake in the company.

Industry peers fear that “a protracted battle will have a negative impact on the two key constituents of an IT business — employees and customers”.

“While L&T is doing what is good for a large conglomerate, no entrepreneur would like to let go of a business he’s built, so from a distance (we) can see that both stances make sense. However, they need to work towards a quick resolution,” said Ganesh Natarajan, former CEO of Zensar.

The aggressive protest by Mindtree promoters is driven also by what they see as an unwelcome takeover by a larger rival with a “completely different corporate culture”.

“The hostility is because this particular group (L&T) has competing interests with us and to that extent, that is not the reason to be happy with this occasion,” Mindtree CEO Rostow Ravanan told ET.

L&T owns IT services firm L&T Infotech (LTI) and engineering services company L&T Technology Services, both of which are mid tier companies.

Clarifying that Mindtree will be acquired by parent firm L&T and not the technology services arms, company executives said “Mindtree will operate independently even after acquisition”.

“While L&T will help it (Mindtree) with customer connect and strong balance sheet, Mindtree could help L&T in bringing in best practices to curb attrition,” Subrahmanyan told ET.

But L&T’s conciliatory tone cut no ice even with management experts. “While L&T has said that it will keep the company independent, it is difficult to believe that this will be the case in the long run,” said Rishikesha Krishnan, professor of strategy at Indian Institute of Management-Bangalore.

“Some of the clients that the company has could be based on the connect created by the founders. If they exit, this could have an impact on those accounts, and this is a legitimate concern,” he added.

Siddhartha, founder of Coffee Day Enterprises which owns the Cafe Coffee Day chain, had been searching for a buyer to offload his holding in Mindtree since 2018. After engaging with private equity investors such as KKR and Baring Private Equity, he settled on L&T “as he wanted the company’s shares to be with an organisation that had a strong foundation, balance sheet and history”, Subrahmanyan told ET.

“The discussion we had was always about how the management and employees will be treated, what we can learn from each other. Nothing else. We will reassure the management and employees that we are coming as an investor and the idea is to keep it (Mindtree) separate,” he said. “Time will soothe things and they will see reason.”

Countering the charges of L&T not being people-centric, Subrahmanyan pointed out that L&T has nearly 19% ownership by employees and their trust, has strong values and a culture that focuses on customers.

“I would like to reassure Mindtree, its people and all stakeholders that we are an 80-year-old company, with a chairman who is a legend who received Padma Vibhushan. It shows our beliefs and values and what L&T is all about,” he said.

The engineering giant is confident that it would be able to complete the acquisition of Mindtree once it gets regulatory approvals. L&T would look at a consolidation only if its companies reach a point where it cannot scale.

Striking a note of caution, R Shankar Raman, chief financial officer of L&T, pointed out that Mindtree’s promoters have 13% stake in the company. “A lot of value is riding on it. Any emotional step that they take is putting that at risk,” he said.

“We can join the tweet war but it doesn’t help. We will maintain dignity and decorum,” Raman said.

Source: Economic Times