Mindtree’s not being chopped!
by Arijit Barman
Who is a gardener? Someone who works in a garden, tending to plants and nursing saplings. There is an inherent ring of care and compassion to the term. Co-founder and former chief operating officer (COO)-turned ‘gardener’ at Mindtree, Subroto Bagchi’s recent tweets attacking Larsen & Toubro (L&T) as a bunch of marauders arriving at the gates of Mindtree’s Eden with “bulldozers and saw chains” to mow it all down “so that in its place, they can build a shopping mall” is rather imperious, contemptuous and derisive.
As L&T’s leadership retorted, “We have bulldozers, we have cranes, we make things that make the nation proud. We make submarines, rockets, missiles and guns. We are a national company.” Any self-respecting professional would tend to agree with that last statement.
So, what’s the din all about in the first place? Corporate takeovers are as commonplace as the potholes on Mumbai’s roads. Hostile ones are a rare breed in India, but that too is normal corporate evolution. But the war of words, the threats, the outrage in social media, the comparison with the #Metoo movement is ridiculous.
Emotions are understandably high. First generation entrepreneurs who believe in ‘humanising’ business, conscious capitalists with a dream of leveraging technology to change the world, may squirm, recoil and even react violently if they feel threatened. But let the minority shareholders also have a say.
L&T wants to buy Mindtree after the latter’s largest shareholders reached out to the infrastructure giant. L&T saw value and business logic in the move and so went ahead. If its proposal turns out to be bad and value-destructive, public shareholders and institutions who collectively have around 6.5 times more skin in the company will tear up the bid and throw it in the bin.
Like electoral politics, the stock markets are a great leveller. Just as voters can punish an ineffectual politician by booting him out with their mandate, upon listing, minority shareholders have as much right over a company as its founder-promoters. In India, most businessmen — drunk on cheap debt and brute power, and aided by a supine board of directors appointed to protect shareholder rights in the first place — forget that.
Culture is important. Compatibility, too. But so is competence. If Mindtree has a great track record, then shareholders will stick with them. Otherwise, it, too, will be punished for ‘underperformance’.
In 2006, Mindtree had internally set a revenue target of $1 billion by 2012, a milestone it has missed twice already and is likely to finally achieve only this fiscal. Of late, it has, indeed, aggressively transitioned to digital revenues that has seen a huge bump in operating revenues. Most analysts on the street feel that revenue will grow faster than the industry average due to a lower drag from legacy revenues.
Operating margins, too, recovered from the lows of FY17-18. As key segments like banking, financial services and insurance (BFSI) stabilise further, there is a further upside to be enjoyed. But in a business where scale does matter, a combination with L&T may be beneficial. And as for L&T, 19% of the diversified behemoth is owned by its employees and trusts too. So, perhaps, it is as ‘large-hearted’ as Mindtree’s mentors.
A takeover by L&T could enhance shareholder value in cash, provide solid comfort and long-term prospects for Mindtree’s employees, and even customers, who would seek comfort in the combined heft. It could help the company clamber back in the big league to bring in new business into the tech services. L&T plays across industries, and although there are some legacy issues, it doesn’t help for emotions to influence dispassionate judgement.
The marginal 1.5% drop in L&T’s shares on Tuesday shows that markets are not worried about the acquisition. At Rs980 a piece, it is also paying top dollar for a company whose valuation is arguably peaking among other middling peers of IT stocks.
L&T reportedly offered Rs1,150 a share when it initiated their negotiations, close to Mindtree’s all-time high of Rs 1,183 a piece. But there was a caveat. L&T wanted management support. Who is responsible then for the loss to shareholders? Should we blame that on the #MindtreeMatters trolls too?
The ‘gardeners’ of Mindtree have replicated the Infosys model in leadership planning — handing over the baton to each other in succession. This has not worked even for the venerable Infosys. More importantly, announcing a buy-back when its largest shareholder is seeking an exit, and with reserves of just Rs2,800 crore, may also seem odd for a tech company that positions itself as being ‘conscientious’.
(Arijit Barman is a senior journalist with the ET.)
Let L&T first come clear
by Anjana Menon
Larsen & Toubro’s hostile attempt to take over Mindtree is a Goliath vs David battle. While Mindtree is raising an army on Twitter, fighting through emails and emotional appeals, reinforcements ought to come from the market regulator. The Securities and Exchange Board of India (Sebi) should halt any takeover attempt by L&T until the firm is able to clear allegations that it was a conduit in a multimillion bribery scam. Investors on both sides deserve to know more before a big move.
The worrisome origin of these allegations is a voluntary disclosure from L&T’s customer, US-based Cognizant Technologies, to the Securities & Exchanges Commission (SEC). In 2016, Cognizant alerted SEC that it was probing whether payments relating to facilities in India were made in violation of US anticorruption laws.
SEC has since charged two of Cognizant’s top officials for allegedly sanctioning $2.5 million in bribes. It found that Cognizant paid a rent-seeking government official through its Indian contractor. It also discovered that the US company agreed to compensate the contractor through ‘sham change order requests’.
While neither SEC nor Cognizant named the conduit in their documents, subsequent media reports in India named L&T. In the immediate days that followed, L&T distanced itself from the scandal saying there was no evidence of such an involvement. More recently, however, it told the stock exchange that it has appointed an external agency to review a 2017 internal probe around this allegation, which failed to find any evidence of their involvement.
Companies know SEC probes involve hundreds of hours of investigative work, interviewing witnesses, written submissions, forensic audits and gathering evidence. It’s what Americans would call ‘some really serious stuff ’, and one that’s hard to airily dismiss. In short, the L&T management may have just acknowledged that as a storied blue chip, it must show more ambition in clearing its name. Of course, none of this suggests that L&T will be found guilty.
Still, it’s had its share of bad publicity. In 2013, L&T was barred by the World Bank for six months, after it falsified performance certificates for medical equipment. It recently paid fines to settle a case with Sebi over alleged late compliance with insider trading norms involving its venerated chairman AM Naik and another top official.
Recently, the engineering conglomerate’s annual general meeting (AGM) was marred by Naik calling marshals to escort shareholders who questioned the company’s decision to raze a facility to set up a cancer hospital in memory of his grandchild. And in January, Sebi rejected L&T’s proposed buyback of shares, saying it wasn’t in compliance with the Companies Act and Sebi norms.
Interestingly, L&T seems to be attempting a hostile takeover of a company without even a due diligence of its books. That’s a salute to Mindtree, whose founders are, therefore, right in spotlighting unsullied governance record — the stuff of role models.
While companies can’t fend off a hostile takeover citing just a different management style, they must be allowed to seek similar corporate governance standards of a parent. This is especially true for businesses whose customers demand high ethical standards because they in turn are governed by the same.
During all this duelling, Sebi has remained a spectator. It needs to step up. GoI also needs to be mindful of the signal this takeover sends to entrepreneurs. It could open the floodgates on hostile bids where promoter holdings are small, typically true of most startups. Bullying a smaller rival that’s vulnerable because of its promoter structure, is hardly alaudable culture.
Investors in India have already tasted what happens when regulators turn into dullards and managements slack. In just a year, the former chief of ICICI Bank, India’s largest private lender, turned from a star CEO, who was given a clean chit by the board, to one being probed by the country’s top investigator.
For shareholders, the success of L&T’s expensive purchase hinges on building on Mindtree’s newer technologies and clients once the takeover is complete. For a smooth transition, L&T will also need a buy-in from Mindtree’s employees and management.
On the face of it, much of this is predicated on shared values, trust, transparency, good governance and greater accountability. Some of this will have to come from a clean chit to L&T. Until then, shareholders of both L&T and Mindtree deserve a break from big brother love.
(Anjana Menon is CEO, Content Pixies)
Source: Economic Times