L&T's hostile takeover bid of Mindtree, explained

While L&T maintains that this isn’t a hostile takeover and that Mindtree will be run as an independent company, Mindtree promoters strongly oppose the takeover bid.

Money M&A

Indian multinational conglomerate Larsen and Toubro is set to acquire IT major Mindtree through a hostile takeover bid. On Monday, it entered into a share purchase agreement with Cafe Coffee Day founder VG Siddhartha to buy 20.3% stake in Mindtree from him and his two affiliate firms. L&T will purchase this stake at a price of Rs 980 per share, which will approximately amount to Rs 32.69 billion.

The total deal will cost L&T roughly Rs 10,733 crore. Currently it has cash reserves of Rs 15,000 crore.

With the promoters of Mindtree -- Krishnakumar Natarajan, Subroto Bagchi, NS Parthasarathy and Rostow Ravanan – vehemently opposing the takeover, this makes it one of the largest hostile takeovers India Inc. has seen.

Here’s an explainer on what the takeover is all about:

What is a hostile takeover?

By definition, a hostile takeover is one where one company (acquirer) acquires another company (target) either by directly going to the target’s shareholders of by fighting to replace the management in order to get the acquisition approved. And when the target company’s management doesn’t want the deal to go through, it becomes a hostile takeover.

In this case, Mindtree’s promoters have unconditionally opposed the takeover bid by L&T and say that it is value destruction for all shareholders.

What exactly is L&T doing?

Usually, when a corporation is trying to acquire another, it makes an offer to gain control if it owns 25% of the organisation it is trying to acquire. However, L&T would be exploiting a loophole in the Takeover Code of the Securities and Exchange Board of India.

Using section 3, clause 1 of the takeover code, along with section 4 of the code, L&T is entitled to announce an open offer to acquire control of Mindtree.

As per this, those with 25% stake or more cannot take over a company unless they make an open offer to acquire the shares, and make a public announcement. However, the code also states whether or not one holds shares or voting rights, one cannot take control of the company unless a public announcement of an open offer to acquire those shares is made.

What this means is that using both these sections allows L&T to make an open offer, without having to own 25% shares in Mindtree.

With this takeover, L&T reportedly aims to acquire Mindtree. It has bought 20.3% stake from Siddhartha and has placed an order with its broker for on-market purchase of up to 15% of share capital.

Apart from this, L&T has announced an open offer as per SEBI Takeover Regulations (as required under Regulation 3(1) and 4) to the public shareholders of Mindtree to purchase up to an additional 31% of the outstanding shares of Mindtree at a price of Rs 980 per share in cash.

If this goes through, L&T will hold nearly 66% stake in Mindtree. The three promoters together currently own 13.3% in Mindtee.

Why does L&T want to acquire Mindtree?

The Chairman of L&T Group, AM Naik says that the acquisition of Mindtree fits into the larger plan of the company.

According to L&T, it started with Siddhartha approaching them to sell his stake in the company. While it initially had a neutral view towards this, L&T now sees enormous value in taking over Mindtree.

L&T MD and CEO Subrahmanyan has maintained that Mindtree will remain independent and that L&T will provide board oversight.

L&T already has a listed IT company L&T Infotech, and believes Mindtree will complement the business. While L&T Infotech is predominantly into banking, Mindtree focuses on areas such as retail and hospitality.

Addressing the media on Tuesday, Subrahmanyan said that the logic behind acquiring Mindtree is to expand its services business and not to integrate it with L&T Infotech. The objective, he said, is to increase shareholder value.

What is VG Siddhartha’s role and why does he want to sell his stake?

Café Coffee Day founder VG Siddhartha held 20.4% stake in Mindtree, making him the single largest shareholder in the company. This, he held along with two of his firms - Coffee Day Enterprises and Coffee Day Trading.

Coffee Day Enterprises, as a company, has a total debt of around Rs 6,500 crore as of September, as per a Bloomberg Quint report. Siddhartha has been looking to sell his stake in Mindtree to pare CCD’s debt and at current market prices, Siddhartha’s stake in the company through his companies is worth roughly Rs 3,100 crore. Now, most of these shares have been pledged with banks including Standard Chartered, Edelweiss, Kotak Mahindra, Yes Bank, Axis, among others.

However, according to an Economic Times report, Standard Chartered Bank has agreed to lend Rs 3,000 crore to Siddhartha to release his pledged Mindtree shares held with these banks and consolidate all of them under one entity. This, the report says, will make it easier for him and for L&T to transfer the shares.

Why is Mindtree opposing the takeover and what is its strategy?

Over the past week, the promoters did everything they could to save the company, but to no avail.

Mindtree has called a board meeting on March 20 to consider a share buyback to prevent the possible takeover from L&T, as per its filings with the stock exchanges.

The Companies Act states that a company can buyback a maximum of 10% of its capital. If they hold a general meeting and pass a special resolution, then they can buy up to 25%.

A first measure of its kind to fend off a hostile takeover, the buyback could possibly reduce the number of shares available for purchase.

According to Bloomberg, as of December 2018, Mindtree had cash worth Rs 162 crore and investments worth Rs 811 crore. If the board, in its meeting on Wednesday, agrees to the buyback plan, Mindtree can use this money for a buyback and potentially prevent L&T’s takeover bid.

Mindtree founders fight back

The founders have strongly opposed the deal and have said that it makes no strategic sense.

Bagchi too, has resigned from his current role of head of Odisha's Skill Development Authority and has returned to try and save the company he co-founded. He tweeted over the weekend that Mindtree has not been designed as an “asset” to be bought and sold and that it is a national resource.

Following L&T’s announcement of acquiring Siddhartha’s stake, the promoters said in a statement that the attempted hostile takeover bid of Mindtree is a grave threat to the unique organisation they have collectively built over 20 years.

“A hostile takeover by Larsen & Toubro, unprecedented in our industry, could undo all of the progress we’ve made and immensely set our organisation back,” they said in a joint statement.

Addressing the media in Bengaluru on Tuesday, they posed several questions to L&T.

“You are a company with a turnover of ~120,000 crore rupees. You are 18 times our size. Why can’t you build a great technology business with all your resources and capability without decimating another organisation?” it questioned L&T.

If further said that customers will stall all future business and even take their business elsewhere and that employees too, will oppose the move.

Several employees took to Twitter to oppose the deal with #MindtreeMatters.

With Mindtree’s board set to meet on Wednesday, it now remains to be seen if L&T succeeds in taking over Mindtree, or if the promoters find a way to retain control.