Larsen & Toubro Infotech’s Hostile Bid for Mindtree Ltd.: Much Ado About Nothing! A Teaching Case

Abstract

This article tries to understand and analyse the recent acquisition of Mindtree Ltd. by the corporate conglomerate giant Larsen & Toubro (L&T). L&T Infotech (LTI), which looks after the information technology (IT) business of the L&T group made a hostile bid for Mindtree Ltd., one of India’s leading and fastest growing infotech companies in March 2019. The case goes on to analyse the deal and delves into the reasons for the deal turning hostile. The objective of the case study is to understand the concept of hostile takeovers and the business environment that augur acquisitions.

The second part of the article tries to focus on anti-takeover tactics, which the company adopts to avoid the takeover attempt. Here, Mindtree’s decision of share buyback, immediately after L&T’s bid, has been examined. Two perspectives have been studied here—one from the point of view of the promoters of Mindtree, and the other from the point of view of investors. There have been certain very interesting and jocular exchanges of words between the promoters of Mindtree and LTI1 during the whole phase of takeover, which put the focus on the human element in acquisitions.

The business environment and industry analysis have been conducted to understand the nature and circumstances of the deal. Legalities of the acquisition and dominant player misuse have also been examined.

LTI’s take on the acquisition was very clear. For them, it was a pure business deal. They were on the path for fast growth, which Mindtree would help them achieve. Certain sectors such as Retail, Consumer Packaged goods, Media and Technology are underachieved for LTI where Mindtree has a formidable presence. Mindtree would help LTI explore geographies in Europe that so far were unexplored.

However, for the promoters of Mindtree, this bid for takeover became an emotional issue. It all started when one of the non-executive directors of Mindtree itself—V. G. Siddharth—came up to LTI and offered his shareholding of 21 per cent in Mindtree. LTI grabbed this offer and went on to announce that it would acquire a total of about 60 per cent in the company, which made the other promoters very uncomfortable. There was a lot of resistance from some of the Mindtree promoters, and certain hasty announcements and statements in the media were also made. This interesting interlude between the two companies brought a lot of attention to the acquisition and left the investors in a state of confusion.

The main objective of the case will be to analyse and teach the different corporate actions which took place and the strategic decisions that were taken during the entire interaction between the two companies.

This case would address teaching objectives for the topics such as hostile takeovers; share buybacks as a new approach to anti-takeover defence; political, legal and industrial analysis relevant to corporate restructuring decisions; and Hubris and Managerialism. A separate teaching perspective on Corporate Business Communication has also been explored.

It all started when the non-executive director of Mindtree and founder-promoter of Coffee Day Enterprises V. G. Siddharth came out in the open to sell off his close to 21 per cent stake in Mindtree. The total shareholding owned by V. G. Siddharth individually, comprised of 5.469 million shares (3.3%), and the 17.4 million shares (10.63%) were held by his company Coffee Day Enterprises. Another company called Coffee Day Trading Corporation held 10.5 million shares (6.4%) of the Information Technology (IT) company Mindtree. V. G. Siddharth started investing in Mindtree in 1999 while it was still a struggling IT2 Start-up.

Other promoters of Mindtree owned 13.32 per cent shares in the company.

Siddharth3 approached L&T in March 2019 and offered his shareholding in Mindtree. L&T took to the offer and bought out his stake on 18 March 2019. In the same month, L&T declared an open offer to the shareholders to buy a stake of another 26 per cent in Mindtree and then further increasing it to 51 per cent. In that event, the present management of Mindtree would lose control of the company.

The current management/promoters of Mindtree were extremely resistant to the deal.

Mindtree was incorporated by ten IT professionals from different companies such as Wipro, Cambridge Technology Partners and Lucent Technologies who all had a common passion for technology and entrepreneurship. The brainchild of Krishnakumar Natarajan (KK) and Subroto Baghchi was initially set up as a tech company with Ecommerce in its centre. Later on, as the company started taking shape, other like-minded people, namely N. S. Parthasarthy, Kalyan Banerjee, Scott Staples, Kamran and Rostow Ravanan joined the bandwagon. Natarajan had been associated with Wipro from 1982 to 1999 in various positions wherein he started and grew the Ecommerce division. When Mindtree was set up in August 1999, he played a key role in building the organization and setting up the US business. He, later on, drove the company’s expansion into Europe, Asia Pacific and the Middle East. This international diversification made a big difference in building a risk-resilient company and a diverse client profile. KK4 was the executive chairman of Mindtree when Larsen & Toubro Infotech (LTI) made the hostile bid. Baghchi had previously worked for Wipro and Lucent. Baghchi who later took on the role of a non-executive director in the company had played a key leadership role as the Chief Operating Officer during the tough years between 1999 and 2007, spanning the economic slowdown in the USA and into the crisis after 9/11. At a time when most of the new IT companies had to shut shop, Baghchi moved to the USA, in order to deal with the crisis, which helped the leadership team stay together during the difficult phase. Baghchi was instrumental in articulating Mindtree’s Vision, Mission and Values and led areas such as leadership development, marketing and knowledge management initiatives, which differentiated the company from other technology companies in the field.

In a desperate but bold attempt to stop the acquisition, on 20 March 2019, the Mindtree board announced a share repurchase after L&T’s open market bid to buy shares.

However, even if it were not successful in stalling the takeover, it would definitely raise the offer price for the acquirer.

Mindtree had a cash reserve of ₹1.62 billion and investments of about ₹8.11 billion, which could be used for the buyback.

Mindtree

The acquisition of Mindtree would help LTI to significantly expand its presence, with operations in key markets across the world. Mindtree had a strong presence in the technology and media industries, which were all potentially new areas of expansion for LTI. Mindtree catered to numerous industries and provided customized IT solutions for industries such as Banking, Insurance, Retail, Consumer Technologies, Education, Manufacturing, Transportation and Logistics, Media and Entertainment, Travel and Hospitality and many more. The services of Mindtree could be categorized into six parts, namely Digital Services, Operations, IT Consulting Services, Engineering R&D, Enterprise Software and Products. In the year 1999, when ten IT professionals came together to form this company, part of the company was held through a company in Mauritius. It was initially funded by Venture Capital as most IT firms are. In 2007, Mindtree came out with an Initial Public Offering (IPO) and was publicly listed on the Bombay Stock Exchange BSE and National Stock Exchange (NSE). Its IPO was oversubscribed by 100 times. The company spread out in 17 countries had more than 40 offices. At the time of the announcement of the bid, the company had more than 20,000 employees of which 31 per cent were women. The employees represented 65 nationalities and 93 per cent of the workforce comprised software professionals. Mindtree had the reputation of a fast-growing company in the industry. Its revenues increased by 28.53 per cent, and profit before tax increased by 32.93 per cent in 2019 from the previous year. In the year 2018–2019, Mindtree posted an annual revenue of US$1 billion (Table A1 and A2).

Larson &Toubro Infotech

In 1997, LTI resumed operations as a subsidiary of L&T. Since then, its journey had been eventful and fast with a slew of acquisitions for augmenting its growth story. When it announced the bid for Mindtree, it had a presence in more than 30 countries and had about 28,000 employees. It functions across several service verticals namely Cloud services, consulting, Cloud-based Infrastructure services, Assurance, Cyber Defense Resiliency Services and Applications Management. Digital has emerged as the universal change agent, trying to address new challenges in the business world. LTI’s business philosophy was to improve business outcomes with the use of Artificial Intelligence (AI), Automation and Data Analytics. Their Digital services portfolio was one of the most advanced in the industry with major focus on Internet of Things, AI, Digital Integration and Intelligent Robotics Programme Automation.

Industry

The IT industry in India had revenues of US$181 billion as of March 2019 and was expected to grow at 7–9 per cent in the next few years. Exports formed more than 80 per cent of revenues and aggregated at around US$137 billion. The industry is expected to reach a forecasted US$350 billion by the year 2025. The domestic industry, which generated revenues of US$28–29 billion, was expected to grow at the rate of 10–12 per cent in the coming few years. Among all the segments of the IT sector, the Digital technologies sector was growing at 30 per cent per annum. The share of the Digital technologies segment is expected to become a staggering 38 per cent by the year 2025. Foreign direct investments to the tune of US$37 billion has come to the Indian IT sector between the years 2000 and 2019 as per the data released by the Department for Promotion of Industry and International Trade (DPIIT).

Some of the major initiatives taken by the government to promote IT and information technology–enabled services (ITeS) sector in India after the year 2014:

The government identified IT as one of the 12 champion service sectors for which an action plan would be developed. Also, the government set up a ₹50 billion (US$745.82 million) fund for realizing the potential of these champion service sectors.

As a part of Union Budget 2018–2019, National Institute for Transforming India (NITI) Aayog would set up a national-level programme that will enable efforts in AI and would help in leveraging AI technology for development works in the country.

In the Interim Budget 2019–2020, the Government of India announced plans to launch a national programme on artificial intelligence (AI) and setting up of a National AI portal.

National Policy on Software Products–2019 was passed by the Union Cabinet to develop India as a software product nation.

Looking to the industry scenario, and the environment for doing business, it was natural for any ambitious IT company like LTI to expand through acquisitions.

Reasons for the Acquisition

In the past couple of years, LTI had been on a fast growth spree. In the years 2016 and 2017, the company made some very focused and pure play acquisitions taking on the inorganic growth path. In 2016, LTI acquired AugmentIQ Data Sciences that specialized in Big Data. In 2017, it acquired Syncordis SA for core banking implementation. In January 2019, LTI acquired a US-based company called Ruletronics for making a big entry in the Pega Implementation space. Mindtree’s portfolio has strong capabilities and clientele that is complementary to LTI. Mindtree’s strong presence in the Media and Technology industries was the main attraction for L&T where it had yet to make a mark (Figure A1 and A2). Mindtree’s presence in industries such as consumer packaged goods, retail, travel and hospitality could pave the way for a synergistic equation with the LTI portfolio.

LTI had a good presence in the USA but not in Europe. Acquisition of Mindtree would give them an entry into the European markets.

Both companies were basically headquartered in India, and hence integration with respect to ironing out cultural differences would also be less challenging.

The Big Coup

Finally, after a lot of hostility and war of words, Mindtree redacted its plan of share buyback and took a sort of conciliatory route. However, the battle was far from over.

KK said that he was not so much concerned about the takeover attempt; rather, he was more concerned about the timing of LTI’s offer.

He said in an interview with a reputed newspaper that:

"Mindtree did all the early work, suffered low margins for years and now it’s poised to clock top-shelf growth in the next couple of years. We tilled the land, fertilised it, put the right seeds, and now it may give us a great yield. Now if a tornado spoils it, it’s not the right thing for shareholders.

The focus now is on safeguarding the interests of employees and customers."

This emotional outburst surprised many in the industry. He, however, underlined the importance of remaining optimistic and practical; saying that crying over the past is pointless.

LTI bought out Siddhartha’s shares for ₹980 per share, and it purchased another 13 per cent from the open market. Its original plan was to ultimately to own about 66 per cent of Mindtree.

On 2 July 2019, L&T had acquired 60 per cent stake in Mindtree and became the promoter of the company.

The first ever hostile takeover attempt in India was made by a non-resident Indian (NRI)—Swaraj Paul, somewhere in the 1980s for companies DCM Ltd. and Escorts Ltd., wherein the promoters held 10 per cent and 5 per cent shares and voting rights, respectively. Although Paul was not successful in acquiring the companies, the Indian Law and regulatory authorities as well as the corporate world realized that proper regulation for takeovers of companies was needed. After the economic reforms of 1991, the need was further accentuated due to privatization and globalization and the arrival of multinationals in the country. The Securities and Exchange Board (SEBI) was formed in 1992, and thereafter a proper guideline for takeovers was set out.

How the acquisition was executed:

31 per cent was acquired in an open offer worth ₹50 billion.

15 per cent was acquired through an open market purchase.

20.32 per cent stake of V. G. Siddharth worth about ₹32 billion was acquired.

The total value of the deal was pegged at around ₹100.7 billion at ₹980 per share. This deal has been tagged as the first hostile takeover in the Indian IT space. LTI declared that it intended to have a total stake of 66.32 per cent in the company and, on 6 June 2019, increased its stake to 28.90 per cent.

On 12 June 2019, amidst all the drama and hostility between both the companies, a report of the independent directors of Mindtree came out. This report claimed that the offer of ₹980 per share made by LTI was a fair offer. This again was a thumbs up sign for LTI that had maintained that its offer was anything but hostile and Mr A. M. Naik, Group Chairman of L&T, even said that the directors of Mindtree were in fact perpetrating hostility and not the other way around.

Initially, LTI had offered a price of ₹1,150 per share with a caveat that the management cooperated in the acquisition. But since the management did not take kindly to the deal, LTI had had to take the market route (Table A3 and A4).

Share price movement of Mindtree Ltd. and LTI Ltd. between the date of purchase of V. G. Siddhartha’s shares, announcement of acquisition and the date of final acquisition.

Student assignment questions:

What are the factors that LTI would have considered before the acquisition of Mindtree Ltd.?

Why is this acquisition referred to as ‘Hostile’? How is it different from a tender offer? When does a tender offer convert to a ‘Bear Hug’?

Why did Mindtree Ltd. decide to declare a Share Buyback in March 2019? What is a Share Buyback and what is its purpose? How was Mindtree’s approach to and purpose for Share Buyback different?

What could have been the strategies that Mindtree might have used to avoid the acquisition?

Why were not the current managers of Mindtree willing to sell to a company like LTI. (Answer from the point of view of Hubris or Managerialism.) What are your ideas regarding the cultural amalgamation of the two companies after Acquisition?