Hostile takeover of Mindtree by L&T: What investors should do?

P Saravanan/V Gopal

Larsen and Toubro (L&T) is all set for a hostile takeover of Mindtree. L&T has already entered into an agreement with VG Siddhartha (founder of Café Coffee Day and one of the early investors in Mindtree) to buy his 20.30 per cent stake in Mindtree at ₹980 per share.

It has also placed an order with its broker for on-market purchase of up to 15 per cent of shares in Mindtree. But, the other promoters of Mindtree — Krishnakumar Natarajan, Subroto Bagchi, NS Parthasarathy and Rostow Ravanan — who hold 13 per cent stake are fighting hard to retain control of the company. Is L&T’s bid advantageous to the share holders?

Under a hostile takeover, one company (acquirer) acquires another company (target) by making a tender offer directly to the target company’s shareholders. When the board of directors of the firm that is being acquired oppose the takeover bid, it is called as hostile takeover.

Why is L&T eyeing Mindtree?

Currently, L&T is sitting on huge cash reserves of ₹15,000 crore and is on the lookout for acquisitions. Sometime ago, L&T had planned a share buyback, which was stalled by the regulators for various reasons.

So, the company now wants to utilise the cash reserves by acquiring Mindtree.

In acquiring Mindtree, L&T sees synergies with L&T Infotech, its listed group company in the IT space.

This acquisition is expected to expand its IT service business and increase value for L&T Infotech’s shareholders.

But why are the Mindtree promoters opposed to the takeover? It is a classic case of promoters or founders not being able to give up their emotional connect with the company. This is a common feature among many first-generation entrepreneurs. Promoters view their companies as their creation. Primarily, this is an emotional reaction to the deal. However, recently Mindtree formed a panel to evaluate the open offer and the deal will most likely go through.

Value adding or destroying?

L&T’s plans of using its cash reserves for an acquisition in a non-core business, raises questions about judicious capital allocation. Shareholders might have concerns on whether their (shareholder) value can be enhanced by buying a non-core business. Alternatively, by acquiring Mindtree, L&T may be looking to smoothen the cash flows of L&T Infotech by increasing the scope of their offering in the infotech space. If L&T can handle the cultural issues of the takeover and are able to manage the product portfolio, the shareholders may actually gain.

Public shareholding in Mindtree is more than 80 per cent. As L&T is making an open offer for about 45 per cent of shares, institutional shareholders will play a major role in its success.

The choice now with retail shareholders is whether to accept and sell their shares in the open offer or not. L&T is making an open offer at ₹980 per share.

To conclude, L&T is offering a good exit opportunity to Mindtree shareholders as the valuations are on the higher side.

However, for L&T shareholders, they must keep in mind that an engineering and construction conglomerate is increasing its exposure to non-core businesses with the additional risks of integrating Mindtree and hostility from its promoters.

The writers are professorsin finance and accounting,IIM Tiruchirappalli

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