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Explained: The fight for Mindtree that threatens to snowball into a war

NEW DELHI: An unprecedented takeover drama is unfolding in India’s information technology (IT) sector. Homegrown IT company


is resisting takeover by L&T Infotech, the IT arm of an persified conglomerate. On Sunday, Mindtree cofounder and board member Subroto Bagchi rushed back to “save” his company from a hostile bid. He said he had quit his government job as chairman of the Odisha Skill Development Agency to help counter the takeover threat.

“An imminent threat of hostile takeover of Mindtree has made me resign from the Government to be able to go, save the company,” Bagchi tweeted. “I must protect the Tree from people who have arrived with bulldozers and saw chains to cut it down so that in its place, they can build a shopping mall.”

The background

For several months, majority shareholder in Mindtree VG Siddhartha has been planning to sell his 21% stake in the company to L&T Infotech. The four founders — Subroto Bagchi, NS Parthasarathy, Krishnakumar Natarajan and Rostow Ravanan — together control 13.32% in the listed company. Three of them also run the company: Natarajan is chairman of the company, Ravanan is the CEO and Parthasarthy is executive vice chairman and COO.

Mutual funds own around 8.32% and foreign portfolio investors hold 40.18%. Siddhartha wants to pare his ballooning debt, more so as liquidity pressures heightened following the NBFC crisis late last year. L&T has eyed Mindtree for some time as it scouted for M&As in a consolidating sector. The nearly $1-billion revenue and fast-growing digital revenue — signalling strong adoption of newer technologies like AI, cloud, big data and analytics by clients — makes Mindtree a particularly attractive target.

Who is VG Siddhartha?
Siddhartha is son-in-law of India’s former external affairs minister SM Krishna, who later left Congress and joined BJP. Siddhartha’s claim to fame is founding India’s iconic coffee chain Cafe Coffee Day. The billionaire entrepreneur is also the biggest exporter of coffee. With business interests spanning from coffee retailing to real estate to hospitality to logistics, Siddhartha had also bet high on technology.

In September 2012, the 58-year old first generation entrepreneur was quoted as saying that he was committed to staying invested in Mindtree for five to eight years. He has kept to his word, giving the Mindtree management a great deal of operational comfort with his stake.

He bought an initial 6.6% stake in the company for Rs 41 a share in 1999. He started increasing his stake from June 2011, buying out founder-chairman Ashok Soota’s stake and later accumulating his shares from the market at Rs 450-475 a share. Siddhartha first talked about exit plans around 10 months ago, soon after he left the company’s board.

Why Mindtree management doesn’t want the deal
Mindtree competes with Larsen & Toubro, Infosys and other rivals in supporting corporate customers that need tech expertise. The management would prefer the stake not go to Larsen & Toubro because of competitive tensions. The founders’ bloc has been pursuing a deal with Baring PE to see that shares change hands to a friendly investor so that they continue to hold the reins. Natarajan is said to have told the L&T board of his shock that a hostile takeover attempt was being mounted.

He said it had alarmed Mindtree stakeholders, including institutional investors, clients and customers and employees. They had told the management they wouldn’t want to be part of an organisation that is culturally different from Mindtree or where there are minimal revenue and cost synergies, he said.

Natarajan argued that several large IT services providers had failed to integrate acquisitions and said a merger between Mindtree and L&T Infotech would be value destructive for all.

The founders have been holding talks with Baring PE Asia, Chrys Capital and KKR to persuade them to buy Siddhartha’s shares so that they continue to hold the reins. The founders fear that L&T Infotech would press for an open offer after buying out Siddhartha and then inch towards majority stake. This, they suspect, would pave the way for a merger between Mindtree and L&T Infotech.

“Mindtree has not been designed as an asset to be bought and sold,” Bagchi wrote in a tweet. “It is a national resource. It has a unique culture that humanizes the idea of business. It sets the standards of corporate governance. I need to be there in its time of difficulty. Hence the hard decision to return.”

Time for leadership change?
L&T Infotech has grown 2.5x in the last three years in market capitalisation and has maintained margins (16%) that are steadily improving. Mindtree on the other hand was trading at a high of Rs 1,180 per share early last year and is now at Rs 950 levels, although it’s recovered from a 15% drop on October 19 after second-quarter earnings came in below expectations.

The company’s 10% operating margins and growth are under pressure and it has only one large client in Microsoft. “The pending announcement of Siddhartha stake sale is probably the only reason the stock is seeing new highs—a clear indication that the minority shareholders are keen for a leadership change,” an official working on L&T’s strategy told ET. A combined entity of Mindtree and L&T Infotech may make up a quarter of Infosys in terms of revenue.

Mindtree’s plan to block the deal
A few days ago, Mindtree took the unusual step of calling a board meeting on Wednesday to consider a share buyback as it sought to stave off a possible hostile bid by L&T Infotech. It is possibly the first time in India that a target is fighting a potential takeover bid by using buybacks.

Mindtree’s move could increase the cost for the acquirer and reduce the number of shares available for purchase. Depending on the price, it would also be a signal to investors that they should put up an aggressive competing offer.

However, L&T Infotech is keen to act before Mindtree’s board meeting on Wednesday. An agreement with Siddhartha, the largest shareholder, is likely to scupper the buyback plan. Once he sells his stake, any change in capital structure will need a shareholder vote. In the normal course, a company can go for a buyback of up to 10% of its free reserves without shareholder approval.