Mindtree – Hostile Takeover Attempt by L&T

L&T has acquired 20.4% stake in Mindtree- What Next?

In Mindtree Hostile Takeover Attempt by L&T, L&T has bought the 20.4% stake held by Café Coffee Day (CCD) founder V.G. Siddhartha along with his two Café Coffee Day affiliate firms in Mindtree Ltd. L&T has agreed to pay Rs 981 per share. L&T is soon to announce an open offer to buy an additional 31% stake in the company

Company Overview : Mindtree

• Establishment: Mindtree, Technology and outsourcing company, was incorporated in the year 1999 by a group of 10 industrial professionals. Venture capital firms Walden International and Sivan Securities funded the company, later joined by the Capital Group and Franklin Templeton.
• Listing: It was listed on the Bombay Stock Exchange and the National Stock Exchange in December 2006. I
• Market Cap = Rs 15,805.60 Cr, Mid cap company
• Business: Mindtree Ltd. is an international Information Technology consulting and implementation company that delivers business solutions through global software development. It is 11^th largest company in IT consulting & Software sector.
• The Company is having four industry verticals Retail, CPG and Manufacturing (RCM), Banking, Financial Services and Insurance (BFSI), Technology, Media and Services (TMS) and Travel and Hospitality (TH).

• Top 3 Business Segmentation:
• Media and Services = 37.47%, BFSI = 24.26% and Manufacturing = 23.23%
• The company deals in e-commerce, mobile applications, cloud computing, digital transformation, data analytics, enterprise application integration and enterprise resource planning with over 340 active clients.
• Services offered: The Company offers IT and R&D services in the areas of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services.
• Global Alliance: Mindtree has formed successful business and technology alliances with big companies like Microsoft, Hewlett Packard, Oracle, Bluetooth SIG, Intel, IBM, SAP, Orange, Sun Microsystems and many more.
• Active Clients: It has over 340 active clients including names like Getronics, Sonoco, ABB, Elance, Symantec, Samsung.

Shareholding pattren od mindtree

• Highest Public Shareholder:
• Coffee Day Enterprises Ltd = 10.63%
• Coffee Day Trading Ltd          = 6.45%
• V G Siddhartha                       = 3.33%
• VG Siddhartha, one of the large non-promoter shareholders who along with his group companies own about 20.41% of Mindtree, wants to monetize his investments. And ysesterday on March 18, L&T has signed a deal with VG Siddhartha to buy his 21% stake in Mindtree.

A Hostile takeover attempt by L&T infotech

Stepping towards MINDTREE TAKEOVER

• Larsen and Toubro Ltd. (L&T) has bought the 20.4% stake held by Café Coffee Day (CCD) founder V.G. Siddhartha along with his two Café Coffee Day affiliate firms in Mindtree Ltd. L&T is soon to announce an open offer to buy an additional 31% stake in the company.
• L&T has agreed to pay Rs 981 per share.
• According to SEBI’s takeover rules, an acquirer can launch an open offer to gain control of a listed firm only it makes a public announcement to acquire more than 25% stake and voting rights in the listed firm eventually.
• Typically, an acquirer first buys 25% in the listed company to trigger a mandatory open offer to take control of a listed firm. KPMG’s corporate finance team is handling the mandate for the entire deal and Axis Capital and Citigroup Global Markets are running the mandate for the open offer as bankers.

Mindtree’s Proposal for Buyback to prevent hostile takeover

• Panic-stricken and desperate activity on both sides- Mindtree and L&T, has sparked the buyback plan announcement by Mindtree. Promoters of Mindtree is holding only 13.32% stake in the company.
• An agreement of L&T with Siddhartha, the largest shareholder of Mindtree, has ruined the buyback plan of Mindtree. Because any change in the capital structure now will need a shareholder vote.
• Company can go for a buyback of up to 10% of its free reserves without shareholder approval. Mindtree has around Rs 2,800 crore in reserves, implying the company can use around Rs 280 crore for the buyback of the company’s shares and then use a further Rs 700 crore from the reserves for another 25% stake to retain control.

L&T conunter strategy of MINDTREE hostile takeover attempt

• After L&T’s board approved an enabling resolution in January to engage with Siddhartha to explore a trade; it has been in touch with institutions and family offices that are key public shareholders.
• L&T Infotech has grown 2.5x in market capitalization in the last three years. Also it has maintained margins (16%) that are steadily improving.
• Mindtree was trading at a high of Rs 1,180 per share early last year and is now at Rs 950 levels. 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.
• At the reported price of Rs 981 per share, the value of  Siddhartha’s stake amounts to Rs 3,288 crore. However, if LTI ends up acquiring close to 51 percent of Mindtree, it will becomes a subsidiary. The cost of this acquisition might rise to Rs 8,205 crore.

synergy gains from acquisition

• Over the medium to long term, synergistic gains will flow through. First and foremost it helps the business of L&T Infotech [LTI] to scale up. On the basis of nine month FY19 financials, the combined revenue of LTI and Mindtree would be close to $1.7 billion, the 6th largest in the industry.
• Their geographical presence will also be similar:
• Mindtreee: 73.4% of revenue accruing from the US and 18.7% from Europe
• L&T Infotech: 67% of revenue accruing from the US and 17% from Europe.
• However, in terms of verticals, LTI has a lot to gain as Mindtree has a strong presence in technology, media and services (close to 40%) where the rate of growth of digital adoption is very high.
• The other verticals where Mindtree has a strong footprint are retail and consumer packaged goods (CPG) and travel and hospitality. These industries are at the forefront of digital adoption. In fact, the share of digital in total business for Mindtree is much higher at 49.5% compared to 37% for LTI.
• Mindtree’s revenue per employee (because of higher value added in digital) is a tad higher than LTI. However, LTI has been reporting a much better operating margin of close to 20% compared to 15% for Mindtree.
• LTI this has come with a record high utilisation rate of 82% (compared to 74.6% for Mindtree), we feel the synergistic benefits, coupled with the sharper focus of LTI management, can lead to improvement in Mindtree’s margin performance.

IMPACT OF MINDTREE HOSTILE TAKEOVER ATTEMPT BY L&T ON THEIR SHARE PRICES

• A mergers and acquisitions (M&A) transaction typically boosts the shares of the target company and weighs down the shares of the acquirer.
• It’s no different in the case of Mindtree Ltd and one of its potential acquirers-L&T.
• L&T reported plan to buy a large stake in Mindtree has led to a fall in the value of its software services arm- Larsen and Toubro Infotech Ltd (LTI).
• Larsen and Toubro Infotech’s valuation has fallen nearly 11% since mid-January, on fears that a possible combination can be a drag on its performance. Reports of L&T’s interest had emerged first in mid-January. Mindtree shares, meanwhile, have risen about 7% in the same period, adding to the gains since October last year.
• Mindtree- The shares of Mindtree were 2.19% up on March 18, at Rs 966.70 on BSE and 1.98% up at Rs. 966.15 on NSE Nifty.
• L&T- While the shares of L&T have slipped 1.72% on BSE Sensex and by 1.76% on NSE index.

summary

• In Mindtree Hostile Takeover Attempt by L&T Mindtree need to find an investor offering a higher price to counter the offer. In this case there is no one offering a price higher than L&T.
• So the promoters do not have any option but to leave it to shareholders to decide on change of control.
• L&T could be a better controller of Mindtree than the existing promoters in terms of corporate governance. Since L&T is not driven by a single founder-promoter group unlike Mindtree.
• This will be the first ever hostile takeover move in India’s Technology Industry. And also a rare, full blown tussle for a publicly traded company.