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How L&T Infotech acquires Mindtree: Case Study

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L&T is one of India's largest and most diversified companies; it performs various activities in a very diverse number of areas and sectors, thereby making this company a very energetic and important one. The major focus areas are on engineering, construction, manufacturing, and technology. So why on earth would a construction company buy a technology company, especially when it does not match the company's main business? Did you know that L&T had no intention of acquiring Mindtree? So, how and why did it finally decide to buy a technology company? These will form the crux of our discussion with this case.

Read more Case Studies at Corporate Chronicals

L&T Problem

L&T had enough cash on its balance sheet with over US$2 billion of free cash flow in 2019. It was expecting another US$1.5 billion of such ready cash in 2020. All that the company wanted to do was to use this surplus cash on share buyback from the market. There was, however, no such approval of SEBI - Indian stock market regulator. SEBI was concerned because the buyback would have brought L&T's debt-to-equity ratio above 2:1, which was against the SEBI rule.

Another point to consider is that if a company has excess cash, it can distribute it to shareholders in the form of dividends. However, L&T was already paying about 30% of its profits as dividends, which is pretty high for the industry. Raising the dividend percentage further may have made shareholders expect even more in the future. If the company had paid a lower dividend in any particular year, then the market might not have liked it, which could harm the reputation and share price of the company. So, L&T thought that increasing the rate of dividend was not a good choice.

Read more Case Studies at Corporate Chronicals

Triggering Event

V.G. Siddhartha, owner of Café Coffee Day, was the largest individual shareholder in Mindtree, owning around 20% of the firm's shares. He had financial distress and was looking for a buyer for his stake. For L&T, this was the right opportunity, as in March 2019 it announced an agreement to purchase Siddhartha's 20.4% stake in Mindtree for ₹3,269 crore at ₹980 per share.

This 20% equity gave L&T the most important position in the company, starting a hostile takeover. Then, L&T bought another 25% of shares of Mindtree from the open market. Pursuing a majority stake, the company offered Mindtree's shareholders to sell their holding to L&T at the price of ₹980 a share. During this process, L&T gained more than 60% of the holding of Mindtree.

Read more Case Studies at Corporate Chronicals

Resistance from Mindtree

Mindtree's co-founders, Rostow Ravanan, Krishnakumar Natarajan, and Subroto Bagchi, spoke strongly about the company's special culture and independence. They publicly disagreed with the takeover, saying it was not good for the employees and shareholders. Mindtree's board thought about buying back shares to stop L&T from getting more shares, but the board eventually said no to the proposal, partly because of rules and some board members' objections. The founders sought a "white knight", or friendly investor, in order to help stop this takeover attempt by L&T. They could not find any good partner because most likely investors did not want to venture into L&T.

Read more Case Studies at Corporate Chronicals

Completing the Sale

By July 2019, L&T formally acquired Mindtree and inducted its leadership into the key positions. L&T further consolidated its IT services through the formation of L&T Mindtree, which would come to be known as LTI Mindtree, the merger between Mindtree and L&T Infotech.

Read more Case Studies at Corporate Chronicals

Conclusion

Mindtree tried hard but money issues of its major shareholder, V.G. Siddhartha, and well-set plans of L&T resulted in the takeover. The coming together of L&T Infotech and Mindtree has created a stronger IT services company, which assists L&T to focus on digital and technology. In short, the unexpected offer of L&T and all takeover events occurred because SEBI did not allow share buybacks and because a strategic investor wanted to sell his shares quickly.

Read more Case Studies at Corporate Chronicals



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Location: New Delhi, India

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