MFs could support L&T's takeover bid for Mindtree at 'right' price

Mindtree management reiterates backing of large investors

Mindtree’s bid to stave off Larsen & Toubro’s (L&T’s) takeover bid could go down the wire. While the management of Mindtree on Tuesday said it has the backing of large investors, mutual funds (MFs) say they are willing to tender their shares in the proposed open offer if the price is attractive. MFs held 8.3 per cent stake in Mindtree as of December 31, 2018. 

On Tuesday, Rostow Ravanan, managing director and chief executive officer of Mindtree, said, “Institutional investors would make up their mind at different prices. As of today, we have the support of our investors.”

As part of its strategy to acquire Mindtree, L&T has announced an open offer at a price of Rs 980, nearly 4 per cent more than its current price of Rs 943.

Fund managers say L&T’s current offer price is not compelling, but the equation could change if the deal is sweetened. “If L&T is serious about taking its shareholding to 66 per cent, it will have to revise the open offer price upwards by at least 20 per cent. At current price, not many public shareholders will be excited to tender their shares,” said a fund manager.

Meanwhile, Mindtree management has termed the reports of Nalanda Fund, second-largest public shareholder of the company, not backing the existing promoter group and supporting L&T’s bid, as false.

“Nalanda is behind us. These investors have seen the high-performing management of Mindtree deliver results for several years,” Rostow said.

Commenting on the L&T’s media statement that they would be open to keeping Mindtree independent, Mindtree’s brass said that their actions did not match their words.

Meanwhile, some of L&T’s shareholders are also not happy with the company planning to divert large sums of money in pursuing growth of non-core businesses.

“The company is committing large cash for an industry with low-growth prospects and low return on equity. This shows that the company lacks conviction on its core business,” said a chief investment officer of a large-sized fund house.

Fund managers add that ‘hostile’ takeovers can often lead to disruption of the business in near-term. 

“Following such a takeover, clients may be worried about ramping up their business. The employees could also lose morale, which is a big risk as information technology is a people’s business,” a fund manager said.  

The shares of Mindtree fell 2 per cent, while that of L&T ended 1.6 per cent lower on Tuesday.

However, some brokerages see positives for the L&T Infotech from the merger with Mindtree.

"Despite the obvious integration risks and possibility of some senior and middle management exits in the event of a hostile takeover of Mindtree by LTI, we think the combined entity will be in a sweet spot with scale in almost all major verticals, barring healthcare," analysts at Elara capital said in a note.

On Tuesday, shares of L&T Infotech rose as much as six per cent, before settling four per cent higher at Rs 1,636 per share.

Earlier, Mindtree was expected to launch a buyback to thwart the takeover bid of L&T. However, L&T has quickly closed the deal with Coffee Day-founder VG Siddhartha and announced its own open offer plans.

L&T’s open offer announcement has created uncertainty over Mindtree's buyback plans.

"This incident has come up publicly yesterday (Monday). We will have to look at the prevailing law and options with respect to the buyback offer," Rostow said. The board will meet on Wednesday to consider the buyback.

Legal experts said the company will require a special resolution to do the buyback in the wake of L&T’s open offer announcement.