Mindtree-L&T saga: Oversight, price correction behind Nalanda's U-turn

Mindtree founders couldn't convince institutional investors to stay on in their last meeting

There was a meeting in Mumbai last week between the Mindtree founders and the key institutional investors in the Bengaluru-headquartered IT services firm.

This was the founders’ last-ditch attempt at convincing the big investors to stick to the company, which they had earlier seen as a tight ship.

However, sources in the know said sensing that there would be no more upside to the share price of Mindtree in the medium term, most of them were inclined to exit with a handsome return than to be caught in the fight between L&T and the founders.

After that meeting, it was clear that L&T would get a controlling stake in Mindtree because there would be no upside to the offer price, said two persons familiar with the development.

Nalanda Capital was part of that meeting, they added.

They said the exit of Nalanda Capital from Mindtree was logical because the fund house's lobbying to raise the open offer price was futile.

“Nalanda Capital is accountable to its limited partners (LPs). They tried hard to get a better price from L&T but when nothing yielded results, it was logical to exit at a profit,” said another person familiar with the development.

Some market experts say after the open offer, the Mindtree share price is likely to see correction in the near-term. So, it is wise to exit through the open offer than to enter into a phase of uncertainty. This is evident in the share price of Mindtree, which has corrected around Rs 30, or 3 per cent, from a high of Rs 980 a week ago.

“Nalanda Capital was not able to get enough support from other shareholders. Also, the complaint against the fund house accusing it of ‘acting in concert’ might have a bearing on its decision to offload the Mindtree stake,” said V Balakrishnan, chairman of Exfinity Venture Partners and former chief financial officer and board member of Infosys.

Since the beginning of the takeover bid, Nalanda Capital has sided with the Mindtree management in its opposition to the deal. 

In a rare stance, the Pulak Prasad-led fund house publicly supported the Mindtree management in its fight against L&T in March. 

“If an exceptional business is in good hands, why risk changing anything at all? Why would Mindtree be better-off as a non-core holding of a diversified conglomerate than in the hands of its proven, passionate and committed current owners?” the fund house had said in a letter.

“If we factor in opportunity costs compared to Mindtree’s unhindered trajectory, this sudden hostile disruption would be specially damaging,” it said.

The fund house had reached out to some institutional investors, asking them not to tender shares in an open offer. But such interventions raised questions of fair play, leading some investors, including Bengaluru-based proxy advisory firm InGovern, to urge the Securities and Exchange Board of India (Sebi) to look into the allegations of “acting in concert” with the management.

“The first thing is that Nalanda had seen the writing on the wall on the pricing front. Secondly, its effort in convincing other investors didn't yield results except inviting some scrutiny from Sebi,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.

Some analysts said Nalanda Capital’s exit was expedited owing to the lack of any road map on Mindtree’s future with L&T as the single-largest investor.

“The Mindtree founders couldn't convince the big investors regarding the road ahead for the company with L&T on board. When the integration is evident with the pain of transition lurking, no sane investor like Nalanda Capital would stick to the company,” said an investment banking source.

When the sale of a 10.61 per cent stake at Rs Rs 980 per share yielded Rs 1,708 crore for Nalanda Capital on Monday, it was almost four times its average investment over a decade or so. “Nalanda cashed out with a 400 per cent return. For a fund house, that is a good deal at least in the mid-cap space,” said the person.