Review takeover code

IT industry's first hostile bid has created high drama

Hostile takeover bids are a rare occurrence in Indian corporate culture. For the software services industry, which is a relatively young industry, rival promoter-CEOs have been extremely cordial and friendly with one another. The reporting, disclosures and corporate governance standards of software companies are generally good, so a buyer would have the comfort of there not being skeletons in the closet. While there have been deals in listed software companies, Larsen & Toubro’s attempted takeover of Mindtree is the first hostile one. The Mindtree promoters have opposed Larsen & Toubro’s bid to acquire 67 per cent in their company, calling it a “grave threat to the unique organisation” and that the transaction will be “value destructive” for all shareholders. Whatever be the final outcome of the battle between the two sides, such an outburst on the part of Mindtree founders will hardly meet the end objective as L&T is well within the law.

The logic of the takeover bit can’t be faulted. For L&T, which has two software services arms L&T Infotech and L&T Technology Services, it is a move to diversify its services base further. Mindtree, with its focus on the banking, financial services and insurance vertical, will be complementary to the L&T group’s manufacturing specialisation. It will also bring scale to the business and the group can aim a shot at larger contracts. L&T believes it will be able to create more value for its shareholders with this investment. Mindtree’s promoters may not agree to this, but it’s perhaps illogical for them to expect that V G Siddhartha will hold his 20.3 per cent stake in the company for eternity just because he was once the driving force in getting all of them to quit their jobs and start the company as co-founders in 1999. Mr Siddhartha let his intention to quit known quite some time ago. In any case, it was obvious that he had to take a call on whether to sell his stake to an investor for a premium and to keep honouring his emotional attachment with Mindtree.

On a broader point, a bid like this one does raise some questions on the takeover code, which seems to be a work in progress today, given the absence of a leveraged buyout where the company buys all its shares by raising debt. This is not possible under the current code. The Mindtree promoters, many of whom are also the management, own 13.3 per cent in the company, which falls short in case they have to make any counter-offer. While they do have the option of getting an investor who will pay a higher price for the company’s shares, chances of getting someone on board so soon are slim. At the end of the day, it is a case of capital triumphing over management. Moreover, top-tier tech companies, despite having plenty of cash, have stayed away from acquisition in India because they have either found valuations to be high or have not seen enough benefits that they cannot build over time. With its bid, L&T is reposing its faith in what the Mindtree promoters have created over the last 20 years and is willing to pay top dollar.