New Delhi: Larsen & Toubro is making an attempt to acquire IT services firm Mindtree even though the IT company is not willing to comply. Therefore, L&T opted for an alternate route. The engineering conglomerate signed a deal with Café Coffee Day founder VG Siddhartha to buy his 21 per cent stake in Mindtree and announced plans to make an open offer for an additional 31 per cent.
If the deal materialises, L&T will automatically become a majority stakeholder in Mindtree with over 50 per cent shares and thus, according to accounting terms, would have acquired the IT services firm despite opposition from Mindtree’s top bosses who hold 13 per cent stakes. This is thus being termed as a hostile takeover.
What is a hostile takeover?
Mergers and acquisitions are almost an everyday affair for corporates. In order for a company to acquire a target company, the potential acquirer must buy at least 51 per cent shares of the target firm. There are two ways to go about acquisitions.
A friendly acquisition is one in which the controlling group of the target company sells its shares to the offer-making firm wilfully. However, if the management of the target company is unwilling to negotiate, the acquirer can directly approach the shareholders of the company by making an open offer. This is known as a hostile takeover.
Why is Mindtree unwilling to sell stakes?
Mindtree promoters have maintained that they oppose the hostile takeover bid by engineering giant Larsen and Toubro. After L&T signed a deal to acquire 20.3 per cent shares of Mindtrees’s lead investor VG Siddhartha on Monday, the IT firm’s top management reflected on the potential negative consequences to corporate culture, client relationships and employee retention if the deal goes through.
The promoters, including Krishnakumar Natarajan (executive chairman), Subroto Bagchi (co-founder), Rostow Ravanan (CEO) and Parthasarathy NS (executive vice chairman and COO), issued a statement saying, “The attempted hostile takeover bid of Mindtree by Larsen & Toubro is a grave threat to the unique organisation.”
The promoters further emphasised that a hostile takeover by Larsen & Toubro, “unprecedented in our industry, could undo all of the progress we’ve made and immensely set our organisation back. We don’t see any strategic advantage in the transaction and strongly believe that the transaction will be value destructive for all shareholders”. Employees of the firm have also expressed their discontentment on social media platforms with #MindtreeMatters which seems to have gained significant traction.
Why does L& T want to acquire Mindtree?
It is an attempt solely aimed towards upgradation of scale for L&T. The hostile takeover comes almost a decade after it had lost the race to acquire scam-struck Satyam Computers. This acquisition will add an additional arm of IT services to its business and escalate its stature in the industry. The engineering conglomerate will also be able to cater to a diversified customer base. Under L&T’s strategic business plan ‘Lakshya 2021’, IT business was identified as a key growth business and was given the mandate of exploring acquisitions.
What are the options ahead for Mindtree to prevent a hostile takeover?
The hostile bid has shocked the IT industry, where deals are fought hard, but competitors remain friendly. Until Mindtree co-founder Subroto Bagchi tweeted that there was a threat of an imminent hostile takeover, few believed such a thing could happen.
Though few, there are tools through which Mindtree can prevent an acquisition. “Some of the options make the takeover expensive for the acquirer. In some cases, the most attractive assets of the target company are sold off so that the acquiring company may lose interest and back out from the hostile takeover,” said DK Srivastava, chief economic adviser, Crisil.
Here are two ways in which takeovers can be made unattractive for the acquirer:
Sale of Assets: In a move to make the acquisition less interesting for the acquiring company, the target company may sell the entire company or the most important assets, thereby making the sale less attractive for the acquiring company.
White Knight: Where a hostile takeover seems imminent, the target may seek out other investors which are friendly to the target company, and sell the company or substantial stocks of the company to the friendly investor. Such a friendly investor is called a white knight.