Mindtree: How Fiction May Become Fact in Corporate India's First Hostile Takeover Bid in IT Space

In mid-January, one of the co-promoters of Mindtree, the IT services major which is believed to be in the midst of an unprecedented hostile takeover bid by Larsen & Toubro (L&T), had termed media reports on such an event happening “fiction”.

Krishnakumar Natarajan had said during an earnings call for the December quarter results that none of the promoters had any intention of selling their stake and that business journalism had become “fiction”.

“No promoter has any intention to sell. We would rather make the company much stronger, potentially sort of increase value of our stakeholders, multiple-fold over the next 3-4 years and build an admired company rather than getting into any speculation because honestly today our business journalism has become a bit of fiction. So, beyond a certain point, I do not think we want to comment on fiction,” Natarajan had said.

Now, as this piece of fiction seems on the verge of turning into reality, perhaps the promoters may want to be wiser in hindsight.

The shares of Mindtree are widely held with only 13.32% held by the four co-promoters. Its single-largest shareholder, VG Siddhartha, is keen to monetise his stake and L&T has sensed a great opportunity to acquire majority control in Mindtree. Even if the current promoters continue to hold on to their shares, the company could be taken over by L&T through a hostile bid.

That the promoters have been taken aback by L&T’s aggressive pursuing of the acquisition, after dismissing such a possibility for months, is apparent.

The promoters have cited “minimal revenue and cost synergies” and a vast difference in the culture of Mindtree and the potential acquirer to stave off a hostile takeover.

L&T is believed to be moving to acquire the nearly 20% stake from VG Siddhartha, Mindtree’s single largest shareholder. And reports suggest that L&T will then be launching an open offer for another 31% in Mindtree, as per SEBI guidelines. Media reports suggest all these actions may be initiated as early as this evening.

The main actor in this drama is VG Siddhartha, the son-in-law of former Karnataka chief minister SM Krishna and the promoter of popular coffee chain Cafe Coffee Day besides some other businesses. Siddhartha has been a passive investor for almost two decades in Mindtree with no interference in the way the company has been operating.

So why does he now want to sell off his substantial shareholding in the company? There has been some speculation that income tax troubles could be behind this move and notices to BSE by his company Coffee Enterprises show some skirmishes Siddhartha has had with the I-T department.

First, his shareholding in Mindtree was attached by the I-T department on January 25, but the shares were released in February. Thereafter, some of his other shareholding in the coffee business was attached by the income tax department.

There are unconfirmed reports suggesting that Siddhartha tried to sell his stake to the current promoters but without success. So now, if this L&T hostile bid succeeds, it would establish a series of firsts in India Inc. This will be the first such hostile bid for an Indian IT major and the first in years for a listed company by another stock market blue chip. Mindtree’s shares are widely held. As per the latest quarterly shareholding pattern filed with the stock exchanges, ‘promoters and promoter group’ together hold just about 13.32% stake in the company and the remaining 86.68% is held by the public.

Proxy advisory firms believe a takeover by L&T could be good news for Mindtree shareholders. Shriram Subramanian, MD of Proxy advisory firm InGovern, says shareholders would benefit from this takeover as “the company becomes a leading IT services player and the benefits of scale (will) accrue. Client concentration risk of Mindtree and L&T Infotech reduces”.

Any such takeover is beneficial to L&T Infotech anyway as this company gains a “much larger portfolio in IT services and if Mindtree and L&T Infotech are merged, (the company) becomes a leading IT services player,” Subramanian says.

As one co-promoter, Subroto Bagchi, quit a government position to help Mindtree firefight the alleged hostile takeover bid, there have been reports that institutional investors may be none too happy with L&T jumping into the fray.

The bottom line for this saga should be whether the small shareholders in Mindtree gain through a change of guard. If they benefit, then the hostility of any takeover may not matter in the long run.

(Author is a senior journalist)