To acquire Mindtree, L&T will have to pay more than Rs
9000 crore that it wanted to use for a buyback that Sebi nipped
L&T’s hostile bid for Mindtree has stirred passions last
seen in the late 1980s. Ironically, the predator was at the receiving end of
unwanted advances from Dhirubhai Ambani and then Kumar Mangalam Birla. A feisty A M Naik, who was then the CEO and MD
of the engineering and construction player, succeeded in convincing financial
institutions that a professionally-run company was in a better position to
create wealth than becoming part of a promoter-driven enterprise. Subroto
Bagchi, one of the founders of the tech solutions provider, has raised
the prospect of the entrepreneur-backed venture in the danger of being levelled
by the bulldozers of a conglomerate governed by hierarchies. The strategy to
resist surrendering to an undesirable new owner remains the same 30 years
later: tugging at the heartstrings rather than the purse strings. Loss of
identity of an iconic presence remains a potent weapon to mask an underwhelming
performance. If the sight of a low-level employee who had risen to the top
perch fending off two powerful businessmen got sympathy then, a co-promoter
taking a break from his mission to teach school kids in Odisha to come back to
rescue his dream project is triggering admiration now. It would be interesting
to know if today’s boardrooms and fund managers will be tolerant of a CEO who
resists an opportunity for the ordinary shareholders to earn a good return on
their investment.
The buyer’s capability to nurture and scale up the acquired
business should ideally determine compatibility. The use of uniqueness as a
defense mechanism to blunt the edge of money muscle of the bidder underscores
the triumph of goodwill over balance-sheet numbers. L&T made an attractive
target not only because of its dispersed holding and sluggish growth. It is
known as much for its competence as for its unsullied brand, at least till
recently, in a segment dotted by unorganized players and public sector
companies. Though Mindtree is not among the top five IT exporters by market
value, it has sticky, niche clients and an informal work environment. Even in
industries whose performance hinges on customer satisfaction rather than securing
contracts from government undertakings, those with friendly corporate actions
and transparent management get better discounting. The market likes companies
ploughing back their profit to expand, disbursing it as dividends or buying
back the languishing shares. Many try to substitute these attributes by
publicising their socially responsible behaviour. Donating a significant
portion of his personal holding to the charitable trust controlling 67% of his
company fetched a promoter appreciation but did not move the stock much. On the
other hand, an auto maker battered by competition got the much-needed traction
when the baton was passed by the second generation to the two heirs without any
bloodshed by efficiently carving out the revenue streams.
The Naik-Ambani-Birla feud ended on a satisfactory note. RIL
got a preferred executioner for its mega projects. Grasim bagged the cement
division, thereby consolidating its position in the industry. L&T got rid
of a capital-intensive asset and secured AAA rating in the process. Naik
created an employees’ welfare trust to park the 10% stake that Birla sold back
after buying it from Ambani. The foundation, controlling nearly 12% share
capital, is the largest individual stake-owner and positioned to shield future
attacks. The end of the present act will depend on how the players perform.
Despite the advantage of size, L&T has been making the right noises.
Mindtree and its team will be left alone, at least during the initial years.
The response is prudent than conciliatory. If the product portfolio and market presence
contribute to the discounting of manufacturers, the number of top-of-the-drawer
customers and strength of the business divisions lend to valuations of firms
offering generic services. Though it has outperformed the sector index since
listing 12 years ago, Mindtree’s five-year EPS CAGR up to FY 2018 pales compared
with that of L&T Infotech. Remarkably, cash with both was at the Rs
330-360-crore level last fiscal year, despite sales of L&T Infotech more by
nearly a quarter, operating profit 40% higher and net profit twice that of
Mindtree. For the combined entity to
become the sixth largest IT player by sales and the third largest by profitability,
L&T will be paying Rs 10653 crore for 66.32% equity. The amount exceeds the
total cash holding of the three entities. A Rs 9000-crore buyback proposed by
L&T was rejected by Sebi as debt would be more than double the reduced
paid-up capital and reserves.
-Mohan Sule
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