Mindtree Ltd. needs a new white knight to fend off any hostile takeover, co-founder Ashok Soota said amid reports that Larsen and Toubro group is looking to acquire stake from single-largest shareholder VG Siddhartha.
Soota, former chairman of mid-sized software services provider, had exited the company by selling shares in the Bengaluru-based company to Siddhartha’s Coffee Day Group. Siddhartha has been a white knight for nine years and investor for 10 years, according to Soota.
The Coffee Day Group founder is said to be looking to sell 20.4 percent in Mindtree to pare Rs 6,500-crore debt of his flagship Coffee Day Enterprises Ltd. L&T Infotech, a subsidiary of L&T, is reportedly in talks to buy the shares. Both Siddhartha and L&T have yet to respond to BloombergQuint’s queries emailed earlier.
Larsen & Toubro Ltd. has emerged as the leading bidder for a majority stake in Mindtree. The infrastructure company is going to pay Rs 981 per share to buy the entire stake held by Mindtree’s largest shareholder, according to report in Live Mint newspaper.
“L&T seems to have the financial muscle to go through this deal,” said Soota. “Mindtree would need to bring in another White Knight, and I’m sure efforts are behind it because the buyback will accomplish only a small percentage.”
The board of Mindtree will meet on March 20 to consider a buyback.
The company will have to ensure that it is able to garner adequate funds to get another 8-10 percent, Soota said. “If that happens, then existing shareholders can be pursued to support the management, but that really remains to be seen.”
Watch the full interview here:
Here’s the full transcript of the interview:
There is no official commentary from Mindtree with regards to possibilities of hostile takeover but if we read the Subroto Bagchi’s tweet it certainly seems that it is at doorstep. Is the buyback planned by board or the management to show that you are happy with current things and you do not want a suitor who comes in and does a hostile takeover?
My own personal empathy here is with Siddhartha as he has been white knight for nine years and investor for 10 years and he likes to try and monetise his investment. I also have empathy with founders as, because in their place, even I would do the same thing to resist a hostile takeover. Will they succeed? You have powerful force lined up at the other end. It seems that, and I am going what I read in media, they are poised to acquire Siddhartha shares and quickly launch a bet for offers from public, for enhancing the 26 percent to reach there.
I don’t think that Subroto and other founders could have made these statements without having alternate financial strategies. One can wish that they are able to work this out in adequate good time and stop the effort as they see as the hostile takeover.
The buyback is announced but whether the buyback would be enough? Is the buyback means for the current management to show that they are not wanting a hostile takeover? Subroto Bagchi’s tweet suggests that Mindtree is not an asset which is meant to be bought and sold but it is an asset independent of such activity to stay and create business and wealth for long term shareholders.
There are two angles to it. The first part is, is this enough. Clearly, the buyback is not enough. You have published the data and it might make a difference of 4 percent or so as there are limit of how much they get in buyback. There has to be another financial strategy and that strategy needs to unfold. If it is not unfolding and there is no appropriate backup which they been able to workout or not able to workout by the time L&T gets going, if L&T go to acquire 22 percent then they still have to get another 4 percent in market before they launch the open offer. The founders are working on multiple strategies behind the scenes and let’s see of what they are able to come up with.
One of the issues which is being raised is with respect to cultural differences with both the organisation. Even if L&T is poised to take hostile takeover, the board and senior management seems to believe that it does not fit culturally. Do you see that as a big issue in entire deal transaction?
I don’t see it as an issue in context with deal going ahead. If L&T has made up its mind, they will buy, and they have all the powers to buy. Culture is a real issue. So many acquisitions fail because of cultural incompatibility, differences in points of view and so on and just the culture of organisations. If L&T were to succeed and go ahead then that becomes one of the challenges in recognising what can be done to ensure success in spite of fact that, there are differences in culture but that exist in all organisations.
The big thing would be for L&T to is if they did go ahead, they could actually see what they can gain in terms of integrating the culture and bring some of the best practices at Mindtree.
Is integration of best practices was the aim, then why would L&T won’t go for the merger with Mindtree rather than hostile takeover?
It is not that this is the choice they have. Then founders then have to agree to a merger. So, this is the only way to really get control. Then, hopefully, get founders align to this and we are making right rules for them as they itself has done good job and delivered good returns since the IPO and that’s may be the wisdom of how they will do the integration assuming they can even keep it apart. Lot of things can happen from here.
From a founder’s perspective, founders and promoters have nearly 13 odd percent in the company. If you have to look back and see that of allowing Siddhartha to go up a 20 percent, was it a big mistake?
It was not a mistake at all. It was great thing then as that time they needed a white knight. The problem they are facing now, they could have faced nine years ago when I was exiting, and Walden also exited. So, between two of us, we were the largest shareholders. It is not that we don’t have offers from other companies at that time. We were keen on stabilising the leadership. We merged with Siddhartha as a white knight. It eventually went well for nine years and it has worked for greater good of all concerns. Siddhartha has got good returns, founders have continued to run the company. It is new development. How well they will come out of this development really remains to be seen.
How is the relationship between Siddhartha and current board and promoters who are now on the board?
That is a wonderful relationship. Siddhartha came in the company because of me as he has sought me out while I was working in Wipro. He said if you choose to start then he will be available to me as an investor. After we began the company, particularly with Subroto, we built very close relationship. In later stage with KK (Krishnakumar Natarajan) and Rostow who is currently the CEO. So,there was no negative in the relationship.
He is proceeding on this on basis of economic approach which is also fair enough as an investor and they are doing what they can do to retain control.
If there is hostile takeover and a bid put up shortly and let’s assume that it is successful, one would presume that the existing management Subroto Bagchi and rest of the people might not find it to their best interest to continue with the company as well. Right?
Subroto is not a part of active management. He is a director on board. He stepped down as chairman to take the government role.
Even Rostow Ravanan?
Rostow and KK are the two people involved at the moment. And also, Partha (Namakkal Parthasarthy) who plays active role who was CEO of the company for some time. So, they are involved.
There is also another founder based in U.S. called Staples. These people are there. It will really be with L&T to work with and win over the existing founders.
Do you reckon it is easy? Because the existing founders or the people of we spoke about are showing signs of resisting this.
If they are not being able to then you have to acknowledge it and workout suitable arrangements to bring about the transition. I believe none of this is impossible. These things get worked out once you see the situation on ground based on who owns what percentage of company.
You said that either option whichever way it works out would be fine for shareholders. Can you elaborate it? Should this succeed or not succeed?
Either way, a group of shareholders bidding to get control or retain control in a process where you will be given asset with two people bidding for and the price of that asset will keep going up. So, it will be good in short run. And if then handled well it will be good for long run for shareholder. Certainly, the immediate thing will be a gain.
From a shareholder’s point of view and for someone who has been founder of this company, what kind of recommendation you give to shareholders? Because your company’s 40 percent is held by foreign portfolio investors and big investors hold 10 odd percent. As a founder of company, what is the advice that you want to give to shareholders that whether they participate and tend their shares to L&T or should they support the board?
Mindtree has delivered good results for their existing investors and they have no reason to believe that they won’t continue to do so. To that extent, it will be a great thing if the existing founders are able to resist. There will be a tussle if L&T reaches a stage or getting 26 percent, Mindtree has worked out alternate strategy whereby they are able to garner adequate funds to be able to get another equivalent percent, then I think the existing shareholders could be persuaded to support the existing team. That remains to be seen.
Do you see a white knight emerging from current management and board to buy out Siddhartha stake?
If I read the Times of India report, it is seen that this is a done deal and L&T will proceed ahead and may be stitch together something which will get them deal going. As somebody who know the intricacies of corporate India let alone just Mindtree, what are the options existing with current set of people at the helm of Mindtree to thwart it? A- They need another white knight and I am presuming the efforts are behind it. The share buyback will accomplish a small percentage. So, they do need another white knight and let’s see how that unfolds. I can’t comment. They may have worked on other financial strategies and it will be great if they have.
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