Chennai: Mounting tension in the IT industry after L&T mounted India’s first hostile takeover of Mindtree further lengthened as the board of the technology services firm rejected the takeover bid.
Hitting out on L&T, Mindtree promoters posed five questions to the construction giant, chief among which stated why it could not build an independent tech business on its own and what it would do if employess chose to leave.
The promoters of Mindtree described the takeover a great threat and value destructive to shareholders.
Larsen & Toubro made an offer to buy up to 66 per cent stake in Mindtree for around Rs 10,800 crore and entered into a deal to buy Cafe Coffee Day owner V G Siddhartha’s 20.32 per cent stake in the firm and also placed an order with brokers to pick up another 15 per cent of the company shares from the open market.
Mindtree promoters have staunchly opposed L&T’s bid to acquire the company, describing it a grave threat and value destructive to shareholders.
“This is a people business. Mindtree minds’ have signed up for a mission not just a salary.Take their mission away and they will go…what will you be left with?” co-founder, Mindtree, Krishnakumar Natarajan said.
“You are a company with turnover of Rs 1.2 lakh crore, you are 18 times the size of Mindtree. Why can’t you build a great technology business with your resources and capability without disseminating another organisation?” Natarajan asked.
However, more than problems surrounding the takeover, experts and analysts state that it is the investors of L&T that need to be taken car of, for they would like to see their money return back.
With Mindtree on baord, it is expected that this will lead to the merger of LTI (L&T Infotech) and the software firm because a conglomerate with multiple arms is typically valued at a discount by investors.
It is also taking a fair amount of risk related to integration of Mindtree, without the support of the latter’s founders, state analysts.
Brokerage firm Elara Capital said, ‘We believe this will inevitably lead to a merger of LTI (L&T Infotech) and Mindtree, as L&T is unlikely to retain two listed entities with complementary capabilities in the same industry.’
Similarly, a report by Jefferies India Pvt. Ltd, said, ‘We believe it will not be in line with L&T’s core focus of listing (cashing on) non-core businesses and enhancing shareholder value. But high leverage isn’t really L&T’s problem. Its net debt-equity ratio could rise marginally from 1.3 times to 1.5 times after the Mindtree deal.’
“Mindtree’s top 10 clients contribute about 44 per cent to revenues. The risk to growth and/or relationships in one or multiple accounts cannot be completely ruled out,” said Motilal Oswal Financial Services Ltd.
L&T’s decision to use its cash for an acquisition in a non-core business raises pertinent questions about capital allocation as well, say analysts.
L&T’s shares dipped 1.5 per cent on Tuesday, showing that investors are not worried about the acquisition but still are seeing potential threat that it might bring with it.
Also, if L&T can pull it off, it stands to gain from higher scale in many key verticals, things that LTI could not target and accomplish on its own.
| The fifer… |
 Here are the five questions that Mindtree promoters posed to the construction giant-
* Why can’t you build a great technology business with your resources and capability without disseminating another organisation? |
| Their stand |
| According to R Shankar Raman, chief financial officer at L&T, “A strong presence in IT will de-risk the E&C business, where margins are low and projects are long-drawn. While financial services business is counter-cyclical to E&C, the IT services business brings in relatively stable cash flows.” |