Mindtree – L&T – India’s 1st Ever Hostile Takeover – An Overview
Acquisitions
may be friendly or hostile. A friendly acquisition is one in which the
promoters wilfully transfer the control of the management of the target company
to the acquirer. In case of hostile
takeover, the same transfer is done grudgingly. Historically, India has
witnessed only a handful of hostile takeover attempts. Foremost amongst these
(predating the takeover code) is the highly contentious and unsuccessful
attempt by Swaraj Paul to take over Escorts Industries. Thereafter, almost 15
years, corporate India witnessed the only successful hostile takeover of Raasi
Cements by Indian Cements in 1998.
Mindtree,
a tech company started by a group of Wipro around two decades back is set to
witness the first ever hostile takeover in the IT sector. Aspiring to achieve
an internal target of 1 billion dollars, Mindtree which has missed the target
twice is poised to achieve the same in the current Financial year. This is
largely due to the aggressive transition to digital revenue resulting from its
strong background in
product engineering leading to an attractive target for any entity looking to
grow in this segment. Mindtree is also a widely held company with around 86%
equity held by public shareholders including FII’s, mutual funds with founders
owning only around 13%. What makes the Mindtree situation interesting is V G
Siddhartha, Chairman of Café Coffee Day who is the single largest non-promoter
shareholder with a 20.32% stake in Mindtree. Faced with liquidity pressures, he
approached Larsen & Turbo (L&T), for the purchase of his entire 20.32%
stake in Mindtree which offered a price in INR 980 per share equivalent to INR
3269 crores for his entire shareholding. The Management however resisted this
move on the premise that the ethos of L&T was very different and this
resulted in setting the stage for the hostile acquisition by L&T.
RATIONALE
L&T is a diversified conglomerate with the lion’s
share of its business coming from its EPC sector which is highly cyclical and
dependant on the economy. To offset this cyclical business, L&T has been
growing its services business which is largely technology, real estate and
financial services. It has been looking at acquisitions and L&T Infotech
has also made a few acquisitions in the past though none comes close to the
nature and size of Mindtree. A deal with L&T would create a $2.4-billion IT
services firm with several verticals of scale namely BFSI, retail, consumer
packaged goods and manufacturing, and technology media and service.
STRUCTURE OF THE HOSTILE TAKEOVER
In March 2019, by entering into a share purchase
agreement with VG Siddhartha, the owner of the famous Café Coffee Day, L&T
has acquired a stake of 20.32% of the paid
up capital in Mindtree. Pursuant to Regulation 3(1) and 4 read with 13(1) and
Regulation 15(1) of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011, L&T made an open
offer for Rs. 980 per share to acquire equity shares of Mindtree aggregating to
35% of the voting share capital.
SAFEGUARD
MEASURES
With only pocket-sized stake of 13% the promoters are
left with minimal options and some of the measures that may be deployed in
similar scenarios to stave of the hostile takeover are considered hereunder:
- Crown Jewel: Since Mindtree is involved in IT business, its main assets
may include Intangible Assets or Intellectual Property among others. In order
to overturn the overpowering business into shallow, the promoters of the
company may sell a large chunk of the assets to third party. This will in
return hamper the sale and make this acquisition less attractive in the eyes of
L&T. This is however not a feasible scenario since the promoters control is
not substantial. - White Knight: The target company may seek intervention of friendly investors
and sell their substantial stock. In August 2013, an arm of Reliance Industries
Ltd (RIL) picked up 14.12 per cent stake in hotelier EIH Ltd. As a white
knight, RIL helped EIH to counter a possible bid by ITC Ltd. The
cigarette-to-hospitality-to-FMCG major has mopped up 14.98 per cent stake in
the hotel company over the years. EIH managed to shore up his defences against
ITC. In one fell swoop, EIH managed to pit a stronger force RIL against ITC, in
effect neutralising the marauder, had it decided to launch an open offer. ITC
has maintained for a decade that it would not launch a hostile bid for EIH, but
its stake was too high. - Buyback of Shares: Pursuant to Regulation 29(1) (b) and 29(2) of SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015, Mindtree
provided a notice for considering Shares Buyback however, it was decided by the
board not proceed with a plan to buy back its shares since it would not have had the desired impact of
acquiring sufficient stake to fend of
the hostile acquisition
CONCLUSION
As both, L&T and Mindtree are Indian multinational companies, their success will benefit the Indian economy, as well. As of today, L&T has raised its stake to 25.94 percent and queries by the SEBI has resulted in postponing the open offer by L&T though it seems inevitable that the acquisition will proceed as contemplated. In the long run, consolidating IT resources might even make India an even larger and stronger hub for IT and technological support than ever before.
Contributed by – Raghav Gaind
Designation – Associate
King Stubb & Kasiva,
Advocates & Attorneys
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