The Story Behind the L&T- Mindtree Takeover Bid
The Indian stock market is abuzz with the news of a hostile takeover. Larsen and Toubro, which is one of the largest and the most iconic information technology firms in the country is trying to forcefully acquire Mindtree which is a medium-sized information technology company. The news is abuzz about how Mindtree promoters do not want to sell to L&T and how L&T is trying every trick in the book to acquire this company.
Prima-facie, the L&T Mindtree takeover seems to be fuelled by the same greed that most hostile takeovers are fuelled with. However, it is also a perfect case study about how regulatory actions indirectly affect the business of all firms working in the industry. The reality is that the Mindtree acquisition bid has less to do with the attractiveness of Mindtree as a target. Instead, this bid is being driven more by the internal conditions which are being faced by L&T.
In this article, we will have a closer look at the internal conditions as well as the regulatory factors which prompted L&T to launch this unsolicited hostile takeover bid.
The Background at L&T
L&T has found itself in a position where it has a lot of excess cash. The company wants to channel this cash into creating higher growth rates. The software industry provides one of the highest rates of return in India. This is the reason why L&T has decided to make an acquisition in the software space, and Mindtree came into the picture.
The Plan to Take Over Mindtree
Mindtree came onto the radar of L&T after its strategic investor tried to offload 20% stake in the company. L&T was quick to pounce on the opportunity and negotiate with VG Siddhartha, who is also the founder of the famous Indian coffee shop chain, Cafe Coffee Day. VG Siddhartha agreed to sell his stake at $600 million. After it became clear that L&T can easily acquire 20% of Mindtrees business, L&T started aiming for the full company.
The result has been the three-fold plan which is playing out now:
Given the present circumstances and opportunities, L&T feels that Mindtree is the easiest acquisition bet and is hence the best way to increase the return on equity in the short run.
Why Are Mindtree Promoters Not Selling?
There are rumours that Mindtree promoters are aware of the fact that they dont really have a choice in the sale. VG Siddharthas 20% stake sale seems to have sealed the fate of the company. However, the promoters seem to be negotiating for a better price. They believe that L&T is undercutting them when it comes to the price. L&T has quoted Rs 980 per share. The promoters feel it is a lower bid because Mindtree has been recently priced at 1081 per share. However, L&T seems unlikely to give in. It is insisting that the current price makes Mindtree a value-neutral acquisition. If the share prices are raised the viability of the entire deal may be in jeopardy.
To sum it up, the unsolicited L&T offer and all the takeover drama that followed happened because SEBI disallowed share buybacks and also because a strategic investor wanted to offload his stake quickly.
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