L&T vs Mindtree: Unveiling India’s First IT Hostile Takeover Drama

SUMMARY

The L&T-Mindtree takeover has been one of the notable cases of hostile takeovers in the history of takeovers in India. This case is a crucial example of how one shareholder can decide the fate of an entire organisation. L&T acquired 20% from a strategic investor and this opened a whole new portal of acquisition opportunities for the company. The Takeover Code has some pretty rigid conditions which makes hostile takeovers almost impossible in India. Had it not been for V.G. Siddhartha and his perfectly timed need for liquidation, LTIMindtree would never have come to existence. In this article, we will see about the basics of takeovers, hostile takeovers, strategies that both acquirer and Target Company could employ in a hostile takeover and its legal standing before jumping into the specifics of India’s first IT sector hostile takeover.

INTRODUCTION

With hungry acquirers on one side of the corporate world and challenged targets on the other, we see the concept of combinations, mergers and acquisitions being fostered. The terms ‘mergers’ and ‘acquisitions’, though oftentimes used interchangeably, carry meanings independent of each other. When two companies come together to form a new combined entity under a singular corporate name, it is called as a merger. A good example of merger can be that of Flipkart and e-bay. When a merger results in the formation of a whole new entity, and neither of the previous companies remains independently owned, it is called as Amalgamation. For instance, Maruti Suzuki is the amalgamation of Maruti motors and Suzuki. On the other hand, when one company purchases another company in its entirety or almost, it is called as Acquisition. A real time example of acquisition would be of Zomato and Uber eats. Zomato acquired Uber eats.  Mergers and Acquisitions are predominantly regulated by The Companies Act 2013, the Competition Act 2002, the Securities Exchange Board of India Act 1992 along with the rules and regulations given thereunder.

In this article, the author aims to talk about takeovers under the concept of mergers and acquisitions, more particularly about hostile takeovers.

What is a takeover? Takeover implies acquisition of control of a company (‘Target Company’) which is already registered through the purchase or exchange of shares by another company (‘Acquirer’)

Takeovers are of various types. From a legal perspective, they can be of two types –

1. Friendly takeovers: When the management of the Target Company willingly let the Acquirer takeover their company.

2. Hostile Takeovers: When the takeover requires the Acquirer to oppose or fight off the Target Company.

However, in a country like India, where most companies are closely held by its promoters, hostile takeovers was a rare concept. But in 2019, India witnessed its first hostile takeover in the IT sector, when the multinational conglomerate company, Larsen & Toubro took over the multinational information technology company, Mindtree against the wishes of Mindtree’s promoters.

In the later parts of this article, the author will be doing a deep dive into the case of India’s first hostile takeover in the IT sector and will be brushing up on the concept of takeovers a little further alongside.

HOSTILE TAKEOVER – A DEEPER DIVE

As previously discussed, a takeover becomes hostile when the target company is unwilling to be acquired. In this case, the acquirer is forced to takeover the target company against the target company’s promoters’ and management’s wishes. The acquirer buys a huge volume of shares from the existing shareholders at a hefty premium (Tender offer strategy). Hostile takeovers in India is a rare phenomenon because, the promoter or promoter group usually hold majority stake in the company. This makes it almost impossible for the acquirer to get a favourable majority vote in the decisions. Despite all this, there are acquirers who try to takeover the target company against its wishes because they are driven by strong motives such as – taking down a competition, wanting to own a company’s brand value, to have the same foothold as the target company in the market, to eliminate competition etc.

While hostile takeovers can prove beneficial for some, here is a high possibility that hostile takeovers fail because of incompatibility between the two corporate bodies. Incompatibility in fundamentals, organisational structure, shareholder culture, work culture etc. can be the reason for failure.

Mergers are like marriages. They are the bringing together of two individuals. If you wouldn’t marry someone for the ‘operational efficiencies’ they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?[1] -Simon Sinek

A prime takeaway on hostile takeovers can be that, it is not an easy way to acquire a company. To facilitate the successful acquisition of the target company, the acquirers need to have a strong strategy and direction. The two main offensive strategies[2], inter alias are –

1. Tender offer: The acquirer offers a hefty premium to the existing shareholders of the target company and acquires it.

2. Proxy Fight: Here the acquirer’s primary aim is to remove the members in the management who oppose the takeover. It is done by convincing the existing shareholders to withdraw support for the current management. This is a firmer approach than tender offer.

Similarly, the target company can also make use of certain strategies to salvage itself. Some of the most commonly used defence strategies[3], inter alias are –

1. White Knight: The target company seeks help from a friendly acquirer who can compete against the acquirer and pilotage the state of the target company into a safer state.

2. Pacman Defence: Here, the target company purchases shares of the acquirer and reverses the effect. This defence is subject to a lot of preconditions. It works best when both, the acquirer and the target company, are of similar sizes and if the target company has a financially sound stand.

LEGALITY OF HOSTILE TAKEOVERS

At first, from a parochial point of view, one might think that hostile takeovers are illegal. But, on the contrary, hostile takeovers are very much legal. It has been happening very rarely in India because of the shareholding structure and disclosure requirements, but India has seen its fair share of hostile takeovers.

In India, takeovers are regulated mainly by the companies Act 2013, SEBI (SAST) Regulations[4] and the Competition Act, 2002. The legal framework pertaining to all takeovers focusses mainly on protecting the stakeholder’s interest by ensuring they get utmost transparency and fairness at all times.

There are certain challenges the regulatory bodies pose to the acquirer when the acquirer wants to engage in a hostile takeover. They are as under:

SEBI SEBI requires the acquirer to give a mandatory open offer in the following cases – 1.       Acquirer individually holds more than 25% of shares in the target company. 2.       Acquirer along with persons acting in concert (PAC)[5] holds shares in the company and wishes to acquire more shares / voting rights and post-acquisition its stake combined with the PAC exceeds the threshold limit of 25% 3.       Acquirer along with PAC holds more than 25%, but less than 75% of shares in the Target Company, but wants to acquire additional shares of more than 5% of the total share capital needs to give an open offer. If it’s less than 5%, (creeping acquisition) then open offer is not triggered. Open offers for all the above mentioned categories needs to be for minimum 26% of the total share capital of the target company. Besides this, acquirers can also give voluntary open offers when Acquirer + PAC holds 25% or more of shares/ Voting/ Control but less than the maximum permissible limit (75%) in the company and want to increase their shareholding, can give a voluntary open offer at its discretion for at least 10% of the company’s share capital.

CCI The CCI also has the power to stop a takeover if it is going to eradicate or reduce the competition in the market and violate the provisions of Competition Act.

RBI If we talk about Foreign Acquisitions, the Reserve Bank of India imbues two main challenges for the foreign acquirer to takeover an Indian Target company – 1.      Sectoral caps for Foreign Direct Investment (FDI) 2.      Approval mandates of the Reserve Bank of India (RBI) and Foreign Investment Promotion Board (FIPB)

L&T v/s MINDTREE; THE ULTIMATE SHOWDOWN

Introduction to the parties:

• The Acquirer: Larsen and Toubro (L&T), a company forming part of a multinational conglomerate group listed in India.
• The Target Company: Mindtree, a service based Software Company, founded in 1999 and listed in 2007.
• The resultant entity: LTIMindtree, an Indian company that provides IT and consultancy services worldwide.

Why L&T wanted to takeover Mindtree?

L&T had massive cash reserves that the company wanted to make use of and create high growth. They had been paying high dividends, but entity growth and wealth maximisation were what the shareholders were concerned with, in the long run. The IT sector in India is known to provide one of the highest rates of return. Hence, L&T chose to keep an eye out for IT/software based companies. Mindtree caught L&T’s attention, when one of Mindtree’s strategic investors V.G Siddhartha (Founder of Café Coffee Day) agreed to sell his stake (amounting to 20% of Mindtree’s share capital) to help repay his debts. Here is where L&T realised that, it could easily buy the 20% and started aiming for Mindtree in its entirety.

Besides the dormant cash reserves owned by the company, the Chairman and Senior Executives of L&T stated a lot of financially sound rationales as to why this merger was needed. This merger will help L&T to –

• Increase its IT related services to up to 25% of the total business by 2026[6]
• Enter into larger deals as the combined entity (LTI Mindtree) will entertain bigger deals and create a bigger and more significant value in the IT sector globally.
• Focus more on cross selling and upselling
• Increase the consolidated return on equity
• To grow revenue and profit [7]

Why Mindtree opposed the acquisition?

Mindtree promoters had their own objections against this takeover for the following reasons-

• The standalone progress of Mindtree would be jeopardised by this takeover
• Mindtree and L&T had vast cultural differences
• Stakeholders of Mindtree did not want to be a part of Mindtree if a culturally different company takes over Mindtree.

The degree of objection from the promoters of Mindtree was so much so that, Subroto Bagchi, the cofounder and board member of Mindtree quit his government job to “save” Mindtree from the acquisition.

It is a national resource. It has a unique culture that humanizes the idea of business. It sets the standards of corporate governance. I need to be there in its time of difficulty. Hence the hard decision to return.[8] –          Subroto Bagchi

V.G. Siddhartha – What was his background and his hand in the takeover?

We all know that “a lot can happen over a coffee”. Well it sure did. Café Coffee Day’s Promoter/Founder Mr. V.G Siddhartha was a catalyst in this showdown between L&T and Mindtree. Mr. Siddhartha and his company were deep in debt and they had to liquidate their holdings in Mindtree to help cover a portion of it. He along with his companies held a stake of around 20 % in Mindtree and he was also a non-executive director in Mindtree. He sold his shares to L&T priced at a whopping 980 Rs. per share.

Mr. Siddhartha had already pledged these shares with one of his lenders, which was the reason why the shares were priced at this rate. L&T had to pay for unpledging the shares and then buying the actual shares. Because of this financial catastrophe, Mr. Siddhartha had to sell his stake to L&T which led to Mindtree’s founders losing the very company they poured their hearts and souls into.[9]

L&T and its plausible strategies

L&T had a threefold plan to acquire controlling stake in Mindtree. Apart from the shares purchased from V.G. Siddhartha and his companies, L&T also acquired shares from the open market to qualify itself for giving an open offer[10]. After the open market acquisition, L&T approached the SEBI with around 29% (around 20% from VG Siddhartha + around 9% from open market) stake in Mindtree to give an open offer with an issue size of 31%. As per the SEBI (SAST) regulations[11], when an acquirer acquires 25% or more of shares or voting rights or control in a company, it should make a public announcement stating it is making an open offer to buy the shares from the existing shareholders of the target company and any shareholder that wants an exit, can sell their shares and catch a respite from this brusque change in control, management and promoters of the company.

After all these acquisitions, L&T’s shareholding in Mindtree looked somewhat like this –

MEANS OF ACQUISITION	% OF STAKE
VG Siddhartha and Companies	20%
Open market	9%
Open offer	31%
TOTAL	60%

With around 60% stake in Mindtree, it goes without saying that L&T acquired control over the board and management of the target company.

Mindtree’s Defence

Regardless of the challenges that were thrown at Mindtree, the promoters were not going to choose to be acquiesce. They were not going down without a fight. The defence strategies that were used by Mindtree were –

• Buyback – The Board of directors planned to make a buy back offer pursuant to provisions of SEBI’s Listing Obligations and Disclosure Requirement Regulations 2015[12]. But the board quickly realised that, even the buyback wouldn’t result in them having enough stake to fight the takeover and hence they did not proceed with the buyback. 

• White Knight Defence – Under this defence, the target company usually approaches friendly acquirers and seeks their help by making them acquire the shares of the target company and saving them from the hostile acquirer. Since White Knights are friendly acquirers, they don’t usually change the company’s board or management. Mindtree sought help from private equity firms like Chrys Capital, KKR & Co Inc. etc., but ultimately was led down as they wanted a controlling stake in Mindtree. Ultimately this defence also failed.

Post-Merger effect on the companies

Amid the proliferation of new business models and revenue streams in a rapidly converging world, LTIMindtree will help businesses proactively take on and shape the future by harnessing the full power of digital technologies. Armed with top talent, comprehensive offerings and a cumulative experience of more than five decades, LTIMindtree brings the diversity of scale and capabilities required to help businesses reimagine possibilities, deliver impact, and get to the future, faster. – Debashish Chatterjee, MD & CEO, Mindtree

Post-merger, the combined entity will have the following –

1. The combined entity will be called LTIMindtree

2. It will be the 5^th largest IT service provider and will have the 6^th place in revenue generation in the IT sector

3. Mindtree will be delisted

4. The shareholders of Mindtree will be offered shares in LTIMindtree at a 73:100 ratio (For every 100 shares held at Mindtree, 73 shares of LTI will be given)

5. The combined entity will have a stronger domain expertise as they will have combined partners.

6. Their client base will be diversified

7. Their service portfolio will be diversified

8. Their strategies will be more innovative

9. They will have generated about 90,000 job opportunities in the initial stages alone

Note: The above mentioned effects are by no means exhaustive. The effect of such a huge takeover cannot possibly be contained in 9 bullet points.

Our purpose is to unleash new possibilities and impact every human we touch.[13] -LTIMindtree

CONCLUSION

In India, Mergers and Acquisitions have been predominantly friendly, as opposed to the other countries. The SAST regulations and other legislations that regulates companies has so many provisions that constraints the atmosphere to foster hostile takeovers. For example, under the SAST regulations, an acquirer cannot get shares from the target company during the following timelines –

1. 52 weeks before the voluntary open offer

2. During the voluntary open offer

3. 6 months after the voluntary open offer

Conditions like these, make hostile takeovers an almost impossible phenomenon in the Indian Market. L&T was able to acquire Mindtree solely because of VG Siddhartha’s sale and the open market acquisition that triggered the mandatory open offer of 31%.

REFERENCES

[1] https://alphabridge.co/practices/mergers-acquisitions/

[2] https://www.fisdom.com/what-is-a-hostile-takeover-famous-cases-of-hostile-takeovers-in-india-abroad/#Top_cases_of_hostile_takeover_in_India_and_abroad

[3] https://www.wallstreetmojo.com/hostile-takeover/#4-differential-voting-rights-dvrs

[4] Securities Exchange Board of India (Substantial acquisition of shares and takeovers) regulations, 2011

[5] Section 2(1)(q) of the Securities Exchange Board of India (Substantial acquisition of shares and takeovers) regulations, 2011

[6] https://www.moneycontrol.com/news/business/mergers-acquisitions/lt-infotech-and-mindtree-merger-gets-nod-will-become-indias-5th-largest-it-firm-by-market-cap-9519851.html

[7] https://www.sebi.gov.in/sebi_data/commondocs/apr-2019/Mindtree%20Limited%20-%20Draft%20Letter%20of%20Offer_p.pdf

[8] https://economictimes.indiatimes.com/news/et-explains/explained-the-fight-for-mindtree-that-threatens-to-snowball-into-a-war/articleshow/68466037.cms

[9] https://www.livemint.com/companies/news/why-v-g-siddhartha-went-with-l-t-ignoring-mindtree-promoters-1553710517498.html

[10] Reg. 6 (1) of the Securities and Exchange Board of India (“SEBI”) Substantial Acquisition of Shares and Takeover (“SAST”), Regulations (2011)

[11] Reg. 3(1) of the Securities and Exchange Board of India (“SEBI”) Substantial Acquisition of Shares and Takeover (“SAST”), Regulations (2011)

[12] Reg. 29(1) (b) and 29(2) of SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015

[13] https://www.ltimindtree.com/about-us/