The Hostile Takeover of Mindtree

An analysis
By Anuj Rakheja, Daksh Arya and Keshav Sood
 Background
About L&T Group About Mindtree
• Larsen and Toubro (L&T) is an Indian • Mindtree is an IT Services firm founded in 1999.
Multinational Conglomerate founded in 1938. • With an FY19 revenue of ~7,000 Crores,
• With a revenue of ~INR 1.41 lakh Crores, it Mindtree has a market cap of ~INR115 bn.
employs ~45,000 FTEs. • Core services offered by Mindtree include
• Its main business is EPC which contributes more Application Development & Maintenance.
than half of its revenue. Other segments include • Key strengths include top tier clients, a full
Financial services, Real Estate and Technology. suite of digital capabilities and a large talent
• EPC is a highly cyclical industry and L&T’s vision pool.
for 2016-2021, Lakshya 2021 includes a target • It is known for strong customer satisfaction,
to double its revenues by focusing on Corporate Governance and deep employee
businesses like IT, Finance and Real Estate. engagement.

Transaction Overview Regulatory landscape of M&A in India

• In March 2019, L&T in line with its strategy to diversify its businesses, acquired
66% stake in Mindtree Ltd via a hostile takeover for a consideration of INR107bn.
• Purchasing 20.32% from its largest individual shareholder, 15% from open market
and 31% from a mandatory tender offer, it successfully completed one of India’s
very few hostile takeovers.
• The transaction was fully funded by L&T.
• L&T received an approval from Competition Commission from India in April 2019.
• Companies Act, 2013: All Corporate transactions governed by the Companies Act
• SEBI: The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
inter alia govern M&A transactions which involve acquisition of a substantial stake
in a listed Company.
• Competition Commission of India: The CCI regulates combinations and governs the
M&A transactions likely to cause an appreciable adverse effect on competition in
India.

2014 2018 Dec 2018 Mar 2019 Jul 2019 Aug 2019
L&T acquires
L&T starts L&T’s board Debashis
Mindtree Siddharth's stake L&T officially
eying passes enabling Chatterjee
approach L&T and launches an becomes the
Mindtree as a resolution to by appointed as the
for a deal, but open offer to promoter of
strategic 20% stake from new CEO of
L&T refuses acquire a total of Mindtree
investment VG Siddharth Mindtree
66% in Mindtree
 The way forward

Advantages to L&T and Mindtree Challenges and disadvantages

• Advantage of scale: L&T has a strategic objective to gain market share and • Difference in size: Mindtree’s relative smaller size and scale also makes it
improve efficiency via acquiring MindTree. L&T Infotech’s presence is currently nimble—a trait that customers value, especially in developing digital solutions.
limited to BFSI, acquiring Mindtree provides synergy benefits and also expanding While, L&T is a much larger and heavier entity, which might be a cause of concern
the diversified customer base. It helps L&T add significant scale to the group's hi- for the clients.
tech, Consumer Packaged Goods, retail and travel verticals. • Attrition: One of the biggest real risks is that key people will leave. Company’s
founders Krishnakumar Natarajan, Parthasarathy NS and Rostow Ravanan had
Larger Scale - Combined revenues post takeover resigned from the board within 48 hours of L&T gaining control of the IT firm.
(in $mn) Human capital is the biggest asset for a service company, and them leaving the
1000 869.1 company presents a huge risk.
800
• Culture: Culture is the biggest roadblock. Synergies between the two companies
650.8 could be maxed if two cultures are compatible, but L&T has more of a
553.2 587.9
600 bureaucratic culture, while Mindtree still retained its more of a nimble startup
396.4
400
363.6 culture.
156.8
224.3 218.3 • Discord in management: Slowdown in business momentum due to discord
200 between L&T and Mindtree’s current management
0 • Negative sentiment: Most analysts have given a “sell” recommendation on the
Hightech and Media Retail, consumer packaging BFSI stock due to the hostile takeover, despite the Company’s decent performance and
and goods future outlook.
MindTree L&T Combined • Transition barriers: There will be an initial barrier or lack of openness between
• Increase in Shareholder’s wealth: L&T has INR 80 bn of CCE in its balance sheet both the companies. It is crucial that they manage the transition into a new
and has been looking to invest in strategic initiatives and businesses which have structure/relationship well. Information asymmetry.
low capex. Its 9000 Rs share buyback plan was overruled by SEBI and the new • Uncertainty: The board’s decision to give shareholders a special dividend of ₹20 a
Mindtree provides the much-required boost in technology service industry. share runs the risk of being overturned, keeping the investors in blind and how
• Diversification: Its main segment, EPC is highly cyclical in nature and L&T’s the future decisions will be run.
“Lakshya” 2021 aims at focusing on non-cyclical industries in order to diversify its
risk and reduce pressure on its EPC segment.
• Both firms have very few overlapping clients which gives a large scope of synergy
via cross-offerings, etc.
• Mind-tree gets access to L&T’s deep pockets.
 Financial analysis of Mindtree
Revenue and KPI analysis Historical stock performance-Mindtree
Historical and projected income statement
INR bn Mar-17 Mar-18 FY19 FY20P FY21P 8,000.0 35.0% 1200

Sales 52.36 54.63 70.22 78.64 89.65

1000
EBITDA 7.05 7.41 10.65 12.58 16.14 7,000.0
30.0%
Net profit 4.19 5.70 7.54 8.65 10.76 800

EPS 24.91 34.78 45.92 50.51 55.57 6,000.0

600
25.0%
Market price 454.41 901.30 966.51 1,010.28 1,111.31
PE ratio 18.24 25.92 21.05 20.00 20.00 5,000.0 400

Sales growth 4% 29% 12% 14% 20.0%

200
EBITDA % 13.5% 13.6% 15.2% 16.0% 18.0% 4,000.0
Net margin % 8.0% 10.4% 10.7% 11.0% 12.0% 0
15.0% Sep-2014 Sep-2015 Sep-2016 Sep-2017 Sep-2018
3,000.0
• Over the past 10 years, Mindtree’s revenue grew at a • It can be observed that over the last 5 years,
CAGR of 18% based on strong clients 10.0% Mindtree’s share has grown only at a CAGR of
2,000.0
• We have projected an increase of revenues by 12% ~4% against the growth of SENSEX of ~10%.
and 14% over the next two years, partly because of • However, it is imperative to note that ever
synergies from the transaction. 5.0% since the news of the attempt of hostile
1,000.0
• Its largest client Microsoft contributed roughly a takeover came out the stock has fallen by
quarter of its revenues, however after the acquisition nearly 30%.
- 0.0%
the concentration is expected to reduce. FY17 FY18 FY19 • The stock’s poor performance however can
• Its EBITDA margin as of FY19 was 15.2%, which we also be attributed to the fact that India’s
Revenue EBITDA margin %
expect to increase to 18% over the next two years midcap sector has performed poorly over the
because of cost synergies. RoE Return on capital employed last few years.