Indian IT firm Mindtree's co-founders wage furious battle against L&T's hostile takeover

The eighth-largest Indian IT outfit is being courted by one of India's oldest engineering outfits, L&T, in a hostile takeover, and the IT firms's co-founders are going stir-crazy fending them off.

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Only in India would a hostile takeover be scripted in the language of an arranged marriage taking place within an Indian film. SN Subrahmanyan, CEO of 80-year-old Indian engineering company L&T, said that his company's takeover offer of India's eighth-largest IT firm Mindtree had "approached the transaction from its dil (heart) and laced it with lots of pyaar (love)." Subrahmanyan went on to explain that "while its pyaar for Mindtree is one-sided like it is seen in several Hindi movies, it could turn mutual eventually, like it happens in movies and then we will live happily ever after."

What Subrahmanyan is referring to is the ice-cold reception from the co-founders of Mindtree after they woke up one morning to the terrifying prospect of being married to the engineering and technology firm. L&T also has an IT wing called L&T Infotech. The Judas among them was not a Mindtree-er but VG Siddhartha, founder of the country's most popular cafe chain, Cafe Coffee Day, who had helped the co-founders out by purchasing a 6-percent stake in 1999 that he has gradually built up to 20.32 percent. Looking to removed debt in his own business, VG Siddhartha decided to offload his stake to the first serious bidder, although Mindtree co-founder and CEO Rostow Ravanan claimed that his cohort had presented him with several other eminently viable options which were ultimately ignored.

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In addition to this 20 percent from Siddhartha, L&T has said that it had already placed an offer with its brokers to buy an additional 15 percent of outstanding shares in the market, thereby triggering an 'open offer' as per the rules of India's stock market regulator. L&T plans to take its stake all the way to 66 percent whereas Mindtree's founders currently only possess 13.32 percent of their company. Institutional investors hold 50.57 percent of the company.

This was hardly an arranged marriage as L&T's CEO was trying to spin it -- but more of a forced one instead as is the case with unsolicited takeover offers. Yet, such is life when you initially prostrate yourself in front of the Gods of capitalism when starting out and sell your pound of flesh to start your company. 

Nevertheless, the outraged cofounders of Mindtree have not taken to the forced companionship lying down. One co-founder, Subroto Bagchi, promptly quit his current job as chairman of Mindtree's Skill Development Agency in the Eastern state of Odisha  and rushed back to Bangalore. He issued a statement that would have left you with the impression that his firm was a national heritage monument rather than an outfit that designs and implements IT solutions if you didn't know any better. "I must protect the Tree from people who have arrived with bulldozers and saw chains to cut it down so that in its place, they can build a shopping mall," he declared. "Mindtree has not been designed as an 'asset' to be bought and sold. It is a national resource. It has a unique culture that humanizes the idea of business," he added.

Others went even further. Co-founder Krishnakumar Natarajan ludicrously labelled the whole affair to be "corporate India's #MeToo moment". Other strident messaging from the co-founders followed, citing Mindtree's unique culture as well as how the merger would stall future business and destroy shareholder value -- all hostile behaviour that would send the wrong message to entrepreneurs in the country and influence Mindtree employees that had signed up for a 'mission' to simply abandon L&T after the merger. The co-founders then declared that they would work on a buy-back offer, which the board and 75 percent of investors would first have to approve.

Finally, to rationally explain to the world why this group of 10 men felt so strongly against the merger, Natarajan explained that "Mindtree did all the early work, suffered low margins for years and now it's poised to clock top-shelf growth in the next couple of years... We tilled the land, fertilised it, put the right seeds, and now it may give us a great yield. Now if a tornado spoils it, it's not the right thing for shareholders."

THE NUMBERS BEHIND THE TREE

The fact is, Mindtree has been striving for years, unsuccessfully so, to try and crack the $1-billion-a-year revenue target. As Quartz explained, it was first supposed to do so in 2009 for a 10-year plan forged in 1999. In 2006, it extended that goal to 2012. In 2009, that plan was revised to a 5-year target to do so by 2014. It still hasn't done so. Total revenues are at $846.8 million and net profit at $88.4 million. According to some analysts, it was simply a case of a good team that was underperforming. However, the past few years of changing business models and protectionism in the US has made the operating climate tough for both Mindtree and its peers.

However, while its peer group was focused on milking the old-era businesses of infrastructure maintenance and app development five years or so ago, Mindtree stood out by making early headway into artificial intelligence and machine learning, which is now in vogue across the business landscape today. Revenues from digital make up a huge 50 percent of its total pie versus just 25 percent for its cohort, making Mindtree a firm to bet on in the years ahead. 

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The company could also be a very good fit for L&T Infotech, as the two firms' focus areas do not overlap. L&T's expertise is in banking, manufacturing, oil and gas, and insurance, whereas Mindtree is strong in consumer packaged goods, retail, hospitality, travel, and technology according to analysts. A merger of the two would take total revenues up to $2 billion and expand the reach and capabilities of both firms. By contrast, TCS is leagues ahead at $19 billion, Wipro at $8.4 billion, and Tech Mahindra at $4.8 billion.

Will Mindtree be able to fend off L&T? Should L&T even bother to court and merge a company that is so chronically hostile to the merger? Is it even good for L&T's business considering the free cash flow that it would suck up and the integration headaches it would cause? These are all points currently being hotly debated. 

For now, however, there seems to be little prospects for love in this arranged marriage.

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