The country’s largest engineering and construction conglomerate Larsen and Toubro (L&T) has now been cast as an avaricious acquirer after it made hostile bid to take over Bengaluru-based I-T services company Mindtree. As a first move to one of the largest hostile takeovers India Inc. has seen, L&T bought the first tranche of shares in a free and consenting transaction with V.G. Siddhartha, the founder of Cafe Coffee Day to buy 20.3% stake in Mindtree from him and his two affiliate firms. The engineering giant has the required pedigree in the IT business with its two companies L&T Infotech Ltd and L&T Technology Services Ltd. The chairman of L&T Group, AM Naik says that the acquisition of Mindtree fits into the larger plan of the company.
The promoters of Mindtree — Krishnakumar Natarajan, Subroto Bagchi, NS Parthasarathy and Rostow Ravanan — have vehemently opposed the takeover as they face loss of control in a company they set up and nurtured with great care over two decades. In fact, the move by L&T has also brought to the fore the subject of hostile takeover in corporate India and the markets regulator will have to actively look into the matter for larger interests.

Larsen & Toubro Limited (L&T), the acquirer, a publicly listed company is a part of Larsen & Toubro Group, is a major technology, engineering, construction, manufacturing and financial services conglomerate, with global operations. L&T addresses critical needs in key sectors — Hydrocarbon, Infrastructure, Power, Process Industries and Defence — for customers in over 30 countries around the world.

Mindtree Limited (Mindtree), the target company, is a publicly listed company engaged in the business of consultation and services related to Information Technology and delivering digital transformation and technology services from ideation to execution.

Selling Shareholders of the Target Company:
Mr. V.G. Siddhartha, owner of Coffee Day Trading Limited and Coffee Day Enterprises Limited.

The Acquirer has executed Share Purchase Agreement on 18th March 2019 with the Selling Shareholders to acquire their holding of 3,33,60,229 equity shares of Rs. 10/- each in Mindtree and ultimately the control of Mindtree. Precisely, the acquisition is of 20.32% stake (20.15% voting rights) from the single largest investor, Mr. V G Siddhartha, of Mindtree at a consideration of Rs. 3269 Crores.

Acquirer has also placed order on the same day to acquire 2,48,34,858 equity shares representing 15% voting share capital through market purchase. Considering the total stake of Acquirer post these acquisitions would cross the limit of 25% of the total voting share capital of the Target Company and his intention to gain control over the Target Company, the Acquirer was compulsorily required to make open offer pursuant to the provisions of Reg. 3 and 4 of the Securities and Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers) Regulations, 2011 (Takeover Regulations 2011).

Accordingly, on 18th March 2019 Acquirer made public announcement for the open offer to acquire 5,13,25,371 equity shares from public shareholders representing 31% of the total voting share capital of Mindtree. If this entire acquisition becomes successful aggregating to 51.32% stake of L&T, Mindtree will become a subsidiary of L&T.

Mindtree’s claim about the Takeover as Hostile Takeover
However, on making of the public announcement by L&T, Mindtree promoters came out with a press release on 18th March 2019 opposing the Takeover bid of L&T stating that

The acquisition was not in the interest of Mindtree stakeholders
The attempted hostile takeover bid of Mindtree by L&T is a grave threat to the unique organization i.e. Mindtree, which the promoters have collectively built over 20 years.
Mindtree consistently delivers strong financial results and favourable returns to its shareholders.
Mindtree has carefully created a differentiated corporate culture made up of its amazing “Mindtree Minds,”
A hostile takeover by L&T, unprecedented in the industry, could undo all the progress Mindtree has made and immensely set Mindtree back.
The Acquisition by L&T will be value destructive for all shareholders of Mindtree.
Whether this hostile takeover is within the bracket of law
The acquirer made public announcement required in terms of Reg. 3 and Reg. 4 of the Takeover Regulations 2011 even though it is an unsolicited offer /voluntary offer. This seems to be on the ground that the acquirer wants to acquire at least 25% and in fact as per the offer at least 51% hence according to the merchant banker there is no need to reach 25% holding before making public announcement as required under Regulation 6(1) of the regulation for voluntary offer.

Can L&T appoint directors on the board of Mindtree?
Offer period is 18th March 2019(i.e. date of execution of Share Purchase Agreement) to 11th June 2019(i.e. date on which payment consideration will be made to Public Shareholders). As per Reg. 24 (1) of the Takeover Regulations, 2011, L& T cannot appoint any of his representatives as Director on the board of Mindtree during this Offer period. It can do so after completion of 15 working days from 26th March 2019 (date of Detailed Public Statement for the open offer) only if L&T Deposits entire consideration payable under the open offer in cash in a separate escrow account. However, even after depositing the said entire consideration, there must be consensus from Mindtree Directors to appoint a new director recommended by L&T. L&T cannot appoint directors by itself without the consent of existing Mindtree directors.

Buyback proposal by Mindtree
To face the situation of takeover attempt of L&T, Mindtree considered a proposal of buyback of its fully paid up equity shares in its Board meeting dated. 20th March 2019. However, in the adjourned meeting dated. 26th March 2019, the proposal of buyback was dropped. It seems earlier intention may be to use buyback as poison pill by sucking out surplus cash from the company, but in the changed circumstances, the board might have decided to wait and watch for some time how the matter unfolds.

Recommendations from Committee of Independent Directors
Mindtree’s board has requested reasoned recommendations from its Committee of Independent Directors on the takeover offer of L&T, in the interest of its stakeholders.

Other considerations for L&T to make this takeover a business success
In view of the pre-arrangement, internal and external environment of Mindtree and claim by Mindtree as the Hostile takeover, L&T needs to ensure that after takeover, all the employees, technicians, officers of Mindtree, which is the real intellectual strength of Mindtree built up over the years gets continued with L&T.

Author's Bio: 

M&A Critique, a monthly published magazine, gives News, Deals and Analysis of Merger and Acquisitions, Insolvency, Restructuring, Takeovers and Joint Ventures in India.