As the hostile takeover battle for Mindtree captures the attention of the financial and corporate world, the event brings to the fore issues related to the relationship that Indian founder-promoters share with their investors.
VG Siddhartha has been invested in Mindtree for the last 20 years and at the time of his exit, the promoters of the company have been making efforts to protect their turf as the
strategic investor is L&T.
As the friction between Siddhartha and promoters increased, Ashok Soota, co-founder of Mindtree, said he has empathy for the founders as well as VG Siddhartha.
The friction is obvious, investors want to exit at a good premium and on the other hand, the promoters want a sponsor who does not seek control in shareholding or in operations. But, a strategic investor pays a premium as it is not under any pressure to exit and file returns. Sources on condition of anonymity told CNBC-TV18 that Siddhartha was getting a much lower price from a private equity firm interested in the deal.
Discussing this issue, a large investor lamented, “If the promoters do not support an investor at the time of an exit, the investors will shy away from betting on companies.”
This discussion is crucial at this point considering investor capital is becoming very important for most promoters saddled with high debt levels. Most large transactions are achieving success with the help of an investor backing the promoters.
In the past, most companies with a large investor stake have seen a strategic takeover in which the promoter also exits, especially, when lured by a large cheque.
Capital market company Baring Asia had bought Hexaware from GA Global and founder and executive chairman of the IT firm Atul Nishar had also tendered his shares in the deal. Selling a controlling stake to a player with strategic interest always attracts more premium and investors prefer that rather than going for block deals on bourses or a secondary minority stake sale to another private equity.
What could have been the options for the investor here? Amit Tandon of proxy advisory firm, IIAS, said, “VG Siddhartha is well within the rights to sell the shares to any party. If he needs to monetise the shares and exit he can choose to unless there is an agreement in place with the promoters.”
On paper, there is no agreement that bars the investor from selling his stake to another investor but do these relationships need to go transgress beyond the boundaries of a contract?
Founders and promoters who have built a company from scratch have an attachment with the business they built, may be the investors need to be cognizant of that but to what extent is the crucial question.
Mindtree promoters are now trying to scuttle the hostile takeover bid by L&T, buyback is one of their frail attempts. Experts pointed out that promoters of Mindtree with 13 percent stake should have ring-fenced themselves from a hostile takeover.
All the big promoters have been careful of this, KM Birla had once said about it that the promoter group will increase the stake to prevent a hostile bid.
It is also true that Indian companies have not seen many hostile attempts because the promoters generally have a very strong hold over their companies. We have seen even in the insolvency & bankruptcy cases where promoters have fought tooth and nail to keep their companies with them.
Mindtree chairman and co-founder Krishnakumar Natarajan meanwhile warned against a hostile takeover bid in a letter to the L&T board: “Such news have alarmed the various stakeholders of Mindtree, including the institutional investors, clients and customers, and employees – many of whom have expressed to the management unequivocally that they would not like to be part of an organisation that is culturally perceptibly different from Mindtree, or where there are minimal revenue and cost synergies. I also do recollect many email exchanges between us in January/February 2019 where we had expressed our concerns based on data relating to previous integrations of large IT services providers, that any transaction with you would be value destructive to Mindtree and all its stakeholders.”
His concerns are not unfounded but L&T is not looking at a merger of Mindtree with L&T Infotech immediately. When asked about the destruction of value from the business point of view, G Chokkalingam of Equinomics said, “Business will not be affected as its going in the hands of a strong company like L&T.”
But what about the value for the shareholders? Here the role of the independent directors become very important. Amit Tandon said, “Independent directors can form an independent committee and assess the offer in the best interest of the minority shareholders.”
Even if the Mindtree promoters come up with a counter offer, it’s the minority shareholders that stand to benefit.Finally, is the battle worth the effort? The founders who form the management have run the company well, it’s a prized asset especially with the digital piece contributing well. It needs to be seen whether the promoters and investors find a meeting ground in the interest of the business or the breakdown of relations leads to a transitional challenge for the acquirer if the hostile takeover succeeds.