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Peace of mind with Mindtree!

“Never give in, except to convictions of honour and good sense”

– Sir Winston Churchill

Most people thought that the takeover of Essar Steel by Lakshmi Niwas Mittal would be the business story of the year 2018-19, but we all were wrong! Another interesting story has taken its place and it promises to be as juicy and exciting like the Essar Steel saga.

Larsen and Toubro is trying to acquire a leading Bengaluru based IT giant, Mindtree. With revenues just shy of a $1 billion and a stock that has doubled in the last 2 years – it is a great company for investors and other large IT behemoths.

Mr. V.G.Siddhartha, the founder of Cafe Coffee Day was the seed investor in Mindtree and till recently owned almost 21% in the company. He was believed to be looking to exit Mindtree in order to pursue greener pastures – a thought which he shared with the current management and the founders of Mindtree. He offered the founders to buy his stake in the company – an offer which they rejected.

Siddhartha wanted to offload his shares to pare down his debt from other business investments. The company founders cumulatively own just 13% of Mindtree. He had offered the founders a way to maintain their control at Mindtree, as with his stake, they would own a strong 33% of the company.

As they did not seem keen to take up this offer, he took his offer elsewhere – an interested Larsen and Toubro, which already help a stake in Mindtree via the L&T Mutual Fund. L&T made an offer to Siddhartha and has purchased his entire stake in Mindtree. They now plan to acquire a total of 66% of Mindtree.

The founders and the many Mutual Fund houses are opposed to the hostile takeover of the company as they are not sure what will be the future of the company under L&T. Also, Mindtree as a company is quite different in terms of the clients, technology, workforce and the work culture that it has. This suggests that the supposed plan to merge Mindtree with L&T Infotech in future may not be financially sound idea.

However, with L&T owning 21%, it is now difficult for the company founders to protect their position at the company.

This is a great example of risk anticipation and mitigation. The Mindtree management did not anticipate their biggest shareholder selling his entire stake to one strategic investor, that to a competitor interested in taking buying them out.

L&T had tried hard to acquire the scam hit Satyam Computer Services company in 2009, but it missed it by a whisker, when Mahindra and Mahindra managed to scoop it at the last moment. When asked if this acquisition is right for L&T, Mr. A.M.Naik, Chairman of L&T said that “This acquisition fits into our larger plan”.

They still had a chance to buy out Siddhartha, but they decided against it. This was again a failure to anticipate the risks involved.

We read about daily news reports where the founders are fighting to maintain control at Mindtree. They are trying many many things to maintain control at Mindtree, which is again quite interesting to see.

The board of directors is planning a share buyback and if that doesn’t work, they plan to have Private Equity investors buy enough shares to ensure that the control stays with the current management.

Elon Musk is well known for his aversion to diluting his equity in a company to a position where he might lose control and be forced to exit it. This is a risk management strategy which many company founders and investors use to ensure they can run the show like they wish to. A critical aspect which which seems to be overlooked by the Mindtree founders.

Learn multiple risk management strategies to avoid and mitigate risks with BSE Institute Limited’s executive program on Risk Management. This program is designed specially for senior executives looking to get a profound understanding of corporate risk management strategies.

PS:- V.G.Siddhartha made a profit of Rs 2,858 crores from his stake sale in Mindtree – talk about peace of mind, from Mindtree!

 

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