Larsen’s hostile bid spurned by Mindtree

BANGALORE • India is witnessing its first hostile takeover attempt of a software developer, a move the target said is a “grave threat” to its future.

Larsen & Toubro Ltd, Asia’s second-largest engineering firm by value, agreed to buy 20.3% of Mindtree Ltd for about 32.7 billion rupees (RM1.96 billion) and plans to acquire a controlling stake for as much as 107.3 billion rupees.

VG Siddhartha, the largest shareholder in Mindtree through Coffee Day Enterprises and affiliated entities, agreed to sell the original stake for 980 rupees apiece.

Mindtree management, including its CEO, said the firm’s success lies in being able to build long-term relationships with clients and partners, ties they argue would be jeopardised by the Larsen’s acquisition. Proxy advisor IInstitutional Investor Advisory Services India Ltd (IIAS) waded into the debate calling for Mindtree’s independent directors to guide investors on the merits of the offer.

“Hostile bids are uncommon in the professional services business since people are the key assets,” Kawaljeet Saluja and Satishkumar S, analysts with Kotak Institutional Equities wrote in a note to clients yesterday. “These assets are not easy to manage in such situations.”

“It is not necessary that Mindtree’s independent directors tow the line with the company’s promoters,” IIAS said in the note. If Mindtree’s leadership and key staff leave taking some clients with them upon the takeover, it could have damaging consequences for the business, IIAS said.

The software maker’s shares suffered the biggest loss in a month, dropping 2% to 943.3 rupees in Mumbai yesterday. Larsen’s stock slid for a second day. The engineering company said it plans to keep Mindtree a listed entity and that the target’s services complement the business of its software unit, Larsen & Toubro Infotech Ltd.

Larsen & Toubro’s CEO SN Subrahmanyan said the company “would go out of the way” to make a success of the investment. “Emotionalities have to be overcome going forward,” he said at a briefing in Mumbai yesterday.

Still, Mindtree insisted the transaction would destroy value. The company has reached out to Nalanda Capital, its largest institutional shareholder, and the investor is “unequivocally in support” of the software developer, CEO Rostow Ravanan told reporters in Bengaluru. Nalanda funds own 10.6% of Mindtree.

Mindtree last week said it will consider buying back shares, in a bid to deter any buyers.

Co-founder Subroto Bagchi, who also signed yesterday’s management statement, said in a tweet on Sunday he’s returning to the company to protect it from being taken over.

“We will do everything to block this hostile takeover,” Bagchi said at a briefing in Bengaluru yesterday. “This isn’t over until it’s over.” — Bloomberg