Mindtree’s Conundrum: ‘A Lot Can Happen Over Coffee’ If One Thinks!

I wish I was not out of the country for an extended period as this fascinating corporate battle unfolds before us in what is India’s first hostile takeover bid in the information technology industry. But there are benefits of perspective which are provided by distance—in the calm environs of Copenhagen—in such emotive situations, especially as I know the principal founders and the company very well and can empathise with their angst.

But this should not be about emotions but a clinical evaluation of what is in the best interest of all stakeholders. The board and the independent directors are in fact mandated by law to do precisely this. In that context, I find it rather amusing to read about the theatrics unleashed in the media by a former founder director who decided to return rather dramatically to ”save” the company from “builders.. with excavators, bulldozers, chainsaws, cranes [who want] ..to raze Mindtree ...and build shopping malls.” Indeed !

The substantive argument can only be around one question: does the proposition make sense for all stakeholders in terms of value creation over the long-term?

This, of course, has many dimensions and the media pronouncements of the Mindtree Ltd. management do not touch on any of these core concerns except raising superfluous issues such as the David versus Goliath syndrome, how Larsen & Toubro Ltd. will be remembered as a corporate raider disenfranchising the middle-class first generation entrepreneurs, wresting the ”mission” away from its employees, etc.

What Mindtree’s Board Must Weigh

The issues to my mind which the board should deliberate are as follows:

1. Can Mindtree grow sustainably and faster as part of the L&T group? It would seem so, as L&T brings deep relationships across globally significant companies apart from its domain expertise in areas such as oil and gas, finance, industrial machinery, etc.

Tata Consultancy Services has had the benefit of leveraging the huge strengths of the Tata group in its growth journey in the early part of its evolution and has created unsurpassable value sustainably over the last few decades.

2. Will cultural integration be difficult? This is always a key concern in any acquisition but I am not so sure that the culture at Mindtree is so very unique that, given the intent and effort on both sides, this would prove insurmountable. L&T on its part has publicly committed to keeping the company as a separate entity in the medium term. Given management oversight, over time these things even out and there are examples of very diverse cultures which have integrated very well right here in Indian IT industry. Tech Mahindra and Satyam is one such example. Also, the Polaris Orbitech (a 100 percent Citibank entity) merger in the early 2000s of two hugely unequal entities has been highly successful at the operating and customer levels. Having been part of that journey as its Group CFO, I can vouch for its efficacy given management vision, commitment, and direction to make it a success.

The argument that a services mindset will not work in a manufacturing enterprise environment is, again, not relevant anymore as L&T has long crossed that hump of the past with its two technology companies whose performance is evidence of its success.

By that rationale, Tech Mahindra falls in that category too, as does TCS !

3. Will internal competition between the L&T entities and Mindtree be an impediment, as is claimed by the Mindtree founders? Highly unlikely if accounts are mapped based on their respective strengths. Again, three entities of the Tatas—Tata Elxsi, Tata Technologies, and TCS—play in the IT sector with hardly any overlap and conflict to materially affect performance.

4. Customers and employees. Minor disruptions notwithstanding, given adequate management supervision this too can be managed. In fact, employees will have a larger canvas to play and will have the benefit of stock option plans that would most certainly appreciate faster if the growth imperatives play out.

Given all the claims by the Mindtree founders of the uniqueness of its culture, the attrition levels at Larsen & Toubro Infotech Ltd. are lower than Mindtree!

Furthermore, let us not forget that the job market is not exactly ripe hot at this moment either.

As regards customers, they would be reassured given L&T’s large and deep relationships with many Fortune 100 companies, and the fact that Mindtree would now be part of a group with a much stronger balance sheet and, therefore, its long term sustainability with a zero-risk profile will necessarily be viewed as a huge positive.

5. Can the IT industry survive consolidation? Given the nature of the global competition in IT services with the likes of Accenture, IBM, etc., survival of entities will depend purely on scale going forward, unless it is a focussed niche play. Mindtree is neither. Hence, the options are limited in the medium-term for such companies.

Wake-Up Call For Other Founders

Additionally, I think Mindtree has failed miserably, purely on matters of corporate finance, capital structure and investor strategy.

Having decided to be a publicly listed entity, to remain in a make-believe world that a founder group with a mere 13 percent shareholding can survive a takeover at some point, belies my understanding of the basics of financial market dynamics

VG Siddharta has been more than fair to the founders and had provided enough runway to them on his intentions to exit. The fact that, despite many parleys, they have not been able to secure a white knight speaks volumes, of either the unreasonableness of expectations of the terms, or pricing, or both. Their only hope is to get institutional shareholders to back them at this stage but they must realise that emotionally fluffy tweets and peurile media campaigns without substance will simply not work. Besides, most institutional shareholders will have significantly larger exposures to L&T and would need very strong reasons not to back L&T in this transaction.

This is a wake-up call to many founders in the IT industry with small holdings.

The time for consolidation is at hand…..and this will be a case study for the future. As for Mindtree, the board—and not only the founders —need to think this through carefully and evaluate whether letting go with dignity would be in the best interests of all – employees, investors, and the founders. I say this knowing full well I will hurt my friends, but L&T has thought this through very prudently. Though the costs can be raised by some more melodrama, though along with a concomitant loss of goodwill, it is highly unlikely that L&T will back out given the inherent strength of the proposition and the flexibility its huge cash reserves provides it for a protracted battle. The worst outcome to my mind would be if a large block of 13%+ decides to vote with the management and thus exercise a veto with a combined 26% shareholding to block critical resolutions. That would be value destructive for all.

Despite many public sermons by the “gardener” in the media, very few have the courage to admit to suffering from a self-serving bias…a tendency to believe in what we love to believe. Embracing truth, though, demands taking a leap of faith out of our own prejudices.

The founders have done a fabulous job in bringing the company to its present stage – and should be happy to see their child move on in life. They have enough talents to battle the empty nest syndrome we all have to deal with in this phase of life and look back with gratitude with all that life has offered.

Think about it….over a cup of coffee if you wish. Pun intended.

This appeared in The Bloomberg QUINT dated March 22, 2019 as an Invitation Op-Ed article under Opinion> Article

Closing comments : The outcome will determine a significant turning point in our staid and inactive market for corporate control in India. Once a company is listed, the founders forego by choice the divine right to control and lead the business in perpetuity. If they feel the value on the table is inadequate they have the liberty to arrange funds and outbid....at the cost of dilution of shareholding and control.

Though as I have argued earlier the regulatory and social construct is still not permissive enough for value discovery through M&A

(PRABAL BASU ROY)

A Sloan Fellow from the London Business School, PE Investor and Corporate Advisor, the author has formerly been a Director and Group CFO in various companies.

He is one of LinkedIn's Top Voices ; his views are frequently published in the national media on the intersection of current affairs, leadership and strategy with matters of finance, public policy, financial markets and corporate affairs.

Join me on Twitter.com @PrabalBasuRoy and feedback by email is welcome