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Founders of India's Mindtree oppose L&T takeover bid

L&T says it has agreed to buy 20.3% of software exporter from major shareholder

Founders of software exporter Mindtree say they will  "unconditionally oppose" the takeover bid by Larsen & Toubro. (Getty Images)

MUMBAI (NewsRise) -- The founders of Mindtree have opposed Larsen & Toubro's offer to buy a controlling stake in the software exporter, setting the stage for a battle with India's biggest engineering conglomerate.

Last night, L&T said it agreed to buy a 20.3% stake from Mindtree's single largest shareholder, V.G. Siddhartha, for about 33 billion rupees ($480 million) at 980 rupees per share. Mumbai-based L&T also placed an order with its broker for an on-market purchase of up to 15% of Mindtree's shares at 980 rupees apiece. It also plans to buy an further 31% stake from Mindtree's public shareholders at the same price.

Mindtree's founders said they would "unconditionally oppose" the takeover bid by L&T.

"The attempted hostile takeover bid of Mindtree by L&T is a grave threat to the unique organization we have collectively built over 20 years," founders Krishnakumar Natarajan, Subroto Bagchi, Parthasarathy N.S. and Rostow Ravanan said in a joint statement late on Monday.

The deal would allow L&T to add heft to the portfolios of its technology services companies, L&T Infotech and L&T Technologies. The acquisition will fill the gaps in L&T Infotech's portfolio, especially in areas such as digital technologies, where the group has a middling presence, analysts say.

After the transaction, Mindtree will remain an independent listed entity, L&T said.

Bengaluru-based Mindtree, founded by 10 executives who mostly broke away from larger software exporter Wipro, has an annual revenue of $846 million and is one of India's top midsize software exporters with a strong presence in the fast-growing digital services market. The founders, who held a 13.6% stake in Mindtree at the end of December, have in the past said they have no intention of selling their holding.

The announcement comes days after Mindtree co-founders Krishnakumar Natarajan and Rostow Ravanan, who helmed the company as chairman and chief executive, respectively, reportedly wrote a letter to the board of L&T warning against any attempts to mount "a hostile takeover."

In their letter, Natarajan and Ravanan said L&T's move has alarmed Mindtree stakeholders, including institutional investors, clients and employees, the Economic Times newspaper reported on Monday. They had told the management they would not want to be part of an organization that is culturally different from Mindtree or where there are minimal revenue and cost synergies, the report said.

Last Friday, Mindtree said its board will meet on March 20 to consider a proposal to buy back shares.

Siddhartha, who owns the Cafe Coffee Day chain, has been in talks with investors for months to sell his stake in Mindtree in a bid to pare down his group debt, which stood at 33.2 billion rupees at the end of March 2018.

Siddhartha quit Mindtree's board last March, saying he needed more time to focus on his group's other businesses. The Coffee Day Group also owns luxury resorts, hotels, and runs warehousing and transportation services through various companies.

On Sunday, Subroto Bagchi, one of the founders of Mindtree, who quit the company last year to join the Odisha state skills development authority, said he is stepping down from his government role.

"An imminent threat of a hostile takeover of Mindtree has made me to resign from the government to be able to go, save the company," Bagchi said in a Twitter post. "I must protect the Tree from people who have arrived with bulldozers and saw chains to cut it down so that in its place, they can build a shopping mall."

Some analysts warn that a hostile takeover may be damaging for Mindtree as it may distract the leadership and lead to a spike in employee attrition.

"Client relationships in services business are sticky, as long as the client is comfortable with service delivery and continuity of partners," Kotak Institutional Equities said in a report on Monday. "High attrition on the other hand can lead to a loss of customer connect and revenues."

L&T's hostile bid for Mindtree is reminiscent of a similar attempt by Malaysia's IHH Healthcare to take control of Fortis Healthcare last year. IHH took over Fortis after a monthslong bidding war with a tie-up between Indian company Manipal Health Enterprises and U.S. private equity firm TPG Capital.

Shares of L&T edged 1.6% lower in Mumbai trading on Tuesday, while those of Mindtree lost 1.4%. The benchmark S&P BSE Sensex gained 0.1%.

--Dhanya Ann Thoppil

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