The War on Cash
Governments all over the world are fighting a war on cash. It is a known fact that the governments do not like cash. However, what is not clearly known is the reason behind it. What is it that makes governments all over the world unanimously abhor cash and pass legislation to control or even curb […]
Accounts Payable Turnover Ratio
Just like accounts receivable turnover ratio show the financing that the firm is providing to its buyers interest free, the accounts payable turnover ratio show the financing that the firm is able to receive from its vendors and suppliers free of cost. Since there are no interest charges involved and this is purely trade credit, […]
Impact Investing: Where Profit Meets Social Responsibility
Finance as a force for good Even before the 2008 global financial meltdown, finance worldwide was not exactly successful at deflecting its reputation for greed and excess. But something has been happening on the periphery and is now very much at the core of the financial world; one that proves investing can generate both profitable […]
Contrarian Investing
The rise of behavioral finance has led to several new strategies being floated in the financial world. Contrarian investing is one such strategy. This strategy did not exist till most of the world followed the traditional cash flow based financial models. However, ever since behavioral finance has come to the fore, so has contrarian investing. […]
The Flow of Funds in a Financial System
The economy of any nation can be viewed from the point of view of fund flow. This is a unique way to view the economy, which until now has only been viewed as a sum of all the sectors in it. In simple words, this means that the economy as a whole is a combination […]
The Indian stock market is abuzz with the news of a hostile takeover. Larsen and Toubro, which is one of the largest and the most iconic information technology firms in the country is trying to forcefully acquire Mindtree which is a medium-sized information technology company. The news is abuzz about how Mindtree promoters do not want to sell to L&T and how L&T is trying every trick in the book to acquire this company.
Prima-facie, the L&T Mindtree takeover seems to be fuelled by the same greed that most hostile takeovers are fuelled with. However, it is also a perfect case study about how regulatory actions indirectly affect the business of all firms working in the industry. The reality is that the Mindtree acquisition bid has less to do with the attractiveness of Mindtree as a target. Instead, this bid is being driven more by the internal conditions which are being faced by L&T.
In this article, we will have a closer look at the internal conditions as well as the regulatory factors which prompted L&T to launch this unsolicited hostile takeover bid.
L&T has found itself in a position where it has a lot of excess cash. The company wants to channel this cash into creating higher growth rates. The software industry provides one of the highest rates of return in India. This is the reason why L&T has decided to make an acquisition in the software space, and Mindtree came into the picture.
It is important to note that Mindtree was not the first choice for L&T when it came to deploying these additional funds. Instead, the company wanted to buy back outstanding shares from the market. This $1.5 billion bid was foiled by the Securities and Exchanges Bureau of India (regulator). The regulator did not allow the buyback offer to go through. SEBI objected because, after the buyback, the debt to equity ratio of L&T would have crossed 2:1. This is against the compliance norms laid down by SEBI.
L&T was not left with too many other options either. The company has already been paying excess dividends. The dividend paid in the year 2016 was a mind-boggling 33% of the annual profit of the company. The problem with raising dividends is that they set expectations for the future. Hence, if dividends are raised now, they cannot be reduced in the future without a sharp reaction from the market. This is the reason why L&T did not choose to take the dividend route.
Mindtree came onto the radar of L&T after its strategic investor tried to offload 20% stake in the company. L&T was quick to pounce on the opportunity and negotiate with VG Siddhartha, who is also the founder of the famous Indian coffee shop chain, Cafe Coffee Day. VG Siddhartha agreed to sell his stake at $600 million. After it became clear that L&T can easily acquire 20% of Mindtree’s business, L&T started aiming for the full company.
The result has been the three-fold plan which is playing out now:
Given the present circumstances and opportunities, L&T feels that Mindtree is the easiest acquisition bet and is hence the best way to increase the return on equity in the short run.
There are rumours that Mindtree promoters are aware of the fact that they don’t really have a choice in the sale. VG Siddhartha’s 20% stake sale seems to have sealed the fate of the company. However, the promoters seem to be negotiating for a better price. They believe that L&T is undercutting them when it comes to the price. L&T has quoted Rs 980 per share. The promoters feel it is a lower bid because Mindtree has been recently priced at 1081 per share. However, L&T seems unlikely to give in. It is insisting that the current price makes Mindtree a value-neutral acquisition. If the share prices are raised the viability of the entire deal may be in jeopardy.
To sum it up, the unsolicited L&T offer and all the takeover drama that followed happened because SEBI disallowed share buybacks and also because a strategic investor wanted to offload his stake quickly.
Your email address will not be published. Required fields are marked *
