The real reason behind NIIT, Mindtree stake sale plans

Promoters of NIIT Technologies Ltd and some large shareholders of Mindtree Ltd are looking to sell their shares, news reports suggest. The timing of these moves is easy to understand. Shares of mid-cap IT companies have fallen between 20% and 35% from their highs this year, making it a tad easier to find buyers. It’s important to note that a majority of previous mid-cap IT deals involved purchases by private equity investors, who are known to shy away when valuations are at their peak.

A look at the chart above shows most deals were between mid-2013 and mid-2016, when valuations were fairly reasonable. In fact, after valuations soared since October last year, Baring Asia and Blackstone Group both sold an 8% stake in Hexaware Technologies Ltd and Mphasis Ltd respectively, to take advantage of the high valuations. Both private equity investors have retained a majority stake in these companies.

According to an analyst at a multinational brokerage, promoters of NIIT Technologies are looking for a sale price that isn’t considerably lower than its highs about three months ago. Indeed, the company’s shares are the least affected in the rout among mid-cap IT stocks, perhaps in anticipation of a deal. In Mindtree’s case, valuations may not be the only sticking point.

In fact, for any deal, a number of other things need to fall in place. Apart from valuations, private equity companies look for board seats and a strong say in the running of the company.

Since NIIT Technologies’ promoters are looking to sell, this might not be as much a problem. But with Mindtree, the promoters appear to be reluctant to sell, and sale talks are led by some financial investors.

As such, it remains to be seen how these deals progress. The fact remains that mid-cap IT companies have done remarkably well for investors in recent years.

This has made them attractive to private equity investors, especially those who missed the bus in previous deals.

And with large companies such as Capgemini SA buying mid-tier outsourcing companies, there is always the hope of eventually selling to a large technology company.

For selling shareholders, finding such a strategic buyer would be the best bet at getting a handsome valuation. Else, a bit of give-and-take with a private equity investor will be the only other option to ensure a deal happens.