A culture shock awaits Mindtree employees under L&T

New Delhi: As engineering conglomerate Larsen and Toubro Ltd (L&T) courses on with its hostile takeover bid for Mindtree Ltd, the first and biggest fear expressed by many analysts and industry executives isn’t about fact sheets—it’s about the fitment between two culturally diverse companies. The success of any merger or acquisition (M&A deal) depends on a diverse range of synergies. And cultural fitment is especially true of people-led businesses such as IT outsourcing.

It’s a bit like horse-power versus brain-power, in the words of one industry observer.

Mindtree has an informal culture: many of its employees call members of the founding team, led by chief executive officer Rostow Ravanan, by their first names.

In contrast, L&T, India’s largest engineering and construction company’s culture is based on command-and-control and top-down management.

Mindtree’s 20,000 employees face an uncertain future—it’s not known how long L&T will let Mindtree run as an independent entity. Further, it is not clear if Mindtree will be merged completely with L&T Infotech Ltd or whether some of Mindtree’s business will be carved and farmed off to Larsen and Toubro Technology Services Ltd, L&T’s second listed IT firm.

“Managing people aspects and cultural integration is critical in any acquisition. It is common in acquisitions to meet the key leaders of the acquisition candidate to get an understanding of the leadership depth, critical resources and strategies of talent retention. We are not sure if this is possible in this case,” Kawaljeet Saluja and Jaykumar Doshi, analysts at Kotak Institutional Equities, wrote in an 18 March note to investors.

“Mindtree has possibly the highest exposure to discretionary spending. Project cycles have relatively short durations, requiring high touch with clients to back-fill completed projects and win new ones for overall growth. Hence, people continuity becomes even more important.”

Two decades after Infosys Ltd put India on the global IT outsourcing map, no Indian conglomerate or manufacturing firm has been able to build a strong software services business—save for Tata Sons Ltd which has Tata Consultancy Services Ltd (TCS).

RPG Group, CK Birla Group and ITC Ltd have struggled to scale their IT businesses—Zensar Ltd, Birlasoft Ltd and ITC Infotech, respectively—although all of them were set up back in the 1990s. Tech Mahindra Ltd, which started in 1986, acquired Satyam Computers in 2009, to become a $2.5 billion company. A decade later, the company’s annual revenue is still less than $5 billion, underscoring its struggles. In comparison, TCS reported more than $5 billion revenue in the December quarter alone.

In common with manufacturing companies, L&T too faced this challenge, until its current non-executive chairman A.M. Naik hired former Infosys executive Sanjay Jalona in 2015 to run L&T Infotech. An executive at L&T Infotech said this was arguably Naik’s best contribution to the conglomerate's IT firm that was set up in 1997.

Jalona, who is based out of New Jersey, has put together a senior management team that has helped the company significantly scale up business: L&T Infotech’s revenue increased from $209 million in the June 2017 quarter to $346.9 million during October-December 2018.

“Sanjay can certainly lead this integration well. But he is not even on the board of L&T, and it remains to be seen if L&T will let him oversee this integration,” said a Mumbai-based analyst at a domestic brokerage, requesting anonymity.

The second risk is the nature of the acquisition: hostile.

This forced acquisition will certainly see the four founders of Mindtree leave. This could lead to a churn among senior management ranks and may even lead to a few exits of executives overseeing large client accounts, according to two Mindtree employees.

This could eventually hurt Mindtree’s clients, many of which contrast with customers of L&T Infotech. Mindtree’s largest clients include Microsoft Corp., Southwest Airlines Co., Marriott Hotels Ltd, and Procter and Gamble Co.

Much of the work is consultation-led and involves offering solutions in technology areas like data analytics and cloud computing. Companies in the hi-tech space accounted for a fourth of Mindtree’s revenue in the December quarter. L&T could possibly be tempted to split some of this business and put it with L&T Technology Services, which ended last year with $580.4 million revenue.

L&T Infotech gets about a fourth of its total business from four clients comprising three banks—Citibank Inc., Barclays Inc. and Nordea AB—and oil giant Chevron Corp. L&T Infotech also counts General Electric Co., the embattled conglomerate, as one of its larger customers. Nearly a third of business is handled by engineers who roll out business software such as SAP and Oracle. Mindtree’s dependence on Microsoft, which made up a fifth of company’s revenue in the third quarter, has also been cited as a concern.

L&T Infotech too gets more than 13% of its business from Citi, and ten of its largest customers accounted for half of its revenue in the last quarter. At Mindtree, the ten largest clients accounted for 44% of total business.