New Delhi: Late one Sunday evening in March this year, V.G. Siddhartha, who was in Mumbai, texted Mindtree Ltd’s executive chairman Krishnakumar Natarajan in Bengaluru about his decision to sell 20.3% shares the founder of the Café Coffee Day had held for close to two decades in the information technology (IT) outsourcing company to Larsen and Toubro Ltd (L&T). An agitated Natarajan, who knew that the company risked an ownership change, spoke to his friend and another co-founder Subroto Bagchi, who was in Bhubaneswar, more than 1,700km from Mumbai.

Three years ago, Bagchi had relinquished his role as executive chairman of the firm to devote time to his new calling as chairman of Odisha Skill Development Authority.

Though immersed in his new role, Bagchi hadn’t forgotten Mindtree. After all he, along with nine other friends, had set up the company on 18 August 1999.

An imminent threat of hostile takeover of Mindtree has made me to resign from the government to be able to go, save the company. I must protect the Tree from people who have arrived with bulldozers & saw chains to cut it down so that in its place, they can build a shopping mall," Bagchi tweeted at 8.37pm on 17 March.

Seven minutes later, he tweeted again.

“Mindtree has not been designed as an “asset" to be bought & sold. It is a national resource. It has a unique culture that humanizes the idea of business. It sets the standards of corporate governance. I need to be there in its time of difficulty. Hence the hard decision to return."

Over the next 48 hours, the three co-founders, including Natarajan, Bagchi and chief executive Rostow Ravanan, played the emotive card to express their unhappiness over what was India’s first hostile takeover bid in the IT services sector.

Not everyone was impressed. “Quite clearly, the bulldozer tweet and the decision to cast L&T as a villain is something the founders could have avoided. This is not how business leaders run," said an executive at a large IT firm, requesting anonymity.

But Natarajan, Bagchi and Co. aren’t cast in the same mould as other business leaders. To understand their present woes, one needs to go back to the beginning.

A brief history of the Tree

Fifteen years before the country was witness to the startup frenzy of 2014, Mindtree was set up by 10 friends, who came from Wipro Ltd, Cambridge Technology Partners Inc. and Lucent Technologies in 1999. Ashok Soota, who was then the vice-chairman of Wipro’s IT services business, had started discussions with Siddhartha, the firm’s first investor. After another two rounds of meetings, Soota was convinced, and told Azim Premji, Wipro’s charismatic chairman, about his decision to leave the company in February that year.

CCD founder V.G. Siddhartha was the first investor in Mindtree, back in 1999.
CCD founder V.G. Siddhartha was the first investor in Mindtree, back in 1999.

Over the next five-and-a-half months, a period which also witnessed the first dotcom boom in India, eight other co-founders joined Soota. Siddhartha and venture capital firm Walden Software put in about $8 million, while Soota and his eight friends came up with $1.4 million.

Finally, on the morning of 19 August, the nine co-founders, led by Soota, who was appointed as chairman and managing director, announced Mindtree to the world at a press conference in Bengaluru. A get together in the evening at Taj Residency was attended by over 100 guests, including Premji and Nandan Nilekani of Infosys Ltd.

S. Janakiraman, who was Wipro’s global head of research and development at the time and who would join in October as the 10th co-founder, was understandably missing from the party.

Mindtree CEO Rostow Ravanan.
Mindtree CEO Rostow Ravanan.

Mindtree, which raised $9.5 million, was valued at $40 million in 1999. The 10 co-founders, together, owned 75% of the new company while Siddhartha and Walden Software, which exited in 2012, owned the remaining 25% shares.

In 1999, Wipro’s IT services business was a tad over $100 million while Infosys had ended the financial year with $120 million in revenue. In 2001, Capital Group invested $10 million while an additional $4.4 million was put in by Franklin Templeton (Siddhartha got them into the company), Soota, Siddhartha and Walden. By now the firm’s valuation had jumped to $80 million. Six years later, Mindtree, after having raised over $24 million, went public in February 2007.

Mindtree, like many of the other IT vendors, deploys engineers to do software testing, manage IT infrastructure and write codes for applications that eventually help its clients, from Microsoft Corp. to Southwest Airlines Co. run their business. It wasn’t a unique proposition but investors still liked the IT story and its shares were subscribed 110 times.

Mindtree executive chairman Krishnakumar Natarajan.
Mindtree executive chairman Krishnakumar Natarajan.

Now, the company’s founders owned about 35.46%, a number that would progressively go down even as they focused on building a unique work culture incorporating some of the best practices from companies such as Infosys and Wipro.

Indeed, Mindtree’s two-decade journey is full of moments that can be the stuff of business school curriculums. One such instance shows how the firm won an account. A month after he had joined Mindtree as head of marketing, Joseph King arrived in Mindtree’s US office early one morning and made a direct call to Larry Kinder, the chief information officer (CIO) of Avis, the car rental firm.

“The IT business is all about relationships. So Joe came into the office early and called directly because he realized that was the only time he could connect with him as the receptionists would not have come in at that hour," Soota recounted in an interview.

Mindtree co-founder Ashok Soota.
Mindtree co-founder Ashok Soota.

Kinder took the call, liked the story, gave Mindtree executives an appointment and finally agreed to give them business, which over a three-year period became a $7 million account.

“I was employee no. 7 in the US and I joined Mindtree on 4 October 1999," said Joseph King, who now heads marketing and communications for Tata Consultancy Services Ltd (TCS) in the US. “I remember speaking to the Avis CIO in November 1999 and we started our engagement there in early 2000."

However, the company also had its fair share of near-death experiences. The dotcom crash in 2000 was the first, followed quickly by the 11 September 2001 terrorist attack. “The second round of funding, led by Capital Group, got closed in the first week of September 2001, days before 9/11," said Janakiraman. “Post 9/11, it was a different world and imagine what would have happened had there been any delay."

The financial crisis in 2008 was another. The company’s failed move to make mobile handsets, after it paid $8 million to buy Kyocera Wireless’s India R&D unit in 2009, only to shelve it later, was yet another. This failed attempt was too big a setback for Soota, who was spearheading this move. He decided to leave the company in 2011 and subsequently sold his 11.6% shares to Siddhartha, whose ownership increased to 20.32%.

Finally, Mindtree’s long restructuring exercise, which saw the firm hire management consulting major Bain and Co. in 2013, was another phase when both growth and profitability took a hit.

But Mindtree steered through each of these setbacks. Four reasons essentially explain how Mindtree survived many of the challenges it faced.

During the dot-com crisis, when almost 198 of the 200 companies that were set up in 1999 crashed, Mindtree had enough money to steer through the stress. “We survived because we had taken a lot of money and we still had money when the dot-com crash happened," said Soota.

Second, the decision to include engineering business helped the firm diversify with an alternative revenue stream.

Third, during the dot-com crash and then again during the financial crisis of 2008, the senior management, led by the founders, agreed to take salary cuts. Salaries of senior management were cut by 20-25% while mid-level managers agreed to a 10% cut. Finally, there was the excellent rapport between the founding team and the key investors, the two VCs in Walden Software and Siddhartha.

Betrayal or Bailout

So when the crunch came in 2018, why did Siddhartha choose to sell his crucial 20.32% stake in Mindtree at 980 a share to L&T, even though the founders had repeatedly expressed their reservations to him about India’s largest engineering and construction company which had in the past, too, made overtures for a stake sale? After all, just two weeks before L&T’s announcement on 18 March, another global private equity firm had agreed to buy the shares at 975, in a deal that was acceptable to Mindtree founders.

Siddhartha was forced to sell his shares because of a sudden liquidity squeeze in the lending markets, triggered by defaults in payments by Infrastructure Leasing and Financial Services Ltd in August. It led to his lenders calling in 3,000 crore of loans given to him against his entire holding in Mindtree which had been pledged.

With repayment deadlines fast approaching, he needed to monetize his holding in Mindtree at the earliest. However, none of the dozen-odd private equity firms, sovereign funds and long-term funds which were interested in buying his shares was okay with a complex deal. This was because for any sale to take place, the potential buyer needed to pay for the unpledging of the shares before buying them or at least agreeing to an arrangement wherein the shares stayed with the banks even while the transaction to sell them was underway. A deal just couldn’t happen as none of them was willing to pay unless the shares were transferred.

Amid L&T's hostile takeover bid, Mindtree founders are perhaps missing Soota’s contacts and astuteness.
Amid L&T's hostile takeover bid, Mindtree founders are perhaps missing Soota’s contacts and astuteness.

“They could have tried to get Infosys’s founders, including (N.R. Narayana) Murthy, (S.D.) Shibulal, and Krish (Senapathy Gopalakrishnan) to pick up some shares," said a former Infosys executive. “They would not have risked losing control of their firm. But the founders (Mindtree) thought nothing will happen to them."

Natarajan does not comment on why the firm could not have got a friendly investor from an existing IT firm to buy Siddhartha’s shares, saying the founders did everything they could. It is also possible that at this moment of crisis, they missed Soota’s contacts and astuteness.

“Ashok was clearly the captain," said Janakiraman. “He was more like a father-figure to all of us and helped us stay sane as we sorted through each of the episodes."

So did Mindtree miss Soota during this period? “Possibly," said Janakiraman.

“Absolutely not," Natarajan said, adding that the founders did everything possible to fend off the hostile takeover bid.

ALSO READ | Hostile takeovers can enrich shareholders

What is clear is that their inability to buy the shares of the five co-founders who exited the company over the years, in the process leaving the current founders with just 13.32%, cost them dearly—perhaps even their control over the company. Thus, when Soota exited in 2010, he sold his substantial 11.61% stake to Siddhartha. Ditto for Kalyan Banerjee and Anjan Lahiri, who together sold 2.06% in the open market.

Looking ahead

Even as Mindtree’s four independent directors evaluate the unsolicited offer by L&T, it appears a given that L&T will eventually get to own Mindtree.

Analysts expect L&T to combine L&T Infotech, L&T Tech Services and Mindtree once they, together, cross $5 billion in revenue.
Analysts expect L&T to combine L&T Infotech, L&T Tech Services and Mindtree once they, together, cross $5 billion in revenue.

L&T’s two listed technology firms, L&T Infotech Ltd and L&T Technology Services Ltd ended with $1.13 billion and $580.4 million in revenue, respectively, in the year ended March 2018. The company has said it intends to keep Mindtree, which ended with $846.8 million last year, separate for now. However, most analysts like JP Morgan Chase and Co. analyst Viju George expect parent L&T to combine the three entities once they, together, cross $5 billion in revenue. This will take at least three years, provided two of the three companies clock a 15% annual growth.

ALSO READ | A culture shock awaits Mindtree employees under L&T

Will combining the three firms be enough to compete against the large IT firms? Mumbai-based Tata Consultancy Services Ltd (TCS) will end the current year with more than $20 billion in revenue while Cognizant Technology Solutions Corp., which follows January-December as the financial year, is expected to end with over $17 billion. Bengaluru-based Infosys will end with over $11 billion while HCL Technologies Ltd and Wipro Ltd will end with more than $8 billion each.

Clearly, L&T’s consolidated IT business will still lack enough firepower to compete against the big boys of the industry. At best, it will be competing with Tech Mahindra Ltd, GlobalLogic and other mid-tier IT firms.

ALSO READ | Mindtree battle enters final decisive phase

The downside risk is in the cultural mismatch. Mindtree’s informal culture, where many employees call members of the founding team by their first names is in contrast with command-and-control and top-down management at L&T.

For now, Mindtree founders don’t have many options other than to delay the inevitable and negotiate for a smooth transition. Management guru Peter Drucker best described it as: “Many problems cannot be solved; they have to be survived." Ironically, Bagchi often recounted this to employees in the past when the company was faced with challenging times.

Close