Mumbai: A day after revealing their plans to pick up a significant stake in Mindtree Ltd, Larsen and Toubro’s (L&T's) managing director and chief executive officer S.N. Subrahmanyan and wholetime director and chief financial officer R. Shankar Raman, in an interview with Mint, explained their rationale behind buying V.G. Siddhartha’s stake in Mindtree, and why it was not a hostile takeover. Edited excerpts:
You say the Mindtree deal is not a hostile takeover. Why so?
Subrahmanyan: A mutual friend introduced me to Mr Siddhartha (of Coffee Day Enterprises Ltd). He wanted to meet me, I said most welcome, and we had a cup of tea. During the course of our conversation, he told me he owns 20% of Mindtree. I wasn’t even aware of this at the time. I said, great, but so what. And, he said, he would like us to buy it.
Of course, we wanted to grow our services business, but we had not been thinking about it (proactively). (But), he kept meeting me to persuade me. He used to fly in from Bengaluru to meet me in Mumbai and Chennai. I was not very sure about our ability to take such a decision. We haven’t done this before, of taking this to the board and the chairman. But the fundamentals looked good. We did not have any other plans in mind because the recent (share) buyback offer did not go through Sebi. We did our strategic planning, ideas came, but there was no major investment. This was a good idea and looked value accretive to me.
Siddhartha told me that for 19 years, he was involved in the company, (and) he was emotional about it. He wanted it housed in a company with good governance, in a safe place with good ethics and values and good management. “And therefore I would like to give it to you. You tell me the price." We analysed it, then convinced the chairman and the board, and we decided to go forward.
We met with the management of Mindtree, and told them that we were not on this deal, but it was their shareholder who had come to us. If we don’t buy it, some third party will come and you have no background on them.
Siddhartha seemed keen to sell. If I said no, I don’t know what is going to happen. If I said yes, you know who the friendly party is. We have no intention to destabilize (Mindtree), we told them please continue with the same chairman and management. You can continue running Mindtree independently; that is how all L&T companies are run. We will give some oversight in the board with our experience, we have huge client connects and leverage, and we will bring it to Mindtree. If we are there, nobody will touch you.
We tried to convince them (Mindtree promoters), they were convinced at the meeting. Then we hear in the media what you have written about. At the meetings, they were positive with us, (we had a) good Chinese dinner, the meeting went up to 3-4 hours, we parted as friends. Krishnakumar (Natarajan, executive chairman, Mindtree) came for my son’s wedding. I spoke to him today morning to tell them that we had signed the agreement with Siddhartha. Whatever we do, hum dil aur pyaar se karte hain (we do it with heart and love).
Which part of the process are you at?
Subrahmanyan: There is a regulatory process, wherein we have to get approvals from agencies in Germany and the US, and from the Competition Commission of India. In our opinion, this should not be a problem. Having said that, let’s wait for the CCI approval. As the rules require, we have to make an open offer and buy from the market. Our intention is to acquire a reasonable shareholding. The way L&T runs, we are passionate and involved, and committed to the business. We don’t do it with just a 20% shareholding. We want to create value for shareholders. We will be a very positive force for them.
Is it true that the Mindtree management wrote to you and asked you not to go ahead with this transaction?
Subrahmanyan: No. They didn’t say that. They said: “You’re making this investment. Please think through it and do it." We thought through it, and we have done it.
What could be the reason for them to have come out so strongly against you?
Subrahmanyan: You will have to ask them. We had 2-3 dinners with them and they went very well. We had a very cordial relationship. Mujhe kissi ke saath dushmani ya hostility nahi hain (I do not have animosity or hostility towards anyone).
Do you foresee problems in getting to the 67% shareholding that you are aiming for through the open offer?
Raman: The construct we have laid out leads to 67%. We’re not saying that it will be 67%. It could be anywhere between 20.32%, which is sealed and done, and 67%. We have to wait and see what the response is. (All) we’re saying is that through the open offer, we are looking to acquire 31%, and the response can be anywhere from 0-31%. It is not that if we don’t reach 67% we have lost the game.
We don’t think 20% enables us to effectively contribute. We should at least have 26% to effectively contribute, then we become a significant influencer in the event.
What sort of board representation will you seek?
Raman: This is hypothetical. With a 13% promoter holding, they have four directors on the board. If I go by the arithmetic, I should have six, but that’s not practical.
Consistently, we've been saying that in our group companies, we believe in empowered leadership and the quality of board representation is more important than quantity. We need to wait first for the dust to settle.
We signed the agreement last night and not even 24 hours have passed. It’s not the appropriate time to start thinking of this.
We want to stay and contribute to the growth of the enterprise.
Are you speaking to institutional investors of Mindtree to get their backing?
Raman: They will be speaking to us. They will have to make a call on whether they will participate in the open offer, in which case they have to reach out and say what are your plans. And based on those plans they will decide if they will stay on board, exit or participate in the open offer. In this case, very strangely, the equity holder approached us. So, the rest of the financial sector will also approach us. Our job is to maintain cool and calm and be focused on what we need to do for the well-being of the institutions.
Do L&T shareholders believe you have overpaid for Mindtree in this transaction?
Raman: We haven’t overpaid. If you take the last one year of volume-adjusted weighted average price, it comes to ₹934. According to Sebi rules, it’s either that or the negotiated price. We think it’s appropriate to pay a 4-5% premium to this.
Nobody has come back to me since the (L&T-Mindtree) deal was announced saying that you have overpaid. All our investors were interested in how do you want to take this forward. They went back feeling assured that we won’t joining this cacophony in the market, we will stay calm. They wanted to know how the value accretion will happen.
If Mindtree’s net profit to revenue is 15%, and that’s demonstrated in our other IT businesses, then the value pays for itself.
Are you talking to Mindtree’s independent directors?
Subrahmanyan: Courtesy demands that we speak to them.
Raman: And under regulations, independent directors have to recommend to shareholders, and my guess is, that obligation will also force them to talk to us. How do they decide, on what basis, how will they recommend. They can’t duck the issue, unless they resign and it will be even more embarrassing if they resign.
How long do you plan to keep Mindtree separate from L&T Infotech?
Subrahmanyan: I can’t speculate on that. It is an active management. We have to do what is good for the business from a shareholder’s point of view. As we see it, running independently Mindtree has done tremendously well. And that’s the formula also within L&T. There is no reason to change it this now.
Once both of them acquire scale and joining together makes sense, we will look at it that time. L&T is not dictatorial. We have to bring in consensus. If there is no consensus, then we won’t do it.
Is the ₹980 price for the open offer fixed?
Raman: That is the contract we have signed (with Siddhartha), that is the price we have given for the open offer and the price we have given to our brokers. That’s frozen. Now, the only way it will change is if there is a competing offer and there is pressure on us. But it is not so easy to cut a cheque for this size of a commitment.
Did you get time to do due diligence on the asset?
Raman: This is a process that does not involve due diligence. If we merge two companies and there is shareholder approval, then we appoint a legal firm and accounting firm and do detailed due diligence. Here we are buying from the exiting shareholder. But since we play in the arena, we have a fair understanding (of the company) and sufficient amount of data is publicly available. We have also engaged professionals to ensure there are no apparent skeletons.
Mindtree said there are concerns with clients in a hostile takeover. Are you speaking to their clients?
Subrahmanyan: Microsoft (Mindtree’s biggest client) knows us well; they have been with L&T for the last 20-25 years. The entire management of Microsoft is well known to me.