L&T Infotech shares already carry scars of meddling with Mindtree2 min read . Updated: 20 Mar 2019, 12:28 AM IST
- Larsen & Toubro Ltd’s (L&T's) reported plan to buy a large stake in Mindtree has led to a fall in the value of its software services arm
- L&T Infotech investors’ worries aren’t limited to those of a typical M&A transaction
A mergers and acquisitions (M&A) transaction typically boosts the shares of the target company and weighs down the shares of the acquirer. It’s no different in the case of mid-sized IT company Mindtree Ltd, and one of its potential acquirers.
Larsen & Toubro Ltd’s (L&T) reported plan to buy a large stake in Mindtree has led to a fall in the value of its software services arm, Larsen and Toubro Infotech Ltd. The IT subsidiary’s valuation has fallen nearly 11% since mid-January, on fears that a possible combination can be a drag on its performance. Reports of L&T’s interest had emerged first in mid-January. Mindtree shares, meanwhile, have risen about 7% in the same period, adding to the gains since October last year.
L&T Infotech investors’ worries aren’t limited to those of a typical M&A transaction. Reports suggest L&T is attempting a hostile takeover, since Mindtree’s promoters are trying their best to stall the deal. On Friday, Mindtree said its board will consider a buyback of shares, a move that is known to be used to thwart hostile takeover attempts.
A hostile takeover in an industry such as software services, where people are the biggest assets, can backfire. “We are not aware of any precedent where there has been a hostile takeover in the IT services business. This is primarily because this is a business of relationships and execution by people," analysts at Investec Capital Services (India) Pvt. Ltd said in a note to clients.
Moreover, the success rates in the case of acquisitions that are greater than 50% of the acquirer’s size is likely very low, they add. Mindtree’s annualised Q3FY19 revenues stood at a little over a billion dollars, or 72.5% the size of L&T Infotech.
Even if Mindtree’s promoters somehow agree to strike a deal, the cultural differences between the two companies can create hurdles going ahead, warn some analysts. “L&T Infotech comes from a group that is predominantly in the manufacturing business, while Mindtree is a services firm from the ground up; shall the twain ever meet?" said an analyst who preferred anonymity.
If, however, they do find a meeting point, there will be benefits of scale. The combined entity’s annual revenues will be nearly $2.4 billion. Dependence on large clients will reduce and services offerings will expand. And as the chart alongside shows, the combine’s banking, financial services and insurance vertical will reach a size of $870 million, not far from the crucial $1 billion mark that helps open doors to large customers. What’s more, cost synergies from sales and general administration can result in meaningful savings as well, say analysts at Investec Capital.
But none of this counts for much if Mindtree isn’t going to play the game. The best bet will be a deal that has a buy-in from the target company as well.