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All is fair in love and war

Mindtree Limited is an IT and outsourcing company based in Bengaluru. Founded in 1999 by the high-profile business author Subroto Bagchi and nine others who had exited from WIPRO, the company employs about 20,000 and has an annual dollar turnover of USD 846 million. The company shot into the limelight recently with construction bellweather, Larsen & Toubro (L&T), announcing its plan to buy a majority stake in Mindtree. All hell broke loose as the promoters responded sharply to the overture.
In a letter to Mindtree Minds (read family), which was widely circulated in the social media, patriarch Bagchi gave a clarion call to ‘hold the tree.’ Wrote the founder, “…as we have remained focused on the institution building process, we have also drawn attention from people (read L&T) who really don’t care about all this. Suddenly, Mindtree has become an ‘attractive asset’ that they must have.”
Well, I am tempted to ask Bagchi whose books I read with great interest, “What’s wrong with that?” So long as L&T plays fair, pays fair and does not do an underhand deal, what’s the fuss about wanting to buy an attractive asset? If there is an attempt to point to the Cognizant case, there are equal penalties levied by global titans on respected IT majors. After all, human resources are also assets, which corporate poach from each other. Remember, a company should go to the highest bidder, unless the bidders are crooks. That’s the nature of the market economy. While I have the highest respect for the founders and can understand their emotional connection with the company, there are a few things that merit attention.

Palpably incorrect

First, no one denies Mindtree is an outstanding company. Bagchi’s claim that they have built a great institution is true. Otherwise, it would not have got a suitor like L&T. Second, in a company, unless you hold 100 per cent equity, you are only a co-owner. And when your company is listed in the market and you have just a 13 per cent stake you are at best a majority owner. Third, and most important, if you founded the company, you are a founder and not a life-time owner. It is, therefore, palpably wrong to believe that you can hold on to it for dear life, forever, unless you have a 51 per cent stake.
Let me get down to where promoters go wrong. If you allow outsiders to invest in your company, you run a risk. By allowing V G Siddhartha of Café Coffee Day to do that, the promoters had to ready themselves for its consequences. If you wanted full ownership, you should have raised debt, not equity. Corporate Finance 101 says equity capital is costlier than debt. You pay the price of equity by helping the investor to pick his return from the market. As an investor Siddhartha has a right to sell to whoever pays him the highest. L&T offered him that. Media reports suggest that he had at the behest of the promoters invested Rs 44 crore in 1999, Rs 125 crore in 2011 and Rs 171 crore in 2012. By now selling it at a fat Rs 3270, he made an IRR of 21.1 per cent per annum!
L&T is now making a public offer of cash to investors at near to market price. It’s asked its brokers to buy 15 per cent at Rs 980 apiece. Those who think there is value in the deal, including the FIs will sell out. Incidentally, this struggle to capture is old hat; and the news has been on for a year. If Mindtree was so very worried about L&T destroying value, it should have got a white knight earlier.
A couple of decades ago, L&T faced the same situation as Mindtree. The stalkers were Reliance and Birla. In the end, L&T won; but it had to go through a long drawn process and it had the ingenious A M Naik who innovatively created an employees’ trust and also swapped the RMC business for Birlas’ equity. Today, India is far more open. Financial institutions will and should vote in favor of those who deliver higher value as they are answerable to their investors.
L&T has the money, and they are a hard-nosed professional outfit. The fight seems to be headed only one way. Let me make one thing clear. I like Mindtree, I can understand them; but I must say the law is not on their side.

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