Why Mindtree and others are in the midst of a hostile takeover?, CFO News, ETCFO

Picture of Mindtree chairman Ashok Soota & the company’s other nine co-founders in 2009. Recently, the IT firm has formed a panel of independent directors to look into ‘unsolicited open offer’ by Larsen & Toubro, who has launched a hostile takeover after buying 20.3% stake from early investor VG Siddhartha in March 2019.
Ever wondered how to protect your company from a hostile takeover?

Low promoter shareholding, shareholder activism, liberal tax and regulatory landscape, availability of vulture funds harvest a fertile ground for hostile takeovers in the M&A world. Be it a friendly merger or a management buy-out or leveraged buy-out or a hostile bid; one thing is common – where emotions run high and eventually dry up, the winner is always CASH. In a hostile bid, the acquirer is looked upon as a vulture, and so on. but the question is why wasn’t the target’s management keeping an eagle eye?

Netflix Inc. adopted a stockholder rights plan (popularly known as a poison pill) to thwart a potential hostile takeover bid by Investor Carl Icahn after he acquired 10% in the company. A poison pill is a distribution to the target’s shareholders of the right to purchase shares of the target company at a nominal value resulting in substantial dilution of corporate raider’s shareholding in the target.

Though the Indian regulatory framework limits the ability to use such a poison pill by the target, “white knights” have been effectively used as an anti-takeover defense strategy to frustrate potential hostilities.

In 2010, Reliance Industries played a white knight to the promoters of East India Hotels (EIH) by buying 14.1 % stake in their company to prevent any aggression from ITC group which had raised its stake in EIH to 14.8% over the years. Similarly, Mahindra’s played a white knight to save GESCO Corporation from a hostile bid from Mr. Abhishek Dalmia, and very recently Mr. Saroj Poddar played a white knight to fend off Deepak Fertilisers’ bid on Mangalore Chemicals.

There is no place for sentiments in pursuit of building a global empire regardless of whether the target is Arcelor, Essar Steel or Jet Airways or for that matter Mindtree.Saumil Shah, Partner, Dhruva Advisors
In the ongoing battle, Mr. Siddharth & affiliates held a 20.4% stake in Mindtree whereas the combined promoters’ stake in Mindtree is only 13.3 % which makes it a soft target for a hostile bid. There were several strategies that the management and Board of Mindtree could have adapted to dilute significant shareholding of one dominant non-promoter group. Some of these ideas could have been a preferential issue to private equities, or large family offices, or industrial house which do not have a presence in the IT sector. Like L&T, shares could have been issued to an employee welfare trust. Another option were to create a holding company structure with operating subsidiaries and have differential voting rights at the sub-level. Though these options have their pros and cons but living in hope is not a strategy.

If one was to look into history and draw similarities to the current saga of L&T and Mindtree, Emami’s acquisition of Zandu comes to mind immediately. Emami acquired ~ 23% stake from the Vaidya family, co-promoters of Zandu sometime in May 2008 and announced open offer in June 2008 to buy an additional 20% from the shareholders of Zandu.

Immediately after that, the Parikh family who was in charge of the management of Zandu called for a board meeting to discuss preferential allotment to the promoters of Zandu namely Parikh family which was later withdrawn due to legal notice served by Emami.

Subsequently, Zandu attempted to appoint five additional members on the board of Zandu which also was successfully blocked by Emami. In the interim, Zandu and Parikh family also went to the Bombay High Court and Company Law Board alleging insider trading violations, contractual restriction on transferability of shares acquired by Emami, violation of other provisions of Companies Act, etc., none of which could hold back Emami. Ultimately, Parikh’s agreed to sell their 18% in Zandu to Emami and the wrestle to acquire control of Zandu was laid to rest.

L&T which itself has been a subject matter of a corporate battle for takeover once by Mr. Dhirubhai Ambani and subsequently by Mr. Birla, cannot be blamed for its ambition and “lack of emotions.” There is no place for sentiments in pursuit of building a global empire regardless of whether the target is Arcelor, Essar Steel or Jet Airways or for that matter Mindtree.

About the author: Saumil Shah, Partner of a tax and regulatory consultancy firm, Dhruva Advisors

The views expressed are solely of the author and ETCFO.com does not necessarily subscribe to it. ETCFO.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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