What Brokerages Have To Say About L&T’s Takeover Bid For Mindtree
Analysts remained cautious over Larsen & Toubro Ltd.’s hostile bid to take over Mindtree Ltd. even as the engineering and construction company said the information technology firm will continue to remain an independently listed entity after the transaction.
“Attrition control and people management would be critical since hostile bids are uncommon in the professional services business as people are the key assets. These assets are not easy to manage in such situations,” according to Kotak Securities.
Agreed Investec. “There have been no such past instances of hostile takeover in India for the IT sector and it’s important to note that the IT business is of relationships and execution by people,” the brokerage said in a note. It also raised a red flag that the success rates in acquisitions of entities greater than 50 percent of the acquirer’s size is very low. Also, cultural differences could create friction and slowdown in growth, it said.
L&T seeks to buy a controlling stake in Mindtree after it entered into an agreement with Coffee Day Enterprises founder VG Siddhartha to buy his 20.3 percent shareholding in the mid-sized IT firm. L&T will buy the 20.3 stake in Mindtree from Siddhartha for Rs 980 a share. It also intends to purchase an additional stake of up to 15 percent from the open market at up to Rs 980 a share and has also announced an open offer to shareholders of Mindtree to acquire another 31 percent at Rs 980 a share. This three-step transaction will give L&T between 20.3-66.3 percent of Mindtree at a total cost of up to Rs 10,730 crore.
Homegrown brokerage IDBI Capital said it would seek clarity on L&T’s plan to manage the risk of exits of Mindtree senior management as the founders have not sounded comfortable with the deal.
Also, it wants clarity on L&T’s plan and timeline to merge Mindtree with L&T Infotech and its target to improve the performance of Mindtree, especially consistency of revenue growth and EBIT margin.
Meanwhile, Kotak Securities has set a target price of Rs 1,000 apiece on Mindtree. “The purported acquisition price values Mindtree at 19 times the FY20 estimated earnings with the price offered consistent with our fair value,” said Kawaljeet Saluja, analyst at Kotak Securities.