The management of IT services company Mindtree rejected conglomerate Larsen & Toubro Ltd's move to buy a 66 per cent stake in the company by spending about $1.6 billion, terming it "value destructive."
L&T, which has its own IT business unit apart from businesses such as construction, power and financial services, said late Monday it would buy a fifth of Mindtree for roughly $475 million and that it wanted to raise its stake to 66 per cent, spending Rs 10,730 crore ($1.56 billion).
Shares in both L&T and Mindtree fell on Tuesday, and analysts said Mindtree's promoters' stance towards the hostile bid made things uncertain.
"The hostility is not just in terms of the shareholding, but also because of the fact that this particular group has competing business with us," Mindtree chief executive Rostow Ravanan told reporters at the company's headquarters in the tech hub of Bengaluru.
The L&T group runs IT firm L&T Infotech and engineering services firm L&T Technology Services.
"Whether the deal is done by reckless pursuit of scale or driven by ego is the question that needs to be answered," Mr Ravanan added.
L&T executives sought to calm investors, promising that they would run Mindtree separately from its tech services unit L&T Infotech Ltd, in which it owns a 74.8 per cent stake.
Mindtree with our investment... will be run as an independent company with its board, with its management," L&T chief executive SN Subrahmanyan said at a news conference in Mumbai. "What L&T at best would do is to provide board oversight, management connects, value additions, benefits."
"We intend to take it forward in the same manner as Mindtree has been run right now - with the same purpose, with the same beliefs, with the same culture, with the same value system."
Earlier in the day, Bengaluru-based Mindtree's biggest shareholders said they saw no strategic advantage in the transaction and believed that it would be "value destructive for all shareholders."
Mindtree said its board will deliberate over the L&T proposal on Wednesday.
Mindtree, with a strong client base, is an attractive asset for L&T, analysts said. It trades at 21.45 times forward earnings, compared with a sector average of 15.58, according to Refinitiv Eikon data.
"This acquisition is in line with (L&T's) stated strategy of focusing on services and asset light businesses ... and will help propel L&T's technology portfolio to within the top tier of Indian IT companies," Morgan Stanley analysts said in a note.
The combined revenues of Mindtree, L&T Infotech and L&T Technology Services - the conglomerate's engineering services unit - would be about $3 billion, the brokerage said.
The Indian IT services industry is dominated by the likes of Tata Consultancy Services and Infosys.
L&T said it will buy a fifth of Mindtree from coffee baron VG Siddhartha and companies related to him.
The company also said it placed an order with its broker for an on-market purchase of up to 15 per cent of Mindtree's shares at Rs 980 each. It is looking for an additional 31 per cent stake from Mindtree's public shareholders at the same price.
If the transactions go through, L&T will be spending up to Rs 10,730 crore ($1.56 billion) to buy a roughly 66 per cent stake in Mindtree, L&T said in an investor presentation on Tuesday.
L&T's offer is at premium of 1.8 per cent to Mindtree's closing price of Rs 962.50 on Monday. Local media reported about the potential stake deal over the weekend.
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