Mergers and Acquisitions Tutorial 1

CASE STUDY ON

Mindtree July
2019

Submitted By:-
Shailja Manya

PRN: 22022021044

BBA 5th SEM

 INDEX
S.No Topic Page
1. Selecting A Recent Acquisition 1
2. Introduction 1
i. Brief Overview of the
Companies Involved in the 1
Acquisition
ii. Industry Context and Rationale 2
Behind the Acquisition
iii. 3
Terms
3. Merits of the Acquisition 6
i. Strategic Merits 6
ii. Financial Merits 6
iii. Operational Merits 6
4. Consequences of the Acquisition 8
i. Pre- and Post-Acquisition 8
Financial Statements
ii. Pre- and Post-Acquisition 13
Key Financial Ratios
iii. Post-Acquisition Issues 16

5. Analysis 19
i. BCG Matrix Analysis 19
ii. 21
iii. SWOT Analysis 21
6. Conclusion 23
7. References 24
1. SELECTING A RECENT ACQUISITION
hostile takeover of
Mindtree in July 2019.

A hostile takeover/acquisition is one where a company (the acquirer) gains control

of another company (the target company) without the approval or consent of the target

2. INTRODUCTION
i. Brief Overview of the Companies Involved in the Acquisition.
Larsen & Toubro (L&T) Ltd:
L&T is one of the largest and most respected conglomerates in India,
with a majority of its revenue coming from the EPC (Engineering,
Procurement and Construction) sector.
Founded in 1938 by Danish engineers, L&T has grown into a global
player over the years, with operations in over 50 countries. The
company is known for its strong engineering capabilities, project
management skills, and innovative solutions across sectors. As of
2019, L&T had a market capitalization of approximately Rs. 1.822
trillion.
The conglomerate has various companies operating under its wing that
span across sectors like engineering, construction, mining, electric and
automation, metallurgy and power etc. Since these sectors are highly
cyclical and susceptible to economic downturns, L&T has been
growing its presence in technology, real estate and financial services.
One such example of diversification is L&T Infotech (LTI),that was
founded in 1997 as a subsidiary of L&T. LTI is a global technology
consulting and digital solutions company that offers services like
application development, maintenance and testing, enterprise solutions,
cloud infrastructure and security, analytics, AI & cognitive and
enterprise integration and mobility.
 Mindtree Ltd:
Mindtree Ltd, founded in 1999 by Subroto Bagchi, Ashok Soota,
Krishnakumar Natarajan, Anjan Lahiri and Rostow Ravanan was
primarily a mid-sized Indian multinational information technology
and outsourcing company with two headquarters one in
Bangalore, India and another in New Jersey, USA.
The company offered different IT services to capital markets,
insurance, manufacturing, retail, travel and transportation
industries. It also provided bailout to automotive, communication
systems, consumer appliances and computer peripherals, industrial
systems, storage and computing systems.
International offices of Mindtree Ltd include USA, UK, Germany,
Switzerland, UAE, Singapore, Australia and Japan.
In 2019, the company had a market capitalization of Rs. 131.52
billion.

ii. Industry Context and the Rationale Behind the Acquisition

The IT services industry in India has been a critical contributor to the
ith global companies relying on Indian firms for
software development, IT consulting, and business process outsourcing (BPO)
services. The industry has witnessed significant consolidation over the years,
driven by the need for scale, cost synergies, and competitive advantage.

Rationale for L&T

objective to enhance its presence in the IT services sector, where it

already had a subsidiary, L&T Infotech. The acquisition was seen as a
way to rapidly scale its IT business, diversify its revenue streams, and
tap into the growing demand for digital services.
According to S.N. Subrahmanyan, chief executive and
core business that involved
large infrastructure projects such as airports, bridges and power plans,
generated profit after tax (PAT) of around 7%. Therefore,
 incorporating information technology into the business seemed
lucrative to derive higher profits and escalate the profit after tax (PAT)
to 15-16%.
Mindtree appeared to be a perfect fit to achieve this goal, because it
was among the first companies to identify and grasp opportunities in
new digital technologies like artificial intelligence, automation and
machine learning. In the January-March 2019 quarter, digital
technologies made up to 42%
higher when compared to Tata Consultancy Services (TCS)
largest IT company, whose digital technologies contributed to only
32.2% n the same quarter.
The Indian conglomerate already had a listed IT company - L&T
Infotech - which focused on BFSI verticle whereas, Mindtree largely
focused on clients from hospitality and retail sector. So, a takeover
would mean an expansion of L&T's information technology business.
The acquisition would help L&T add several large clients to its IT
services portfolio and plug add new
large clients.

Rationale for Mindtree

relatively smaller size compared to industry giants made it vulnerable

to takeover attempts.

resources, global reach, and client base, potentially enhancing its

growth prospects.

iii.
In 1999, Ashok Soota quit as the Vice Ch
technology services business and started a software services firm, Mindtree,
along with Subroto Bagchi, Krishnakumar Natarajan, Anjan Lahiri and
Rostow Ravanan. Café Coffee Day founder, VG Siddhartha was among the
first investors who saw potential in Mindtree and became the single-largest
non-promoter shareholder having 20.32% stake in the budding company
and thus helping it to become a noticeable name in the industry and carve out
a niche for itself in IT services for the past two decades.

However, in March 2019, VG Siddhartha was facing liquidity pressures, and

he initially approached L&T offering them to sell his 20.32% stake in
Mindtree to reduce his debts. L&T offered him Rs. 980 per share, which
amounted to precisely Rs. 3,269 crores. The promoters of Mindtree i.e.
Subroto Bagchi, NS Parthasarathy, Rostow Ravanan and Krishnakumar
They were not amused, and were

adv
organisation.

Normally, when a company attempts to acquire another, it can offer to gain

control only if they hold 25% stake in the target company. However, in
s case, this requirement was not met as the company did not hold 25%
ownership of Mindtree. Therefore, L&T sought to other ways to make this
acquisition successful because it wanted to reap the strategic, financial and
operational benefits coming out of this takeover. They found a loophole in the
and
used it to their advantage.

The Indian conglomerate used Section 3, Clause 1 along with Section 4 of

the ode, which says that whether or not one holds shares
or voting rights in the company, one is not eligible to take control unless a
public announcement of an offer to acquire those shares is made. This made
L&T eligible to make an open offer, without having to own 25 per cent shares
in the IT major.

As a result, L&T proceeded to buy 20.32% shares in Mindtree from Café

Coffee Day founder, VG Siddhartha, for almost Rs. 3,269 crores in March
2019. Not much later, the conglomerate made an open market purchase of
around 15% capital shares and during the period of June 17 to June 28
2019, it again made an open offer to purchase additional 31 per cent stake at
Rs. 980 per share.

As of June 30, 2019, the promoters held 13.30 % stake in Mindtree, which
included 3.71 % held by Executive Chairman Krishnakumar Natarajan,
3.10 % by former Executive Chairman Subroto Bagchi, 1.42 % by Executive
Vice-Chairman NS Parthasarathy and 0.71% by Managing Director and
CEO Rostow Ravanan.

On July 2, 2019, Mindtree announced in its regulatory filling that L&T had
acquired equity shares to an extent of 60.06% of the total shareholding of
the company. Thus, the conglomerate had acquired control over its
target and was categorised as a promoter by SEBI.

On July 5, Natarajan, Parthasarathy and Ravanan resigned from their positions

at Mindtree.
3. MERITS OF THE ACQUISITION
i. Strategic Merits
Market Expansion: The acquisition allowed L&T to expand its footprint
in the IT services sector, complementing its existing portfolio with
digital transformation capabilities.
Cost Synergies: L&T aimed to achieve cost synergies through the
consolidation of operations, elimination of redundancies, and optimization
of resources.
Diversification: ,
reducing its reliance on traditional engineering and construction
businesses.
Competitive Advantage:

the global technology market.

ii. Financial Merits

Enhanced Financial Performance: The acquisition was expected to
-margin
digital services contributing to increased profitability.
Share Price Impact: Post- share price initially saw

performance improved as synergies were realized.

Shareholder Value: The acquisition was projected to create long-term
hanced growth prospects and
improved financial metrics.

iii. Operational Merits

Enhanced Production Capabilities:

to deliver end-to-end solutions.

Improved Supply Chain Management: The acquisition enabled better

to improved supply chain efficiencies.

Resource Allocation:
services to optimize resource allocation across its business segments,
driving innovation and efficiency.
Reduction in Overhead Costs: Overhead costs which were duplicate in
nature were reduced to promote efficiency within the organization.
4. CONSEQUENCES OF THE ACQUISITION
i. Pre- and Post-Acquisition Financial Statements
Balance Sheet

LARSEN & TOUBRO (L&T)

Source: screener.in
MINDTREE

Source: screener.in
The equity capital of L&T remained relatively stable during the post-acquisition
period, with a slight dip in March 2024 (Rs. 275 crores), indicating that the
On the other hand, in
case, the equity capital witnessed a minor increase post-acquisition
i.e. Rs. 164 crores in March 2019 to Rs. 165 crores in March 2022.

The reserves in L&T increased significantly post-acquisition i.e. Rs. 62,094

crores in 2019 to Rs.86, 084 in 2024. This reflects overall growth in retained
earnings and reserves. For Mindtree, the reserves nearly doubled from Rs. 3,142
crores to Rs. 5,504 crores post-acquisition, indicating strong profitability and
retained earnings in the long run after being acquired by L&T.

Borrowings of L&T peaked around the post- acquisition period i.e. Rs. 143,174
crores in March 2020, but then decreased towards March 2024, suggesting that
L&T might have used leverage for the acquisition but then shifted its focus towards
reducing debt. Mindtree orrowings also increased post-acquisition i.e. Rs. 567
crores to Rs. 613 crores in September 2022, but maintained a relatively low lebt
profile in comparison to L&T.

Total liabilities of L&T increased steadily i.e. Rs. 278,036 crores in 2019 to Rs.
339,094 crores in 2024, which is most likely due to the acquisition and more
borrowings or other liabilities to finance growth. Mindtree also witnessed a
significant rise in total liabilities post-acquisition i.e. Rs. 4,179 crores in 2019 to
Rs. 8,465 crores in 2022. This
within L&T's broader financial structure.

Total assets of L&T increased significantly i.e. from Rs. 278,036 in 2019 crores
to Rs. 339,094 crores in 2024, with the acquisition of Mindtree fueling this growth.
total assets nearly doubled i.e. Rs. 4,179 crores in 2019 to Rs. 8,465
crores in 2022, reflecting the expansion and integration into L&T.
 Profit & Loss
LARSEN & TOUBRO (L&T)

Source: screener.in

MINDTREE

Source: screener.in

Sales of L&T steadily increased from Rs. 135,220 crores in March 2019 to Rs.
221,113 crores in March 2024,
information technology services into sales and paved
a way for strong post-acquisition growth. sales also grew from Rs. 7,022
crores in March 2019 to Rs. 10,525 crores in March 2022, reflecting a positive trend
post-acquisition.

Interest expenses of L&T initially increased post-acquisition (2020 & 2021), likely
due to the financing of the acquisition, but later stabilized near its base value (2022 to
2024). Depreciation steadily increased from Rs. 1,923 crores in 2019 to Rs. 3,682
crores in 2024, indicating continued investments in fixed assets.

net profit showed substantial growth, with net profit increasing from Rs.
10,217 crores in March 2019 to Rs. 15,547 crores in March 2024. On the other
hand, net profit of Mindtree also increased from ch 2019 to
ch 2022.

Cash Flow

LARSEN & TOUBRO (L&T)

Source: screener.in
 MINDTREE

Source: screener.in

Cash from Operating Activity: For L&T, cash from operating activity was
negative (cash outflow > cash inflow) for almost all the years till March 2019
before acquisition, except 2017. Post-acquisition, the cash inflow increased
substantially from Rs. 6,694 crores in March 2020 to Rs. 18,266 crores in March
2024. In case, the acquisition provided a boost to operational cash flows
i.e. Rs. 630 crores in 2019 to Rs. 1,537 crores in 2022.

Cash from Investing Activity: Even after acquisition, L&T experienced negative
cash flows
capital-intensive projects. Mindtree also suffered increased outflows post-
strategy of reinvesting
earnings into growth opportunities.
Cash from Financing Activity: L&T witnessed a sharp reduction in cash inflows
from financing activities, turning negative from positive in several years post-
acquisition (2021, 2022, 2023, 2024), indicating repayment of debt or reduced
borrowing. s cash flow from financing activity continued a negative
trend, with outflows increasing over the years, indicating a possible strategy to
reduce debt or return capital to shareholders.
Net Cash Flow: Although the net cash flow has been volatile for L&T in the pre-
acquisition years, the company has managed to generate positive net cash flow post-
acquisition i.e. Rs. 4,658 crores in March 2020 to Rs. 3,156 in March 2023, followed
by significant outflows as of Mar 2024. On the other hand, Mindtree has managed to
maintain positive net cash flow post-acquisition i.e. Rs. 135 crores, Rs. 369 crores
and Rs. 292 crores in March 2022.
ii. Pre - and Post Acquisition Key Financial Ratios
2017 2018 2019 2020 2021
Larsen & Toubro Ltd.
Return on 12.5 13.7 14.6 14.8 9.7
Equity
(ROE) %
Debt-to- 0.21 0.20 0.24 0.49 0.39
Equity
Ratio
Earnings 58.46 38.44 53.41 47.58 80.72
Per Share
(EPS)
(Rs.)
Dividend 0.00 0.00 0.00 21.01 22.29
Pay-out
Ratio (%)
Mindtree Ltd.
Return on 17.02 22.01 22.80 19.98 25.70
Equity
(ROE) %
Debt-to- 0.04 0.11 0.00 0.00 0.00
Equity
Ratio
Earnings 26.55 38.13 45.92 38.32 67.41
Per Share
(EPS)
(Rs.)
Dividend 37.64 23.81 23.93 78.20 25.94
Pay-out
Ratio
Source: moneycontrol.com & statista.com
Return on Equity (ROE): It is a measure (in %) of financial performance of a

Larsen & Toubro Ltd. (L&T) Analysis:

Pre-Acquisition (2017-2018): ROE was stable and gradually increasing,

indicating efficient use of equity.
Post-Acquisition (2019-2021): ROE was high in 2019 and 2020 but declined
thereafter, especially in 2021, possibly reflecting the integration challenges and
increased leverage due to the acquisition.

Mindtree Ltd. Analysis:

Pre-Acquisition (2017-2018): ROE was consistently strong, showcasing robust

profitability.
Post-Acquisition (2019-2021): ROE showed a slight dip in 2020, possibly due
to acquisition-related integration, but rebounded strongly in 2021.

Debt-to-Equity Ratio: This ratio indicates the proportion of debt financing relative
to shareholders' equity.

Larsen & Toubro Ltd. (L&T) Analysis:

Pre-Acquisition (2017-2018): The ratio was low, indicating conservative use

of debt.
Post-Acquisition (2019-2021): The ratio significantly increased in 2019 and
2020, reflecting higher leverage likely due to the acquisition financing. It
slightly decreased in 2021 as the company may have started to reduce debt.

Mindtree Ltd. Analysis:

Pre-Acquisition (2017-2018): The ratio was very low, indicating minimal debt
usage.
 Post-Acquisition (2019-2021): The ratio dropped to zero, suggesting that post-
acquisition, Mindtree continued to operate with minimal or no debt, possibly
due to financial backing from L&T.

Earnings per Share (EPS):

how much money a business makes for each share of its stock.

Larsen & Toubro Ltd. (L&T) Analysis:

Pre-Acquisition (2017-2018): EPS showed some volatility, especially in 2018,

which might indicate inconsistent profit earning capacity of the shares.
Post-Acquisition (2019-2021): EPS recovered and peaked in 2021, likely due
to synergies from the acquisition and improved operational efficiency.

Mindtree Ltd. Analysis:

Pre-Acquisition (2017-2018): EPS was steadily increasing, showing growth in

profitability.
Post-Acquisition (2019-2021): Despite a dip in 2020, EPS surged in 2021,
suggesting effective integration and enhanced profitability under L&T's
management.

Dividend Pay-out Ratio: This ratio shows the percentage of earnings distributed
as dividends to shareholders.

Larsen & Toubro Ltd. (L&T) Analysis:

Pre-Acquisition (2017-2018): L&T did not pay dividends, likely retaining

earnings for reinvestment in its projects.
Post-Acquisition (2019-2021): The ratio increased, indicating a shift towards
rewarding shareholders with dividends.
 Mindtree Ltd. Analysis:

Pre-Acquisition (2017-2018): The ratio was consistent, reflecting a balanced

approach to dividend distribution.
Post-Acquisition (2019-2021): The ratio spiked in 2020, possibly due to
strategic financial decisions post-acquisition, but normalized in 2021, indicating
stability in dividend policy.

iii. POST-ACQUISITION ISSUES

According to a Business Standard article dated March 19, 2019
after L&T buys 20% stake of the company, L&T down by 1%
The bid offered by L&T was viewed negatively by the analysts post the
announcement.
Due to this, the share price of L&T slipped 1.5% in intra-day levels to Rs.
1356.75 level on BSE, while Mindtree lost 2% to Rs. 943 levels.

Source: scribd.com
On 8th July 2019, when the announcement regarding the resignation of 3 co-
founders of Mindtree was made, 1 week after the takeover by L&T, the share price
of Mindtree dropped to Rs. 781, 10% lower than the previous day closing price.
As Mindtree shares were falling, to calm down the stakeholders, L&T announced
that Mindtree would function as a separate entity, different from L&T Infotech and
L&T Technology Services. Further, the conglomerate clarified that the two firms
will operate in different areas with minimum client overlap.
Impact on Share Prices of L&T and Mindtree:

Share Price of L&T

Source: screener.in
The share price of L&T experienced a decline in 2019 and 2020 maybe because of
mixed sentiments of investors regarding the acquisition and the onset of COVID-
19 pandemic. However, the rise in the share price from 2021 to 2023 suggests that
the market may have gradually recognized the value of the acquisition in the long
term, possibly due to the synergies realized between L&T and Mindtree.

Share Price of Mindtree

Source: screener.in

price, with fluctuations that might have been driven by market reactions to the
 acquisition news. The share price remained in the same range for a while, but
then witnessed a significant increase from 2021, indicating the investors
eventually recognized the benefits of the acquisition.

Cultural Alignment Issues:

L&T and Mindtree are two culturally diverse companies and this difference of
culture might have posed to be the biggest post acquisition concern for the
Acquirer.
L&T works on the principles of traditional management hierarchy with a top-
down management culture in place in contrast to Mindtree, which has
comparatively informal culture.
For a talent led sector such as IT sourcing, culture fitment becomes one of the
most important factors for success of an acquisition.
5. ANALYSIS

i. BCG Matrix Analysis -

It is a portfolio management framework that is developed by the Boston Consulting

Group to identify the position of a company in a particular industry and
help companies decide how to prioritize their different businesses. It has two
dimensions Market Growth and Market Share to classify companies into 4 quadrants
namely, Stars, Cash Cows, Question Marks and Dogs.

Stars: High Market Growth, High Market Share

Mindtree (Post-Acquisition) as a Star

Market Growth: Post-acquisition, Mindtree continued to operate in a high-

growth sector i.e. IT sector which usually sees better growth opportunities when
compared to other sectors due to incoming new age technologies.

Market Share: Under L&T's ownership, Mindtree's capabilities, and resources

were enhanced, helping it gain a stronger market position. Its high market share
in a growing ind

Cash Cows: Low Market Growth, High Market Share

L&T's Core Business Units as Cash Cows

Market Growth
manufacturing are mature markets with lower growth potential.

Market Share: L&T has a dominant position in these sectors, generating stable
and significant cash flows.
Question Marks: High Market Growth, Low Market Share

Mindtree (Pre-Acquisition) as a Question Mark

Market Growth: Before acquisition, Mindtree was in a high-growth sector, but

it faced stiff competition from larger players in the IT industry.

Market Share: Mindtree had a relatively smaller market share compared to

industry giants like TCS, Infosys, and Wipro. Therefore, as a "Question Mark,"
Mindtree represented an opportunity for L&T to gain a foothold in the high-
growth IT sector. The acquisition aimed to convert Mindtree from a "Question

Dogs: Low Market Growth, Low Market Share

Non-Core or Declining Units as Dogs

Market Growth & Share: Any non-core businesses within L&T with low
growth and market share could be categ L&T
Electrical & Automation.

On this note, L&T decided to divest this business by selling it to Schneider

Electric .
strategy to exit non-core, low-growth businesses and focus on areas with higher
growth potential, such as technology and infrastructure.
 -

analysing the competitive forces that shape

every industry and helps understand the dynamics that could have affected the success
of L&T's acquisition of Mindtree.

Threat of New Entrants: It was moderate, as the IT services industry requires

significant resources, capital investment and technical expertise that is difficult to
find.
Bargaining Power of Suppliers: It was low, due to the availability of multiple
suppliers for IT services and engineering materials.
Bargaining Power of Buyers: High, as clients in the IT services sector have
multiple options and can drive competitive pricing.
Threat of Substitutes: Moderate, with the rise of automation and AI, along with
other new age technologies posing potential threats to traditional IT services.
Industry Rivalry: High, with intense competition among big IT players such as
TCS, Infosys, Wipro etc. and conglomerates seeking to diversify their portfolios.

iii. SWOT Analysis (Post Acquisition)

Strengths:
L&T got an opportunity to enhance its digital capabilities by leveraging

Diversified revenue streams could help L&T reduce dependence on its core,
traditional businesses (engineering, construction, power etc.)
L&T established a strong financial position with improved profitability.
The acquisition also provided
global reach, and client base, potentially enhancing its growth prospects.

Weaknesses:
work
cultures.
Increased debt burden due to the acquisition cost.
Opportunities:
Growth in demand for digital transformation services.
Mindtree could expansion into new
presence across various sectors.
Cross-
Threats:
Intense competition in the IT services sector from big players as well as start-
ups working on new age technologies.
Rapid technological changes requiring continuous innovation and adaptation.
6. CONCLUSION

history, offering valuable insights into the dynamics of hostile takeovers, strategic
growth, and industry consolidation. It demonstrates the potential benefits of
consolidation in the IT services industry but also underscores the complexities involved
in integrating different corporate cultures and operations.

Lessons Learnt: Hostile acquisitions, while effective in securing strategic assets,

require careful planning and execution to manage integration challenges and preserve
the value of the acquired company. For future acquisitions, companies should focus on
clear communication with stakeholders, including employees, customers, and
shareholders, to ensure a smooth transition.

L&T Infotech and Mindtree Ltd. Merger (2022): After Larsen & Toubro (L&T)
acquired 60% stake in Mindtree in July 2019, despite the opposition and disapproval of
of both these firms was on the cards as the
acquisition somehow panned out well for both the companies in the long run with both

widespread exposure. However, the implementation of the merger was held off until
2022. Finally, on May 6 2022, L&T decided to merge Mindtree and L&T Infotech (LTI)

revenue which started operating independently from November 14 2022.

digital transformation, cloud services, and data analytics Thus both the entities could
benefit from their complementary nature when they were merged together.

The combination of LTI and MT expertise and capabilities enabled the merged entity
to offer new services and solutions to their clients, which created new revenue streams.
This potential relied on R&D investment, which was a weakness of LTI individually.
But, with the combined capital, the potential of LTI-MT is immense.
 Currently, LTIMindtree Ltd. has a market capitalization of about Rs. 1,59,947 crores.

Therefore, in conclusion, despite init of Mindtree

in 2019 has shown positive results, with the combined entity delivering value to
shareholders.

7. REFERENCES
pdfcoffee.com_project-on-mindtree-hostile-takeover-by-lampt-prepared-by-
bhavin-bagade-20195006-pdf-free%20(1)%20(4).pdf
Larsen_Toubro_Infotechs_Hostile_Bid_for_Mindtree_%20(3).pdf
Don_t-Mind-You_ve-been-Acquired%20(3).pdf
https://www.scribd.com/presentation/430316440/MACR-L-T-Takeover-of-
Mindtree
https://blog.ipleaders.in/lt-infotech-and-mindtree-merger-an-analysis/
https://research.nelson-hall.com/blogs/?avpage-
views=blog&type=post&post_id=1131
https://www.livemint.com/companies/news/lt-announces-merger-between-
mindtree-and-l-t-infotech-11651830002916.html
https://www.moneycontrol.com/
https://www.screener.in/
https://www.statista.com/