A good omen for startups

A disclaimer before I begin. I am a shareholder of MindTree and attend every annual general meeting. MindTree’s co-founders, with their Wipro, Lucent and Cambridge Technology backgrounds, have justifiably put together a unique culture, humanised the business and set incomparable standards of corporate governance. And yet, to emotionally proclaim that MindTree’s takeover by L&T would have disastrous implications for Bengaluru’s software industry is pure hyperbole.

Touted as the first-ever hostile takeover in the Indian IT industry, where deals are fought hard for, but where competitors remain friendly, the L&T-MindTree deal actually makes for very good synergy. In the tough IT industry, size and scale are crucial for expansion into new markets and accounts and here is an opportunity for two mid-tier companies to add scale to their businesses, escalate their stature and match the big boys of the industry.

Whereas L&T can provide customer connections, network and balance sheet with domain expertise in banking, manufacturing, oil & gas and insurance, MindTree contributes strongly in retail, consumer goods, hospitality and travel. Both companies benefit from a diversified customer base.

L&T itself has a history of averting hostile bids from Birla’s Grasim. L&T had then ringfenced itself from takeover by setting up an L&T employees’ welfare foundation that eventually bought the Birla stake by hiving off the company’s cement business as a quid pro quo. Birla’s cement production capacity was enhanced while L&T gave up a non-core, asset-heavy business.

L&T is not a typical predator or an avaricious acquirer or promoter-led, but a professionally-run company with the required pedigree in the IT business with its two companies L&T Infotech Limited and L&T Technology Services Limited. Besides, it bought the first tranche of MindTree shares in a free and consenting transaction.

Neither is MindTree into rocket science, but similar to other IT vendors, deploys engineers to do software testing, manage IT infrastructure and write code for applications for its clients, to run their business. It is not a unique proposition but combined with a unique work culture incorporating some of the best practices from companies such as Infosys and Wipro, it has managed to be on track to being a company with a $1 billion turnover.

Although MindTree has had its share of near-death experiences, such as during the dotcom crash, the founders and senior management made sacrifices, took salary cuts and ensured a healthy rapport between the founding team and the key investors.

However, when five of the co-founders exited, the remaining founders were unable to buy their shares, leaving the current founders with just 13.32%. The promoters’ stake was not ringfenced and the company seemed totally oblivious to market realities, specially the ways and means of protecting its independent status. MindTree was ripe for takeover. If not L&T, it would have been somebody else.

A classic case of founders being unable to give up their emotional connect with a company they view as their creation, a common feature among first-generation entrepreneurs, they are being presumptuous in declaring this deal to be value destructive to the shareholders of both companies. Shareholders know their interest well and are best placed to decide whether to exit or not after MindTree’s Committee of Independent Directors provide a reasoned recommendation on L&T’s open offer.

Similarly, the fear about the employees, the great minds of MindTree leaving the company. Between the employees and promoters, who naturally have different aspirations, it’s the promoters who are expendable in a takeover situation. L&T’s professionally managed culture being employee-centric, akin to MindTree, is bound to exert extra caution while handling the cultural issues of the takeover while managing the product portfolio and ensuring net gain to shareholders. It should be L&T’s shareholders who should be more concerned about the value of their shares as their cash reserves are buying a non-core business.

The same applies to customers. Knowing that L&T is no novice in customer handling, clients will wait and watch to see whether their interests are taken care off before deciding to take their business elsewhere.
Finally, what message is this deal sending to other startups in Bengaluru? Are entrepreneurs perceived as being bullied, with no incentive to startup?

In the startup world, first generation entrepreneurs normally start a company to sell it in the first place! Their collective stake is often lower than their larger financial investors and when lacking free cashflow, most promoters do dilute their stakes as they go along.

Bengaluru is the centre of the startup universe in India, a lifeline to the business ecosystem, mergers and acquisitions are poised to be a key cornerstone. With access to abundant talent and venture capital, entrepreneurs see an ideal environment to startup in a city that gets approximately 22 new startups each month. L&T’s takeover of MindTree will only whet the entrepreneur’s appetite and increase their feeling of self-worth.

(The writer is a former director on the Board of BEML)