As its IT arms do not have sufficient funds in hand, the buyout is being funded by the construction and technology major through its cash reserves.
When L&T Infotech and Mindtree merge today the companies will see de-rating. There’ll be management instability, client instability, attrition.
But funding the bargain would weigh heavy s balance sheet.
The purchase of Mindtree could take a chunk of their cash reserves L&T has accumulated, which is contrary to the management’s earlier goal of earning the company leaner, Quadros added.
It has said that Mindtree won’t be merged with its two other IT companies –L&T Infotech and L&T Technology. The rationale behind this choice is that it might help prevent integration issues between both companies and protect minority shareholders of each firm, given the difference in valuations of those companies.
However, a turnaround seems unlikely today. The L&T management has signaled it will unite L&T Infotech and Mindtree together just after the businesses reach $5 billion.
As of December 2018, L&T had cash and cash equivalents of Rs15,000 crore, based on Motilal Oswal. Additionally, it generates free cash of Rs1,500 crore annually.
There are also concerns over intends to run Mindtree later on.
“This implies any acquisition synergies and value generation (such as L&T) will be delayed,” Quadros stated. “Three recorded IT businesses decrease shareholder value accretion… L&T Infotech getting Mindtree could have been a better fit. ”
“Since it has pioneered the (acquisition) move, it might maintain L&T’s attention to consummate this buyout quickly so that it may hold on to as many key customer relationships and workers –both of which may see a flight when there’s prolonged uncertainty,” Girish Pai, head of research at Nirmal Bang said.
The Mindtree direction, vehemently opposed to the Mumbai-based engineering major’s offer until a few days back, took a conciliatory note on March 26 by setting up a committee to check in the bid.
L&T expects to have a stake of over 66 percent in Mindtree to get crore.
The business was on track to satisfy its goal of delivering the 18% return on equity by divesting its non-core assets, according to Amit Shah, a research analyst at Motilal Oswal. If there’s an increase in the price of acquiring Mindtree, that might not happen.
The company had said it will purchase Rs9,000 crore worth of shares back. However, the strategy ran into trouble with the industry regulator, the securities and exchange board of India (SEBI), also was in limbo since.
The strategy will be pushed until cash is created from the company if the Mindtree purchase goes through.
Against the L&T direction, the purchase goes for one ’s earlier devotion to making its balance sheet thinner by letting go of companies. The bargain is “not substance for L&T in itself ”, brokerage firm Jefferies India stated in a March 27 notice to investors. It does raise scrutiny on L&T’s capital allocation,” Lavina Quadros wrote.
On March 26, L&T announced it will make an offer to get an additional 31 percent of Mindtree stocks for Rs3,050 crore, at Rs980 apiece. L&T also has plans to pick up some shares from the open market.