The technology and construction important is financing the buyout as its IT arms don’t have capital in hand.
There are also concerns over how L&T plans to run Mindtree in the future.
Finally, L&T expects to have a controlling stake of 66% in Mindtree for Rs10,700 crore.
Additionally, the purchase of Mindtree may take away a chunk of their cash reserves L&T has gathered, which is contrary to the earlier goal of making the company leaner of the management, Quadros added.
If L&T Infotech and Mindtree unite today the companies will see de-rating. There’ll be attrition, management instability, customer instability. The integration will proceed for a year or longer because it isn’t a smooth acquisition,” Sanjeev Hota, an analyst at brokerage company Sharekhan, said.
But a quick turnaround seems unlikely now. The L&T management has indicated it will merge L&T Infotech and Mindtree after the companies reach $5 billion.
However, this also portends several risks, and at least some experts are questioning the wisdom behind L&T’s proceed.
In the event the Mindtree purchase goes through, the strategy would be pushed until extra money is generated from the company.
As of December 2018, L&T had cash and cash equivalents of Rs15,000 crore, according Motilal Oswal. Furthermore, it creates cash of Rs1,500 crore every quarter.
“Since it has pioneered the (acquisition) transfer, it would maintain L&T’s interest to consummate this buyout fast so that it can continue to as many key customer relationships and employees–both of which could see a flight if there is protracted uncertainty,” Girish Pai, head of research at Nirmal Bang explained.
“This implies any purchase synergies and value generation (such as L&T) would be postponed,” Quadros stated. “Three listed IT companies reduce shareholder value accretion… L&T Infotech acquiring Mindtree would have been a better match. ”
It’s stated that Mindtree won’t be merged with its two other IT businesses–L&T Infotech and L&T Technology. The reason for this choice is that it might help prevent integration issues between the three companies and protect minority investors of every firm, provided the difference.
Against the L&T direction, the purchase goes for starters ’s earlier devotion to making by letting go of non-core companies, its balance sheet leaner. The bargain is “not material for L&T, brokerage firm Jefferies India stated in a March 27 note. It “does raise scrutiny on L&T’s capital allocation,equity analyst at Jefferies India, ” Lavina Quadros wrote.
The business was on course to meet its target by divesting its non-core assets, of delivering an 18% return on equity, according to Amit Shah, a research analyst at Motilal Oswal. That may not occur, now if there’s an increase in the price of getting Mindtree.
On March 26, L&T declared it will make an offer to get an additional 31 percent of Mindtree stocks at Rs980 apiece, for crore. The organization on March 18, had bought a 20.32% stake from Mindtree from VG Siddhartha, owner of the nation’s largest coffee shop chain, Café Coffee Day (CCD). Has plans to pick up some extra shares from the open marketplace.
The Mindtree management, vehemently opposed to this Mumbai-based engineering important ’s provide until a couple of days back, took a conciliatory notice on March 26 by preparing a committee to check into the bid. This is expected to pave the way for L&T to smoothly buyout an asset that would add great value because it seems to diversify into non-core places.
But financing the bargain would weigh heavy on L&T’s balance sheet.
The company had last year said it will purchase Rs9,000 crore worth of stocks back. Shareholders would have favored this,” said Shah of Motilal Oswal.