Eventually, L&T hopes to have a controlling stake of over 66% in Mindtree to get Rs10,700 crore.
“This means any acquisition synergies and value creation (for L&T) will be delayed,” Quadros stated. “Three would have been a better match. ”
The company was on track to satisfy its goal by divesting its assets of delivering an 18% return on equity to investors by the end of March 2021, based on a research analyst at Motilal Oswal, Amit Shah. If there is an increase in the cost of acquiring Mindtree, that might not occur.
The company had said it will purchase back Rs9,000 crore worth of stocks. Shareholders would have favored this, said Shah of Motilal Oswal.
Who’s ’s paying?
“Since it has initiated the (acquisition) move, it would maintain L&T’s interest to consummate this buyout quickly so that it may continue to as many key customer relationships and employees–both of which may see a flight if there’s protracted uncertainty,” Girish Pai, head of research at Nirmal Bang said.
As its IT arms do not have enough funds in hand, the buyout is being funded by the construction and engineering major through its own cash reserves.
If L&T Infotech and Mindtree merge today, both the companies will see de-rating. There will be management instability, attrition.
On March 26, L&T declared it will make an open offer to acquire an additional 31% of Mindtree shares for Rs3,050 crore, at Rs980 apiece. Offers plans to pick up some shares from the market.
The purchase of Mindtree may take away a chunk of their cash reserves L&T has accumulated, which is contrary to the management’s earlier goal of earning the company thinner, Quadros added.
Against the L&T direction, the acquisition goes for one commitment to creating its balance sheet thinner by letting go of non-core companies. The bargain is “not substance in for L&T, brokerage firm Jefferies India stated in a March 27 notice. It does raise scrutiny on L&T’s capital allocation,” Lavina Quadros, equity analyst at Jefferies India wrote.
As of December 2018, L&T had cash and cash equivalents of crore, according Motilal Oswal. Additionally, it creates money of Rs1,500 crore every quarter.
However, a turnaround appears unlikely now. The L&T management has signaled it will merge Mindtree after the companies reach $5 billion in earnings each, and it is a couple of years away.
But funding the bargain would weigh heavy s balance sheet.
After weeks of high-voltage drama over a hostile takeover bid, Larsen & Toubro (L&T) can finally be close to successfully acquiring a majority stake in mid sized IT company Mindtree.
It’s said that Mindtree won’t be merged with its two IT businesses–L&T Infotech and L&T Technology. The reason for this decision is that it might help avoid integration problems between the three firms and protect minority shareholders of every company, given the difference.
The plan will be pushed until money is generated from the company In the event the Mindtree purchase goes through.
The Mindtree management, vehemently opposed to the Mumbai-based engineering major’s provide till a couple of days back, took a conciliatory notice on March 26 by preparing a committee to look in the bid.
Additionally, there are also worries over how L&T plans to run Mindtree later on.