But funding the deal would weigh heavy on L&T’s balance sheet.
For starters, the acquisition goes against the L&T management’s earlier commitment to making by letting go of non-core businesses, its balance sheet leaner. The deal is “not substance in for L&T, brokerage firm Jefferies India stated in a March 27 notice. It “does raise scrutiny on the capital allocation of L&T,equity analyst at Jefferies India, ” Lavina Quadros wrote.
But a fast turnaround appears unlikely. The L&T management has signaled it will unite L&T Infotech and Mindtree together after the companies reach $5 billion.
As of December 2018, L&T had cash and cash equivalents of crore, according Motilal Oswal. Additionally, it creates free cash of Rs1,500 crore every quarter.
The business was on track to satisfy its goal by divesting its assets, of delivering the 18% return on equity, based on a research analyst at Motilal Oswal, Amit Shah. That may not happen, If there is an increase in the cost of acquiring Mindtree.
L&T hopes to have a stake of 66 percent in Mindtree to get crore.
Also, the purchase of Mindtree may take a chunk of the cash reserves L&T has accumulated, which can be contrary to the earlier target of making the company leaner of the management away, Quadros added.
It has said that Mindtree won’t be instantly merged with its two 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 also protect minority shareholders of every company, provided the difference in valuations of the companies.
The construction and technology major is funding the buyout as its IT arms do not have funds in hand.
Who’s ’s paying?
“This implies any purchase synergies and value creation (such as L&T) would be postponed,” Quadros said. “Three recorded IT companies reduce shareholder value accretion… L&T Infotech acquiring Mindtree would have been a better match. ”
There are also worries over plans to run Mindtree later on.
The Mindtree management, vehemently opposed to the Mumbai-based engineering important ’s provide until a few days back, took a conciliatory notice on March 26 by preparing a committee to look into the bid. This is expected to pave the way for L&T to smoothly buyout an asset that could add great value because it looks to diversify into non-core places.
The organization had said it will purchase back Rs9,000 crore worth of stocks. Shareholders would have preferred this, said Shah of Motilal Oswal. However, the plan ran into trouble with the industry regulator, the securities and exchange board of India (SEBI), and was in limbo since.
Until money is created from the company, In the event the Mindtree acquisition goes through, the strategy will be pushed.
“Since it has initiated the (acquisition) move, it might maintain L&T’s interest to consummate this buyout quickly so it can hold on to as many key customer connections and employees–both of which may see a flight when there’s protracted uncertainty,” Girish Pai, head of research at Nirmal Bang said.
If L&T Infotech and Mindtree merge today, both the companies will visit de-rating. There’ll be management instability, customer instability, attrition.
On March 26, L&T announced it will create an offer to get an additional 31 percent of stocks for crore. The organization on March 18, had purchased a 20.32% stake in Mindtree from VG Siddhartha, owner of the country’s largest coffee shop chain, Café Coffee Day (CCD). Offers plans to pick up some shares from the open market.