A large investor’s impending exit from Mindtree raises a larger issue of control and whether a financial investor or a strategic investor, and what would the minority prefer.
A large investor’s impending exit is every other large investor’s nightmare. Who will buy that stake, what kind of controls will they seek, will they change the culture, force change, or worse, try to take over management control? This is a regular nightmare in the western market, where activist investors acquire large stakes, either from the market or from a few large investors, and then ask the incumbent management to break up the business.
Closer home, Mindtree’s promoters’ predicament shows that the tussle for control is alive and kicking. This will become one of those case studies in B-schools that will ask students to consider whether a promoters’ desire (and perceived moral right) to retain management control is legitimate, in comparison to the minority investors, who may want a change in control if that means a better return on their investment.
Here’s the issue in brief. A large investor VG Siddhartha owns a 21% stake in Mindtree, of which a 17% stake sits in listed company Coffee Day Enterprises. Siddhartha’s stake is higher than the promoters’ stake of 13.3%, and he intends to sell it. Valued at about Rs3000 crore at current prices, the promoters are not in a position to buy it out. But others are interested.
The promoters are understandably worried. Why they allowed one investor to amass such a high stake is a question they must be asking themselves but it’s too late for regret. Their best hope is that financial investors are keenly interested—such as a private equity firm or a wealthy family office—in buying out Siddhartha’s stake. KKR and Fairfax are two candidates that have been mentioned in news reports.
Financial investors may be friendly, in that management control does not interest them but they have a motive—a profitable and timely exit. One part of the profit equation is determined by the entry price. They may have another allied motive, to consolidate holdings in another software services company with Mindtree. Consolidation brings scale and its attendant benefits.
Even with a financial investor, losing control is possible. What Mindtree’s promoters would want is multiple financial investors buying Siddhartha’s stake, so that a similar situation does not arise again.
Then, there are the predators—Mindtree’s rivals or strategic investors--who want to consolidate their industry position. L&T Infotech is a name that is doing the rounds. A strategic investor who is willing to pay Rs3,000crore, a hefty sum, shows an aggression to grow in size and challenge the bigger players.
A key difference sets them apart from financial investors. While financial investors can shift their investment focus to another industry if they expect better returns, a strategic investor may not have that much flexibility. That’s why they could be willing to pay a premium that a financial investor may shy away from.
For Mindtree’s promoters, their best hope is that multiple financial investors buy Siddhartha’s stake. That should allow the promoters to retain management control. One may ask if promoters should have a right to control a company’s management, with a stake of just 13.3%. But this is not unusual in the software industry. Infosys’s promoters’ stake stands at a mere 12.8%. Mindtree’s promoters’ desire to retain control despite holding a sliver of a stake does not seem that outrageous a thought then.The interests of minority investors may be best served by a strategic investor taking over the company, with an open offer made at a premium. Of course, in the longer run, the new management should also be able to give shareholders better returns.