In 2009, as the bids to buy out Satyam Computer were opened, engineering giant L&T found its offer trumped by Tech Mahindra which eventually paid over half a billion dollars to acquire the scam-tainted IT services firm. Tech Mahindra’s revenue that year was $775 million. Thanks to its partnership with UK’s BT, it was largely focused on the telecom vertical and the Satyam deal was expected to broadbase its customer base while accelerating its growth.
Four years later, the two firms were merged to create India's fifth-largest software exporter with $2.7 billion in combined revenue. Company executives were bullish that the new entity would leverage the resulting synergies to hit $5 billion in sales by 2015. In the event it wasn’t till FY 2020 that TechM achieved that milestone and the telecom vertical still brings in 43 percent of its revenue.
While the acquisition was a smart move, it is a moot point whether the merger of two firms has given the combined entity the wings it expected. Tech Mahindra is well behind market leaders TCS, Infosys, HCL and Wipro with little chance of it being able to close the gap.
Two years after its founder B. Ramalinga Raju, confessed to cooking the books of his company leading to a fraud of nearly Rs 7000 crore that sent Satyam into Tech Mahindra’s arms, an eight-year-old startup named Mindtree had gone public to buoyant reception with its shares subscribed 110 times. Over the next few years, the startup would grow in strength and numbers, though a fatal flaw in its construct would eventually lead to its doom.
In 1999 when it was set up by executives from Wipro, Lucent and Cambridge Technology Partners, coffee mogul V.G. Siddhartha and venture capital firm Walden Software put in about $8 million for a 25 percent stake. At this stage the company’s founders owned about 35.46 percent so there seemed little cause for worry. But in 2011, following differences over what business to pursue, Ashok Soota the principal co-founder and the man acknowledged to be one of Indian IT’s shrewdest leaders, left to set up his next venture Happiest Minds. Critically, Soota sold his 11.6 percent stake in Mindtree to Siddhartha, whose holding in the company went up to 20.32 percent.
Soota’s exit though didn’t impact Mindtree’s rapid rise under its crack leadership team of co-founders Krishnakumar Natarajan, Subroto Bagchi, N.S. Parthasarathy and Rostow Ravanan. Its rapid rise, however, caught the attention of L&T which had by now floated two separate companies, L&T Infotech (LTI) and L&T Technology Services, to pursue the IT business, but gained little traction with either. That would come only after Sanjay Jalona took over as CEO of LTI in 2015 and drove the company’s transformation into a strong mid-tier firm.
With that still some years away, L&T made overtures to the Mindtree founders for a possible buyout but they showed little interest. Unlike today’s entrepreneurs they weren’t into it for the money but for the thrill of growing a startup and Mindtree at that stage was on the fast track.
They did however make one fatal error of judgment by not buying out the stakes of the five co-promoters who left the company over the years. So when the moment of reckoning arrived, between them they had just 13.32 percent of their company’s stock.
A thwarted L&T had been on the lookout for another route into Mindtree and in 2018 this presented itself on a platter when Siddhartha’s outsized debts threatened to consume him. With his coffee business in the doldrums and a lending squeeze triggered by the collapse of ILFS, he now found himself in desperate need of funds to repay his loans.
Enter L&T which offered to buy his 20 percent stake in Mindtree. With that, the company’s first outside investor now turned into the founders’ biggest enemy and after a bruising battle, high on emotion but lacking in the networking nous so essential in such situations, they accepted the inevitable. After an open offer, Mindtree passed into the hands of L&T. From thereon a merger of the two large listed IT firms in its fold, was just a matter of time.
Last week’s announcement thus, is a logical culmination of a 10-year-old pursuit by L&T to rightsize its IT business which already contributes the majority of its profits. But post the merger, LTIMindtree will have aggregate revenues of around $3.5 billion, well short of Tech Mahindra’s $5.1 billion, and way out of the league of the big boys like TCS, Infosys, HCL and Wipro, among the home-grown IT majors. In addition, it will also have to contend with global companies like Accenture, Cognizant and Capgemini. To bag the larger deals currently reserved for Tier 1 firms, is still going to be a challenge for the company.
Sundeep Khanna is a senior journalist.Views are personal, and do not represent the stand of this publication.