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L&T takes over Mindtree: What exactly is a hostile takeover?

L&Tmindtree takes over

In March 2019, infrastructure giant Larsen & Toubro made headlines when it made a hostile takeover bid for the information technology company Mindtree. It is the first such hostile takeover attempt in the IT sector in India.

L&T acquired a 20.32 percent stake in Mindtree from investor V.G. Siddhartha, who happens to be the owner of the Café Coffee Day (CCD) chain. The company then decided to pick up another 15 percent from the market, and is making an open offer to investors, offering Rs 980 per share to acquire another 31 percent. If successful, it will take L&T’s share in Mindtree to over 66 percent, thus giving it majority control in the company. Mindtree has been an unwilling participant in the entire process, and hence it has been termed a hostile takeover.

This brings us to the question: what exactly is a hostile takeover? Well, a hostile takeover happens when one company, in this case L&T, seeks to acquire another (Mindtree) by going directly to shareholders. In a hostile takeover, the existing management of the target company will be unwilling to hand over control to the acquiring company. Here, Mindtree said they didn’t want to be part of L&T because of cultural differences between the two companies.

Why would shareholders want to sell their shares to an acquiring company? Well, the biggest incentive is cold, hard cash. Most of the time, the company that wants to acquire another through the hostile takeover route will offer an attractive price to shareholders of the target company. Of course, sometimes shareholders may also be unhappy with the existing management and want a change.

There are a couple of ways in which a hostile takeover can take place. One way, as we have seen above, is to make an offer to purchase the target company’s shares from shareholders. Another way is proxy voting, convincing existing shareholders to oust the existing management, making it easier to take over.

Hostile takeovers have been quite common in recent years, especially in countries like the USA. But what effect does it have on companies?

Every hostile takeover is different, and its effect can be beneficial or detrimental. If the management of a company is inefficient and it is being run to the ground despite being fundamentally sound, a takeover could be beneficial. In this case, the shareholders too will be unhappy with the target company and will be willing to sell their shares to the acquiring company and make it easier for it.

Sometimes fear of hostile takeovers can act as an incentive for managers to improve performance and keep existing shareholders happy. If shareholders feel the company has potential and has been giving good dividends, they will be reluctant to sell the company’s shares. So the fear of hostile takeovers could have another beneficial effect. Shareholders will be better looked after and offered benefits like dividends more frequently.

On the flip side, fears of hostile takeovers could mean that companies could be more reluctant to raise share capital and promoters could end up holding a majority stake for themselves. This will prevent the company from growing and affect its long-term prospects.

There is also the fear of asset stripping. The hostile takeover could be with the motive of selling the company’s assets – real estate, brands, intellectual property etc. – piecemeal to make a profit. This kind of takeover may be good for shareholders, but spells doom for the target company.

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