It was the first-ever hostile takeover in the Indian IT industry: LTI and Mindtree coming together in L&T umbrella—what’s next?
With the IT services industry at its saturation point, several Indian heritage providers are waking up to an unthinkable reality: merging and getting past decades of pride and ego to do the smart thing for the future of their companies, their staff, and their clients.
With Mindtree under the parent L&T umbrella, LTI bravely ventures between the feisty mid-cap providers and the Tier 1 multi-billion-dollar powerhouses. Can it compete in both worlds?
The Indian IT services scene has been in a strange situation where six mega providers with revenues ranging from $5 billion to $20 billion have dominated the big-ticket enterprise deals, and a plethora of “mid-cap” providers—typically between $500 million and $1.5 billion—have been feasting on enterprise clients and demanding more attention on smaller, complex deals, which the large providers simply struggle to take on.
Exhibit 1: How the “mid-cap” services providers landscape transforms post LTI-Mindtree coming together under L&T
Source: HFS Research and Company Financials, 2019
*As per March 2019 financial reports, Mindtree has just crossed $1 billion in revenue.
However, we now have one service provider with revenues approaching $2.5 billion aspiring to break into the open spot between these mid-caps and the large providers: LTI with its protracted hostile buyout of Mindtree. Will it be a winning move or a ticket to disaster for LTI to operate at this size in this market? The need to prove value to clients has never been more intense. One thing is clear, though; the margins between success and failure have never been so fine, and LTI is playing a risky game if it cannot get this right quickly.
A lot of water has flowed down the Ganges since the first chatter about L&T group’s attempts to take over Mindtree, first through a significant share acquisition from an individual investor and then from other entities in the market.
Currently, L&T- LTI’s parent company holds over 60% of Mindtree shares, and it has secured and identified leaders for three board positions. However, three of Mindtree’s founding leaders—the executive chairman, the vice-chairman, and the CEO and Managing Director, have left the organization. On the other hand, L&T has insisted that it will not immediately attempt to absorb and integrate Mindtree with LTI in a forced embrace; instead, it would like for these two companies with unique DNAs to work together to win more, bigger deals in the market.
What should these companies do to make the most of the post-acquisition organization?
Mindtree’s position on L&T’s bid has so far been marked as hostile, while LTI’s parent company has been consistently saying it doesn’t want to take over the management of Mindtree completely. The message they also has been communicating is not about this acquisition being “A Time to Kill” move, but rather one to make a killing in the market by using each company’s complementary abilities to win larger and better deals and beat the competition. That’s much easier said than done!
It is only logical that the mid-size IT services companies would consolidate to improve efficiency and—yes—margins!
Mindtree’s operating margins have been falling steadily since 2015. On the other hand, for example, LTI’s margins are more than 4% ahead of Mindtree’s, which indicates that Mindtree can learn some cool lessons in efficiency and cost management from LTI, both being under L&T umbrella now —if both sides are willing, that is. They have to be, though, given that margins are one metric that all shareholders care about at the end of the day. About 50% of Mindtree’s business comes from digital technologies and consulting. While consulting is a crucial differentiating capability among service providers in today’s business world with sky-high customer expectations, the fact is that digital consulting is also extremely competitive, and for typical IT service providers, the margins are small.
LTI as an organization leverages its manufacturing and traditional industry DNA quite successfully to strike a balance between digital and core, and it executes well on service delivery; it can get better margins from its focused business areas. It also has a strong presence in banking, financial services, and insurance, which contribute 47% revenue and in manufacturing, which contributes 16%. Mindtree has demonstrated strength in high tech and media, with approximately 40% revenue, and in retail and consumer packaged goods.
The sweet spot for higher operating margins and profitability lies somewhere in between, where one can flaunt execution muscle and pivot partners’ excellent digital capabilities to higher margins using execution efficiency as leverage.
For both companies, complementary capabilities can improve market access and presence severalfold
Another beneficial lever for shareholders is that the market presence of both entities can benefit from collaboration because of Mindtree’s founders’ strong consulting heritage. LTI as an organization enjoys strong domain knowledge and execution abilities, and it won’t have to reinvent the wheel to spruce up its digital consulting capabilities and team size if this acquisition can transform into an empowering partnership for both firms. The intent may be there, especially on LTI’s part, but executing the vision of complementary capabilities and collaborating to win in the market is not going to be easy with some of the key exits of leaders.
Size does play a role. With a consolidated revenue stream of almost $3 billion, the power to showcase value and negotiate can go up significantly.
Currently, LTI for example is clocking revenue of upward of $1.6 billion, and Mindtree’s is just above $1 billion. A consolidated balance sheet in terms of sheer capabilities, will enable both to achieve the critical mass to upgrade from mid-tier to the big league. It would have taken quite a few years for either company in isolation to achieve $3 billion to $5 billion, which is a crucial range and a mark of achievement. Consolidation, when managed right, can drive aggressive competitiveness and growth for both entities in the equation.
Top four reasons the takeover may fail to generate value for shareholders
There are, of course, several reasons, but the four that constantly popped up across all analysis and reports are
- Corporate and organizational culture clash: Mindtree’s founders created and cultivated a culture of consulting and digital innovation; the company has been proud of this unique asset. Mindtree management is worried about an imminent culture clash, which could indeed create a backlash at both companies.
- People and talent leaving: The Mindtree Minds have been a unique source of pride for the company. Good minds leaving in anticipation of unsavory changes will harm both companies.
- Organizational DNA incompatibility: LTI’s DNA relies on efficient execution. While Mindtree seems to be troubled by the idea the companies’ different DNAs, the difference itself, when handled with the right sense of urgency and priority, can complement both entities.
- Cut-throat competition: LTI’s competitors are already aggressively targeting its clients, playing on their fears that a hostile merger will impact their delivery. If several clients move away, it could have a negative spiraling effect on morale and external perception.
LTI can execute three critical steps instead of being an annoying Big Brother
LTI doesn’t have to play the ever-condescending Big Brother role; Mindtree knows its business pretty well. Here are three suggestions for LTI to make this partnership work.
Exhibit 2: Next Monday Morning’s suggested action items for LTI leadership
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Action items |
Description and rationale |
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Build an aggressive strategic plan to keep Mindtree’s culture and pride intact. |
In the context of complex M&As, especially when the acquisition is for complementary capabilities, the bigger entity may lack the unique organizational personality that makes the smaller entity tick. |
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Learn from larger global competitors how to handle different types of organizational acquisitions, such as Mindtree. |
A few global services and consulting giants do a good job of getting the best out of their acquisitions by integrating only the parts that will become more efficient when integrated and then leaving the rest alone. That is a tried-and-true strategy that LTI could adopt from these global competitors. |
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Be openly communicative and receptive about what LTI wants to learn from Mindtree. |
Taking a reverse learning route often brings the best of both worlds together. Pursued with an open mind and humility, an acquisition that may have been initially marked as “hostile” can turn into a powerful culture change lever for a bigger entity by showcasing out-of-the-box practices that a large organization often doesn’t have the leeway enough to experiment with. |
Mindtree’s two (steps) to Tango will keep it moving forward
Instead of taking a negative “victim” approach, Mindtree is gearing up to keep an open mind and embrace this challenge as an opportunity to improve its margins while retaining its main strength—talent.
Exhibit 3: Action items for Mindtree Leadership to be taken the next Monday morning
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Action items |
Description and rationale |
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Learn from and work with LTI to improve the margins. |
Mindtree can attempt to look at the takeover with a different lens and convert this challenging scenario into an opportunity for them to learn the tricks of the efficiency trade from LTI and apply them to improve margins. |
The Bottom Line: M&A’s are inevitable, but making them successful is not. LTI and Mindtree have to make concerted efforts to elevate their relationship.