There is Something about Mindtree...
Acquisitions in the IA industry
L&T's unsolicited offer of “Dil and Pyar” (love from heart) to Mindtree and the latter’s resistance provides a classic script for Hollywood and Bollywood.
Mindtree and LTI with revenue slightly upward of USD 1Bn each have been two main challengers to Tier 1 firms for quite some time.
I have often quoted during my interaction with analysts that these two firms have most of the ticks in the boxes to close the gap to Tier 1 firms. There have been around a dozen sizeable and notable acquisitions in IT industry in last decade and some of them have been very large.
Consolidation and investment in the IT industry have been on the cards for quite some time and rightly so as the industry is maturing. However, What will be interesting to see is the synergies between LTI and Mindtree that are of similar size and culture. It will be interesting to see the degree of substance in love from LTI towards Mindtree.
There are few positives if the acquisition goes through:
1. Cost Savings - Opportunity to consolidate is a great opportunity to bring operating cost down (SG&A) and thereby be more competitive. This allows the ability to improve margins.
2. Customers - Significant opportunity in Cross Selling and Upselling. L&T has strong presence in Engineering, Industrial and Smart cities while Mindtree have been strong in Travel and Transportation. This offers significant complimentary opportunity
3. Change of Management – Change of Mindtree management from its founders is a positive step. The founders have been great and have brought Mindtree to where it is now, but it needs to change with time. A more professional management with a young mindset is key to the future.
4. Market Perception – Industry views the acquisition bid with a positive mindset. It will raise the sentiments, which means increased investment from investors.
There are obviously a few challenges that need to be addressed:
1. People and Culture – While L&T and Mindtree appear to have a similar culture, L&T is a conglomerate with several types of business and Mindtree is a strongly knit company founded by IT stalwarts with a culture focused on IT services only. Integrating and assuring employees are happy and attrition is at bare minimum is going to be a challenge. The strategy of L&T to keep Mindtree as a separate business for few years is a good step.
2. Loss of Customers – There may be a fear of losing customers. However typically customers value relationships and people. As long as they don’t see a major shift in value, they should be fine. Getting new deals may be a challenge in the near term till customers see stability in the acquisition. However, I don’t see a major challenge as in loss of business.
Any change comes with its own set of challenges. In the past, several consolidations have happened in the IT industry with mixed results. However, nothing unprecedented has happened that should raise major concerns. There were a few recent notable acquisitions where one IT firm has acquired another firm, e.g., DXC's acquisition of Luxsoft, Atos acquiring Syntel, NTT Data acquiring Dell Services and CSC acquiring HP enterprises. All of them were multi-billion dollar deals.
Other type of investments where PE firms have acquired an IT firm like Barring Asia acquiring Hexaware and Blackstone acquiring Mphasis.
The learnings from the past are that as long as the transition is managed effectively, the acquisitions and consolidation have been successful. The few exceptions are HP-EDS and Atos and the reasons were poor execution.
Mindtree is a fantastic company. I have personally has a great deal of good experience and have seen how they have leveraged their customer and advisory relationships to win big deals. They have transformed effectively from sub 500M USD club to the 1Bn club. Perhaps it is time to take that extra step and jump several feet above to reach new heights.
L&T claims it has true love for Mindtree. Though one-sided as of now, it eventually expects this love will be reciprocated.
Truly “There is something about Mindtree.”