CORPORATE RESTRUCTURING

What is Corporate Restructuring?

Corporate restructuring is also referred to as business restructuring. Business
restructuring is a process in which an entity changes its legal structure to ensure
the seamless running of the business. This process is usually carried out when the
business is facing financial or economic problems. When a company is unable to
pay a corporate debt, it enters into a restructuring agreement with its lenders. In
this agreement, the company's strategy to pay the corporate debt would be
mentioned. Creditors and Lenders are an essential part of the corporate
restructuring process.

A company's inability to not pay a corporate debt is not the only reason for
corporate restructuring. Other reasons can be a company entering into an
acquisition agreement, or a joint venture or M & A process.

Forms of Corporate Restructuring

Financial Restructuring- Financial restructuring is a form of corporate
restructuring strategy which is usually considered when companies merge or get
acquired by another company. In this form of Restructuring, often, companies do
not face any financial problems. The company is restructured as a result of a share
sale or an asset sale in an acquisition. In a share sale, the entire share capital of
the company is acquired. In an asset sale, only a specific asset is obtained from
the selling company. Financial restructuring can also occur during an M&A
process.

Debt Restructuring- Debt restructuring is usually used by a company to change

its strategy to pay off a debt. A company may restructure its business, divest a
particular subsidiary of the parent company, or raise additional capital to pay off
a debt. A creditor or lender would typically allow the company to restructure itself
when they have to repay a debt. In this form of restructuring, the parties would
enter into an agreement that would bind the company's debtors. The amount of
Non-Performing Assets (NPAs) and bad debts has made the government bring in
the IBC. Due to this code, the number of bad debts has drastically reduced.

What are the Benefits of Corporate Restructuring?

• Corporate Restructuring is carried out when a company requires

restructuring its business to perform well in the market. There are specific
benefits of restructuring:
 • It helps the company bring out new strategies to survive in a competitive
environment.
• When a company is facing financial stress, corporate restructuring
procedures are used to change the financial strategy. Using this strategy,
the company can reduce its financial burden.
• Cash flow is one of the major requirements for a company to survive in the
market. Without cash flow, a company will not pay its employees,
suppliers, and third parties. Hence a company utilizes different forms of
restructuring strategies to ensure there is sufficient cash flow and does not
lead to business disruption.
• Corporate Restructuring occurs when a company wants to restructure its
debts and finances. When a company is being acquired or merged with
another company, restructuring happens as a result of the acquisition of
assets, IP, and employees of the other business. Through this process, the
company can enjoy the benefits of synergies from different departments.
• The restructuring also helps in improving the economies of scale and scope
for a business entity.

Different Types of Strategic Corporate Restructuring

Based on the type of situation, corporate restructuring can be divided into
financial restructuring and debt restructuring. However, the types of strategic
corporate restructuring which companies enter into are as follows:
Procedure for Restructuring
Restructuring an organization is a complex task. The form of restructuring would
depend on the main aims of the organization. If the company is paying off a debt,
then a different restructuring process will be used. If a company getting merged
with another organisation, then the criteria would be different. The following
steps have to be followed in a restructuring process:

1. Determination

In this phase, the main objective of the restructuring exercise is determined. If the
restructuring process involves paying a corporate debt, then the debt restructuring
procedure can be used. At Enterslice, professionals will determine your business's
needs and guide you to carry the proper procedure to restructure your business.
 2. Identification

We help your organization identify the strengths and weaknesses. Through

thorough research, we establish the need to concentrate on improving the
business's strengths.

3. Implementation

Once we analyze your business's strengths, we implement the procedure with the
collective strengths of your business. While carrying out this process, we identify
potential problems that can be addressed at an early stage in the restructuring
process.

4. Post-Implementation Analysis

We conduct a broad-based analysis of the restructuring exercise and understand

the effects.

5. Evaluation of Restructuring

In the last step, we monitor your organization and provide post-compliance

reporting.
 L&T ACQUISITION OF MINDTREE

Summary

L&T Infotech’s takeover of Mindtree Ltd. can be considered one of the first
hostile takeover in Indian History. L&T acquired 21% stake in Mindtree from an
investor and eventually took complete control over the software company’s board
and management by acquiring more than 60% stake in it.

We will also discuss different strategies like buyback of shares, poison pill
strategy or white knight strategy which can be used to defend against hostile
takeover.

Full Story

Hostile Takeovers

Mergers & Acquisitions generally take place by mutual agreement i.e., both
companies to the transactions agree to the merger/acquisition after evaluation of
the risks and returns of the transaction and considering the strategic implications.
In case of a hostile takeover there is disagreement on part of the target company.
Hostile takeover began as the fourth merger wave in 1980s. These bids are usually
hostile i.e., target company’s management does not approve of the takeover by
the acquiring company. In spite of that, the bidder continues to pursue the
acquisition. The bidder initiates a hostile takeover through a tender offer to
purchase the target company’s stock at some price above market price or else it
may try acquiring a majority stake of the company in the open market.

About Mindtree

Mindtree Ltd. is a Bangalore based Software Services company. It offers

application development and maintenance, infrastructure management services,
independent testing, package implementation, consulting and intellectual
property products-related solutions. It had around 340 active clients and 43
offices in over 17 countries (as of July 2018).

About L&T

Larsen & Toubro Infotech Limited (LTI) is a Mumbai based global IT solutions
and services company. It was incorporated in 1997 and is a subsidiary of Larsen
& Toubro Limited. It provides services to the clients by leveraging Business-to-
IT Connect. Company has around 23 software development centers and 44 sales
offices across the world.

Rationale of L&T

As per the statements given by L&T’s top management personnel, it has a

software services business under L&T Infotech and this acquisition was aimed at
delivering best IT services to its clients worldwide which could take its
technology portfolio among the top tier IT companies of the country. They were
also confident that company’s current resources were enough to fund the
takeover.

Rationale of promoters of Mindtree

All the promoters of Mindtree opposed the takeover including Mr. Subroto
Bagchi who resigned from a government panel to help the management tackle the
issue of hostile takeover by L&T. As per them, there was no strategic advantage
of this takeover and it was a threat to Mindtree’s unique organization. Mindtree
chairman and cofounder Krishnakumar Natarajan wrote a letter to L&T board to
warn against a hostile takeover wherein he expressed his shock regarding the
attempts of a hostile takeover. He also mentioned that management does not want
to be part of an organization that is culturally very different from Mindtree and
that a merger between the two organizations will not be fruitful for any of the
two. According to Mr. Subroto Bagchi, Mindtree had not been designed as an
“asset” to be bought & sold. Rather It is a national resource and It had a unique
culture that humanizes the idea of business.

L&T responded to that by stating that if the deal happens, the technology
companies of L&T will be kept separate. Mindtree will be independently listed
post takeover and it will benefit due to large client base increasing shareholders’
returns. Market capitalization of L&T had grown 2.5x in last 3 years and its
margins were around 16% whereas Mindtree’s growth was under pressure and so
were its operating margins.

Developments

VG Siddhartha, one of the promoters (also the founder of Café Coffee Day) sold
his 20.32% stake in Mindtree to L&T Infotech. In spite of the persuasion by
Mindtree promoters, none of the PE firms including Baring PE Asia, Chrys
Capital, KKR agreed to buy the stake of VG Siddhartha as these were all looking
for a controlling stake in the company just like L&T Infotech. Mindtree promoters
had also contemplated buy back of its shares to avoid a hostile takeover by L&T
Infotech.

The 21% stake of Siddhartha was pledged by him to various Banks and Financial
Institutions in several tranches. To release these shares Coffee Day Group entity
Tanglin Retail Developments Pvt. Ltd. issued non-convertible debentures of
Rs.3000 Crore with a tenor of 1 year and 1 month. This arrangement was done to
make the share transfer easier i.e., to avoid taking NOC from several lenders. The
stake was sold on 30th April 2019 by VG Siddhartha to L&T for Rs.3211 Crore.
Siddhartha sold his Mindtree stake to pay off his debts of Coffee Day Enterprises
(CDE – holding firm for CCD) and other ventures. Total debt of CDE was
Rs.6550 crores before the sale of its Mindtree stake. The company had raised
around Rs.1000 crore through a public issue in October 2015. It had a debt-to-
equity ratio of 1.7 times in FY16 which shot up to 2.6 times in FY19.

SEBI Guidelines on Open Offer

As per SEBI’s Substantial Acquisition of Shares & Takeovers (SAST)

regulations 2011, whenever a company is trying to acquire another company, it
has to make an open offer to public when the shareholding of acquirer increases
to more than 25%. Further according to the provisions, whether or not one holds
shares or voting rights, one cannot take control of the company unless an open
offer is made to public to acquire those shares.

L&T’s open offer to buy shares of Mindtree:

L&T made an open offer without owning 25% shares in Mindtree. JN Gupta,
founder, Stakeholder Empowerment Services (SES) and a former director at
SEBI in a said an open offer gets triggered only if an order placed with the broker
crosses the threshold of 25 per cent voting rights, which L&T did not have at the
time of announcement of the offer. Mindtree also wrote to SEBI seeking
clarification on whether the offer was “legally valid”.
While the approval of SEBI to L&T for purchase of 31% stake in Mindtree was
taking time, L&T acquired more shares from the open market and its stake
reached to 28.9%. Other investors that sold shares of Mindtree to L&T included
Rekha Shah (wife of Enam Group co-founder Nemish Shah), White Oak Capital
Management (founded by former Goldman Sachs executive Prashant Khemka)

On 6th May, 2019 L&T bought shares worth Rs.113 crore i.e., 0.75% of Mindtree.
On 7th and 8th May 2019, investors Enam Group and HDFC Life Insurance sold
their 2.2% and 1% stakes in Mindtree, respectively to L&T. L&T raised its stake
in Mindtree by about 2% to 28.45% between May 20-24 by picking up share’s
worth over Rs.316 crore. It acquired 97,815 equity shares of Mindtree Ltd on
May 29, 2019 raising the stake to 28.87%. Further, it acquired 25,000 equity
shares of Mindtree on June 6, 2019 raising the stake to 28.9%. L&T bought the
shares from mutual funds, alternative investment funds (AIFs), insurers and
wealthy individuals.

Finally, after receiving approval of SEBI, L&T launched the open offer on June
17, 2019 for 5,13,25,371 equity shares (representing 31% of the share capital) at
Rs.980 per share.

After the launch of open offer by L&T, Mindtree promoters gave up the plan to
buy back shares and formed a committee of independent directors, led by Apurva
Purohit (Independent Director) to evaluate the offer of L&T keeping in mind the
interest of shareholders of Mindtree. While the promoters of Mindtree were of
the opinion that the offer price, Rs.980, was undervalued and much lower than
Rs.1183 (52-week-high), the committee came to conclusion that offer price was
fair and reasonable.

Nalanda Capital sold its whole stake worth Rs.1707.46 crores to L&T in the open
offer for shareholders of Mindtree. Arohi Asset Management too, sold its 1.22 %
stake held in the company via Ontario Teachers’ Pension Plan in the open offer
to L&T. L&T got over 21% stake through open offer so far and increased its
stake in Mindtree to 51%. 73.9% of public shareholders sold their shares to L&T.
Other institutional shareholders, Amansa Private Holdings (2.77%) and UTI
Asset Management Co. Ltd (2.97%) sold their stake to L&T in open offer.

Result

L&T completed buying the 31% additional stake it targeted to acquire in

Mindtree for Rs.4988.82 crores through the open offer. The offer to purchase 50.9
million shares of Mindtree from public shareholders was subscribed 1.2 times on
26th June, 2019 and it closed on June 28, 2019. Thus the 60% stake in Mindtree
gave L&T complete control over the software company’s board and management.
On 3rd July 2019, L&T received promoter status in Mindtree as company
increased its stake to 60.06%.
Krishnakumar Natarajan (Executive Chairman), N S Parthasarathy (Executive
Vice Chairman and Chief Operating Officer) and Rostow Ravanan (CEO and
Managing Director) resigned as members of the Board of Directors of Mindtree
Ltd and as employees of the company. They acted as board members and
employees till 17 July 2019 in line with their employment contracts.

Promoters Mr. Krishnakumar Natarajan, Mr. Subroto Bagchi, Mr. NS

Parthasarathy and Mr. Rostow Ravanan together hold 13.32% stake in the
company. 60% was acquired by L&T. Rest is held by domestic mutual funds and
foreign portfolio investors. L&T eventually wants to buy around 66% shares of
Mindtree that will cost the company around Rs.10800 Crore. The Competition
Commission of India (CCI) had approved L&T’s takeover proposal in the month
of April 2019.