The end of working hours on April 16 also marked the end of one big potential threat to Larsen & Toubro Ltd.’s Rs 10,700-crore acquisition of Mindtree Ltd.
But...
There’s one more potential hurdle L&T may run into. On April 17, Mindtree’s board announced dividend payouts totalling Rs 27 per share.
A large dividend may render L&T’s acquisition more expensive. That’s because it will deplete Mindtree’s cash and hence may impact L&T’s assessment of the company’s value, currently at Rs 980 per share.
Over the last 10 years, Mindtree has announced interim dividends ranging between 10 percent and 50 percent (Rs 1-5 per share) and often paid final dividends higher than that – such as 100 percent in 2015. In this period it has also announced a special dividend twice—50 percent in April 2014 and 20 percent in October 2017.
With approximately Rs 970 crore in cash and cash equivalents, the IT company can pay as high a dividend as it paid in the past, or even higher. If in the highly unlikely situation that it wanted to give away all the cash, it could pay a 590 percent dividend or Rs 59 per share.
But the takeover code will be watching. Mindtree’s board will have to be mindful of two provisions in the regulations.
1. That, when such an open offer has been announced, the board of the target company shall ensure business “is conducted in the ordinary course consistent with past practice”. This suggests the regulations would frown at any out-of-the-ordinary dividend payments.
The point of contention here would be whether ‘interim and or special dividend’ can be considered an act in ordinary course of business, said Asher of Crawford Bayley & Co.
One may argue it is a corporate action which can be taken at the discretion of the board. Mindtree is celebrating its 20th year, previously on such occasions such as 10th year anniversary, 10th year of IPO they have given a special dividend, however, this may result in increase of open offer price.Sanjay Asher, Senior Partner, Crawford Bayley & Co.
2. As Asher pointed out, L&T, can adjust the open offer price if Mindtree’s dividend per share is more than 50 percent higher than the average of the dividend per share paid during the three financial years preceding the date of the public announcement.
There is no bar on interim dividend, confirmed Vyapak Desai, partner at law firm Nishith Desai Associates. “In fact the offeror can adjust price based on this.”
Just days before L&T made its interest public, Mindtree’s board said it would consider a buyback of shares. That, too, was viewed as a defence to the hostile bid. That plan was later called off.
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