By Shashank Shah
1 December 2021: With the recent developments around Larsen & Toubro’s attempts at taking over Mindtree Consulting, it is topical to go back in time three decades and revisit three occasions when L&T thwarted takeover bids by leading family-owned companies.
Between 1987 and 2004, there were three attempts to acquire Larsen & Toubro (L&T). In 1987, Dubai-based businessman Manohar (aka Manu) Chhabria emerged victorious in a protracted battle to control Shaw Wallace. Next, he turned his attention to L&T. The company lacked identifiable promoters, and hence was an attractive target for a takeover. Manu started picking up L&T shares from the market, and by July 1988, his stake grew to 1.5 per cent of L&T’s equity. This led to speculation in the markets that India’s largest engineering firm was about to be taken over. It is believed that L&T Chairman M.N. Desai sought the help of Dhirubhai Ambani, Chairman of Reliance Industries Ltd. (RIL) to prevent a takeover.
Dhirubhai agreed to help and between 1988 and 1989, picked up almost 18.5 per cent shares of L&T from the open market at a cost of Rs 190 crore. Given the stake, he sought and was granted the chairmanship of the L&T board. His sons, Mukesh and Anil, also joined the board. At that time, L&T was building a 30-million tonnes naphtha-cracker refinery complex of Reliance Petrochemicals at Hazira. It is understood that Dhirubhai had plans of full technology transfer to L&T after completion of the Hazira Project. The technology, which was the expertise of a few multinationals, would help L&T to independently bid for petrochemicals project contracts anywhere in the world.
However, between 1989 and 1991, there were four changes in India’s Central Government. The Rajiv Gandhi Government completed its term in 1989. In that year’s General Elections, V.P. Singh came to power as Prime Minister. However, his government fell within eleven months and Chandra Shekhar became the Prime Minister in 1990. His government was also short-lived, and in the elections that ensued, the Congress Party-led coalition came to power with P.V. Narasimha Rao as the Prime Minister. Given that the Government of India had nearly one-third stake in L&T through leading financial institutions such as GIC, UTI and LIC; and due to pressure from opposition parties, there was an increasing demand that L&T should remain an independent and professionally-managed company. Its management control shouldn’t be taken over by another family-owned group. Dhirubhai yielded but continued as a passive investor with ownership of nearly 10 per cent of L&T stock.
After the 1990s, L&T Management was united and employees stood by it to keep the professionally-managed character of the company intact. ‘We never realized that we were not owners, till we were taken over. This was uppermost in my mind when, in 1999, I decided to bring in employee ownership. After all, Mr Larsen and Mr Toubro were basically employees; they were not businessmen,’ reminisced Naik in a 2008 interview. Interestingly, from March 1989 when N.M. Desai retired as Chairman, the L&T board had no whole-time Executive Chairman. After Dhirubhai Ambani stepped down, S.S. Marathe served as Non-Executive Chairman.
During the AGM in July 2003, shareholders demanded that a company of L&T’s size should have a fulltime Executive Chairman. In December 2003, Naik got the coveted job to lead his dream company. He was the first Chairman of L&T who had risen from the ranks to lead the company. He had joined as assistant engineer in November 1964, and rose to the top position in four decades.
Around January 2000, Boston Consulting Group (BCG) recommended that L&T should exit all non-core areas of business. Besides the cement business, L&T was involved in a number of non-core businesses including shoes, merchant exports, computer peripherals, shipbuilding, ready-mix concrete and many others. BCG suggested a spin-off of its cement division into a separate entity. The low return on capital employed was the primary reason for its recommended divestment. Notably, L&T’s cement business had the least symbiotic relationship with the rest of its businesses. While the product was satisfactory, and production facility was world class, the cement manufacturing location was the biggest limitation. It had set up a gigantic four million tonne facility at Hazira with a modern dock to facilitate exports.
Regrettably, the Asian Crisis of 1997 badly affected its expectations in the international markets. Its geography made domestic transportation of bulky cement prohibitively expensive. By June 2000, L&T announced that its cement business would be demerged from the core activities, and an investment banker would have the mandate of looking for a suitable partner for it.
By November 2001, the Ambanis sold their 10 per cent stake in L&T to Grasim Industries, owned by the Rs 27,000-crore Aditya Vikram Birla Group. A direct competitor in the cement industry, Grasim was interested in acquiring L&T. In February 2002, Kumar Mangalam Birla, MD of Grasim Industries, made an open offer at Rs 190 per share for L&T including its cement division. However, Naik, was keen that L&T should retain its diverse ownership and professional management, and not be taken over by another family-owned group. After a lot of back and forth with the government, financial institutions, the Securities and Exchange Board of India (SEBI), and the Birla Group, Birla exited by selling its stake (acquired from Reliance Industries) to the L&T Employees’ Trust in June 2003. By July 2004, a majority stake in the demerged L&T Cement Division was acquired by the A.V. Birla Group at Rs 2200 crore.
The group’s combined installed capacity was augmented to 31 million tonne per annum (of which 17 million came from L&T Cements), making it the eighth-largest cement maker in the world. In October 2004, L&T Cement was renamed Ultra Tech Cement. This deal was a master stroke hailed by national and international experts as a win-win strategy that prevented a takeover, divested a non-core business, and strengthened employee commitment through the creation of a special fund. This arrangement also ring-fenced L&T against future takeover bids.
Within the first 90 days of the formation of the Employees’ Trust, a stock option scheme was launched by L&T. This created a lot of value for the top management of the company. Since 2006, the management staff (numbering a few thousands) was also extended ESOPs. At that time, of the 27,000 L&T employees, ECC alone had 13,500 staff. L&T was said to be the first non-IT/non-finance company in India to award ESOPs. From then on, Naik provided a futuristic orientation and motivated L&T employees with the question on whether they wanted to remain independent or be taken-over. The employees wanted to remain independent. ‘If you want an independent professional company, you have to make it so expensive that people stay away from you,’ he would tell them.
He visited 38 company locations during his initial years as the CEO, and made presentations to convince employees to focus on value creation, thereby reducing the vulnerability of a takeover and increasing the likelihood of remaining independent. Between June 2003, when L&T was valued at Rs 6,000-crore, and March 2019, when its market cap has increased to over Rs 195,000-crore, the value amplified 32.5 times. L&T had become ‘too big to be acquired.’
(The article is based on ‘Win-Win Corporations’ by Dr. Shashank Shah, published by Penguin Random House 2016. Dr. Shah has been Visiting Scholar, Harvard Business School; Project Director and Fellow’17, Harvard University SAI; and is Consulting Editor, The Business India Group.)