Tech Mahindra had acquired Satyam Computer Services Limited in April 2009, a few months after Satyam was rattled byIndia’s biggest corporate fraud. Satyam was subsequently re-named Mahindra Satyam.
Satyam’s reconstituted borad of directors had chosen Tech Mahindra following its bid of Rs 1,757 crore for 31 per cent stake in the scam-tainted IT giant. Tech Mahindra offered Rs 58 for each Satyam share.
Engineering major Larsen and Toubro (L&T) and private-equity firm WL Ross were among the other major contenders for the Hyderabad-headquartered Satyam.
According to Mahindra Group, the combined entity will have revenue of USD 2.4 billion.
Of the total revenue, the combined Tech Mahindra – Mahindra Satyam entity would earn 42% revenue from US and 35% fromEurope, and the focus will be on telecom, enterprise and engineering as key verticals. 18-19% of the merged company’s revenue will come from BT Group.
The telecom sector will contribute 47%, BFSI (banking and financial services) 11% and retail 5% of the merged company’s revenue, it said.
The combined entity will have 75,000 employees, 350 clients and will be in a position to give a much better value proposition, Tech Mahindra said.
The merger itself got delayed due to various reasons, including the legal processes involving two high courts.
The merger process will take 6-9 months and the company will now take it forward for approvals from the High Courts of Andhra Pradesh andMaharashtra.
Approval from the Competition Commission of India (CCI) and the Stock Exchanges will also be required for the merger process.
The management structure for the merged entity is yet to be finalized, and Tech Mahindra expects there will be no redundancies in staff.
The merger would create a company which would offer software services across sectors such as financial services, manufacturing, retail and telecommunications. The new entity would also be eligible to compete for larger contracts, which typically elude smaller firms.
For Tech Mahindra, which earns most of its revenue from the telecommunications industry, the merger would reduce its dependence on the sector and on its largest client and parent BT Group PLC.
Analysts say Tech Mahindra could now use the 2561 crore rupees of cash on Satyam’s books to lower the crippling 1376 crore rupees of debt it had taken for the acquisition.
While the intention from the outset was to merge the two companies, restating Satyam’s accounts for previous years was taking time. The company has now returned to reporting results normally.
The announcement did not have much impact on the market. Satyam shares were flat at Rs 74.30, and Tech Mahindra shares were up 2 per cent at 662.
Analysts were somewhat cool to the development. In an interview to CNBC-TV18, Ashwin Mehta, IT analyst, NomuraIndiasays it’s largely neutral for Tech Mahindra. “In terms of the swap ratio, it’s marginally positive from a Satyam perspective, if you were to look at the yesterday’s closing price,” he asserts.
But Vallabh Bhansali, chairman, Enam Securities says the merger of the two software services exporters is a landmark move. He sees the combined entity growing fast, gaining size in the IT arena and taking up some of the steam that the company lost. “I am a big bull on the world at this point of time. I think sector wise some sectors will lag a few quarters here and there but the IT sector will ride well as it has in the past as the world comes back on the growth path. The slow growth is there for all of us to see but behind that slow growth, there are a lot of solutions which have now been provided to most parts of the world,” he said.
Commenting on the merger Anand G Mahindra, Chairman, Tech Mahindra said “This merger will help propel the combined entity into the top tier of Indian software and services companies, achieving the group’s key objective of being in a leadership role in each of our focus business areas.”
Vineet Nayyar, Vice Chairman and Managing Director of Tech Mahindra and Chairman of Mahindra Satyam added “This merger is a key part of our strategy to deliver industry leading performance.”
Ten things to know about the merger, according to NDTV:
Here are 10 things to know about the merger.
1. Shares of two companies turned volatile after the merger was announced. Tech Mahindra stocks jumped initially reaching a high of Rs 680 on the BSE. However, it saw profit booking soon after and at 1300 hours the stock traded 2.8% higher at Rs 666.80. Mahindra Satyam gained 2.6% at Rs 76.10 at the same time. The BSE Sensex was up 142 points at 17,457.
2. The exchange ratio, or swap ratio, recommended by the valuers and approved by both the boards is 2 shares of Tech Mahindra (face value of Rs 10 each), for every 17 shares of Mahindra Satyam (face value of Rs 2 each). “The swap ratio is in-line with yesterday’s closing price and 2 weeks and 6 months average. It is a fair swap ratio for the two stocks. I don’t see any immediate reaction on the two stocks,” Hitesh Shah, Director (Research) at IDFC Securities told NDTV Profit.
3. The swap ratio of 8.5 shares of Satyam for every share in Tech Mahindra is positive for Tech Mahindra at current prices, traders and analysts said. “Investors will look forward for diversification of revenue stream,” Sanjive Hota, senior research analyst at Sharekhan, said. Tech Mahindra stock could see some near-term upside due to the longer-term benefits, which could come in the form new set of investors, Citi said in a note.
4. According to the merger scheme approved by both the Boards, the merger is proposed to be undertaken through a Court approved Scheme of Arrangement under Sections 391 to 394 of the Companies Act, 1956. The proposed Scheme of Arrangement will be subject to the approvals of the Bombay High Court at Mumbai and the Andhra Pradesh High Court at Hyderabad. The merger will further be subject to various statutory approvals, including those from the shareholders and the lenders / creditors.
5. On a pro-forma basis, the Mahindra Group will own 26.3% in the combined entity, British Telecom will own 12.8%, 10.4% will be held as treasury stock, 34.4% to be held by the public shareholders of Mahindra Satyam and the balance 16.1% will be held by the public shareholders of Tech Mahindra.
6. Tech Mahindra will issue 10.34 crore new shares, thereby increasing its outstanding shares to 23.08 crore and its equity capital to Rs 230.8 crore.
7. Implications: The merger will result in the creation of a new offshore services leader with revenues of approximately $2.4 billion in revenues, approximately 75,000+ strong work force and 350+ active clients (including Fortune Global 500 companies), across 54 countries. The combined entity will create a diversified company in terms of geographical reach and revenues mix (Americas will contribute 42%, Europe 35% and Emerging Markets 23% to the overall revenue). The combined entity will become 5th largest IT company in terms of market cap.
8. The merged entity will have a net cash of Rs 1,800 crore on its books against a net debt of Rs 1,100 crore currently. The earnings per share of the merged entity would be Rs 79 per share.
9. The impact on the promoter group ‘Mahindras’ will be limited, as they hold virtually similar percentage of stake in both the entities. That is, they hold about 42.65% stake in Mahindra Satyam and 47.65% stake in Tech Mahindra.
10. Since the swap ratio is close to 9:1, the merger transaction is deemed “market-price” neutral, which means that there may not be any arbitrage opportunity left for the shareholders of both the companies. “However, the swap ratio close to 9:1 appears to be “value” decretive for the shareholders of Mahindra Satyam and “value” accretive for the shareholders of Tech Mahindra, Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities Limited said.
Anand Mahindra, Chairman, Tech Mahindra said, “This merger will help propel the combined entity into the top tier of Indian software and services companies, achieving the Group’s key objective of being in a leadership role in each of our focus business areas”. Vineet Nayyar, Vice Chairman and Managing Director of Tech Mahindra and Chairman of Mahindra Satyam said, “This merger is a key part of our strategy to deliver industry leading performance”.
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