>Much awaited merger of Tech Mahindra and Mahindra Satyam has got finalised

The much awaited merger of Tech Mahindra and Mahindra Satyam has got finalised with the boards of the two entities having approved the proposal. The swap ratio for the merger is worked out to be 2 shares of Tech Mahindra (face value Rs10) for every 17 shares of Mahindra Satyam (face value of Rs2). As per the managements’ indication, the merger process will take another six to nine months to complete and the record date of the merger would be announced in due course.


Key synergies from the merger
The combined entity would be the fifth largest domestic IT company: The merged entity’s revenues are at around $2.4 billion for the last 12 months (ended December 2011), making it the fifth largest domestic IT company, next to HCL Technologies among the listed space. The entity would be the sixth largest when taking Cognizant Technologies into consideration. In terms of market capitalisation, the merged entity will be at around Rs17,000 crore.



■ Diversified revenue stream with strong domain expertise in focused areas: The merged entity’s revenue stream will be much diversified as compared to the current single industry (telecom) exposure of Tech Mahindra. The new entity’s revenue mix will comprise of sectors like banking, financial services and insurance (BFSI), manufacturing and telecom among others. On the other hand, the merged entity would derive synergies from strong capabilities of Tech Mahindra in mobility and system integration whereas the legacy strength of Satyam in the area of enterprise solutions would be the key differentiator for the merged entity. Among geographies, the revenue exposure will be more balanced with 42% accounted by the US, 35% by Europe and 23% by emerging markets.


■ Top client’s concentration will reduce; clients portfolio looks more diversified: Currently, British Telecom (BT) contributes close to 35% of the total revenues of Tech Mahindra, which is likely to reduce substantially to 16.5% in the new merged entity. Further, with around 217 Satyam clients adding to the joint entity, the joint entity will have over 350 clients.

■ Cost benefits to accrue from operational synergies: The joint “Go to market” strategy of the merged entit has already started bearing fruits, with both Tech Mahindra and Satyam working closely in the last one year as a joint entity for the market penetration. In the last one year, the merged entity has won more than 10 deals through this initiative. On the other hand, the joint entity would also have the scale and bandwidth to accrue benefits from the general and administrative (G&A) side of the expenses. Going forward, the management has indicated at an EBITDA margins of 16% from the combined entity.


■ Potential for higher investor participation with increase in free float: At present, Tech Mahindra is having a free float of shares of around 29.1%. Excluding LIC, which holds around 13%, the figure stands at 16.1%. In the merged entity, the free float available for the investors will increase to 50.5%. With increase in free float the investor participation in the merged entity will increase further. Through the merger process, 20.4 crore shares of Satyam will be transferred to Tech Mahindra Trust and 10.34 crore new shares will be issued. Post merger, Tech Mahindra Trust will hold a 10.4% stake in the new entity as treasury shares.


■ Other highlights
The management has indicated that C P Gurnani who led the Mahindra Satyam turnaround would be the chief executive officer (CEO) of the combined entity. Sanjay Anand will be the chief finance officer (CFO) and Vineet Nayyar would be the non-executive Chairman. Sriram Papani will lead the enterprise business solutions vertical, Nagesh Kamble will lead the consulting business and Karthikeyan Natarajan would lead the engineering services division. The heads of sales and leaders appointed for specific geographies are
expected to remain unchanged.


There would be no redundancy in respect of employees with the total workforce growing to 75,026 employees. Going ahead the management expects to add to the headcount on a net basis.
 
The in-organic route to growth would remain as the combined entity would look at acquisitions to fill in gaps in services and enter new markets.


Decision with regards to branding would be taken up in consultation of professional consultants.


■ Valuation: We view the merger of Mahindra Satyam with Tech Mahindra as a positive catalyst for creating a value accretive entity for the future. However, legal hurdles pending with Mahindra Satyam and slowdown in the telecom vertical (main industry exposure for Tech Mahindra) would stand to be a roadblock in the medium term. On a longer-term, the new entity will have a more diversified and scalable revenue stream and operational synergies will create value for the investors. At the current market price, both Tech Mahindra and Mahindra Satyam trade at 10x and 9x their FY2013E and FY2014E consensus earnings respectively. We continue to remain positively biased on Mahindra Satyam. Currently, we do not have any active rating on Tech Mahindra and Mahindra Satyam.


RISH TRADER