TechM, Mahindra Satyam to merge, 1:8.5 swap set

Three years after it acquired India’s fourth largest information technology services firm, Satyam Computer Services, Tech Mahindra on Wednesday announced their merger. With a share swap ratio of 2:17 (two shares of Tech Mahindra will get 17 shares of Mahindra Satyam), the merged entity will be a $2.4-billion IT services company, headquartered here. The merger is effective April 1, 2011. Click here for Cloud Computing Also Read Related Stories News Now - We will put in investment, aim to be a significant player: C P Gurnani - Staff rejoice at happy union - Sensex up 285 pts on growth hopes - Tech Mahindra-Mahindra Satyam merger is market neutral - Tech M, Mahindra Satyam entity to be Mumbai-based - Analysis: Tech Mahindra-Mahindra Satyam merger The merger, subject to approval by the Bombay High Court and the Andhra Pradesh High Court including shareholders and lenders, will make an entity that would be the second largest revenue contributor in the Mahindra & Mahindra group. Analysts tracking the firm said the share swap ratio was neutral for Tech Mahindra and slightly positive for Mahindra Satyam. Stock prices of both firms rallied after the announcement. Tech Mahindra’s stock closed at Rs 683.9 a share, up 5.5 per cent from the previous close. Mahindra Satyam’s stock closed at Rs 77.5, up 4.6 per cent. The merged entity will have 75,000 people, close to 350 clients and C P Gurnani as the chief executive officer. Gurnani, at present, is whole time director and CEO, Mahindra Satyam. “I have not been able to see any other candidate than C P Gurnani to head the company so far,” said Vineet Nayyar, vice chairman and managing director of Tech Mahindra and chairman of Mahindra Satyam. The announcement brings to an end the tumultuous journey that began in early 2009, when Ramalinga Raju, founder and chairman of Satyam Computer Services, confessed he had overstated the company’s profits. While the company got acquired by Tech Mahindra in 2009 for a total sum of Rs 2,889 crore, it was just the start of the challenges the new management had to face. From the exodus of clients and employees to firefighting investor wrath and dealing with class action suits, the new management has come a long way. “I think the management has handled all the legal issues very well. The actual settlement the company had to pay was much less than what was being claimed,” points out Sudin Apte, principal analyst and CEO, Offshore Insights. “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,” said Anand G Mahindra, chairman, Tech Mahindra. The combined entity will benefit from operational synergies, economies of scale, sourcing benefits, and standardisation of business processes. This also will bring down the holding of BT in Tech Mahindra as well as in terms of revenue. BT will continue to be the largest client even in the merged entity with revenue contribution of 17-18 per cent. The UK telecom firm's shareholding will go down to 12.8 per cent from the current 23.25 per cent. Tech Mahindra, which focuses only on the telecom segment for services, will get a presence in verticals like manufacturing, media & entertainment, BFSI, retail and others after the merger. This will also give the combined entity a diversified and well-balanced global footprint that would boast contribution from the Americas at 42 per cent, Europe at 35 per cent and emerging markets at 23 per cent. The merger, according to the management, will take at least eight to nine months to complete. Since all assets and liabilities will be transferred to Tech Mahindra after the merger, the entity will have a cash surplus of Rs 1,800 crore. The merger proposal also announces the creation of a trust that will hold about 10.4 per cent of its share as treasury stock. 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. The combined entity will have Ebitda (on LTM basis) of $392 million. "As per the terms decided for amalgamation, 204 million shares of Mahindra Satyam will be transferred to a trust, in which Tech Mahindra will be the beneficiary," said Nitin Prakash Daga, AVP-Research, Microsec Capital. “By keeping these shares in a trust, the objective is to allow the company to create liquidity in the event of an M&A opportunity,” said Sonjoy Anand, CFO, Tech Mahindra. Analysts tracking the company, however, believe the merger is an expected step; what will be crucial is how the company is able to move up from being a $1-billion player to the big league. For instance, the merged entity will be one-fourth the size of India’s largest services firm, Tata Consultancy Services (TCS). The nearest competitor for the merged entity will be HCL Technologies, which has a revenue of $3.9 billion.