Mahindras to merge Satyam with TechM to create $2.4bn IT giant

The diversified Mahindra Group Wednesday announced the long-awaited merger of Mahindra Satyam with its another technology arm Tech Mahindra in an all-share deal.

Updated: Mar 22, 2012, 09:00 AM IST

Mumbai: The diversified Mahindra Group Wednesday announced the long-awaited merger of Mahindra Satyam with its another technology arm Tech Mahindra in an all-share deal that would create the country's fifth largest software firm with an estimated annual revenue of about USD 2.4 billion.

Under the deal, which was cheered by investors of both the companies in the stock market Wednesday, would involve the shareholders getting two shares of Tech Mahindra for every 17 shares held in Mahindra Satyam.

The merger, to become effective retrospectively from April 2011, would create a single IT entity with an estimated market value of over USD 3.5 billion, revenue of about USD 2.4 billion and a combined workforce of over 75,000 employees.

The deal also marks the completion of a turnaround story of once scam-hit Satyam Computer, which was rechristened as Mahindra Satyam after being acquired by Anand Mahindra-led group, and would propel the combined entity to the top league of Indian IT firms, such as TCS, Infosys, Wipro and HCL Tech.

The analysts said that the merged entity was likely to become India's fifth largest software firm in terms of revenue as well as market value.

The shareholders of both the companies welcomed the merger, pushing share prices of Mahindra Satyam as well as Tech Mahindra higher by 4.6 percent and 5.5 percent, respectively. At the end of Wednesday's trade, Tech Mahindra commanded a market value of Rs 8,712 crore, while that of Mahindra Satyam was Rs 9,126 crore.

Tech Mahindra shares closed at Rs 683.90 at the BSE, while Mahindra Satyam settled at Rs 77.55.

Commenting on the merger, group chief Anand Mahindra wrote on the social networking site Twitter: "We now begin to write the next chapter." Destimoney Securities' MD and CEO Sudip Bandyopadhyay said merger is the culmination of successful transformation of the scam-hit Satyam into a part of well-managed Mahindra group.

"Significant duplication of corporate functions can be done away with through this merger apart from synergizing sales and operations. Successful integration will result in significant benefit for the merged company enabling it to break into the top tier of Indian IT companies," he said.

Mahindras had acquired erstwhile Satyam through a government-run auction way back in April 2009, within months of a major corporate scam came to the light at the company that was known as India's fourth largest IT firm at that time.

In a startling revelation of the country's largest ever corporate fraud, Satyam Computer's founder and then Chairman B Ramalinga Raju had disclosed in January 2009 having overstated the company's profits and falsified its assets.

The merger, which also involves amalgamation of certain other subsidiaries with the combined entity, was approved by the boards of Hyderabad-based Mahindra Satyam and Mumbai-headquartered Tech Mahindra this morning. The amalgamated entity would have its headquarters in Mumbai.

After the board meetings, Tech Mahindra vice-chairman and Mahindra Satyam's Chairman Vineet Nayyar told reporters here that Mahindra Satyam has achieved all the targets set for itself and it was appropriate to start the merger process.

The full integration process would take another nine months, Nayyar said, while adding that both the companies will have separate AGMs for this fiscal.

Nayyar further said the new management structure is not finalized and a revamp of existing management is on the anvil.

Post the merger, Mahindra group would own 26.3 percent in the combined entity, British Telecom (currently a shareholder in Tech Mahindra) would have 12.8 percent, 10.4 percent would be held as treasury stock, 34.4 percent will be owned by public shareholders of Mahindra Satyam and the remaining 16.1 percent by public shareholders of Tech Mahindra.

Tech Mahindra will issue 10.34 crore new shares of face value Rs 10 each (worth over Rs 7,000 crore at current price), thereby increasing its equity capital to Rs 230.8 crore.

The companies were advised by JP Morgan, Morgan Stanley and KPMG for the merger process.

In April 2009, Tech Mahindra took over the reins of the scam-hit Satyam by picking up 31 percent stake for Rs 1,756 crore at a price of Rs 58 per share, a 23 percent premium to Satyam's last closing price at that time. The acquisition had given a valuation of Rs 5,665 crore to the company, which is now worth over Rs 9,000 crore.

For October-December 2011 quarter, Mahindra Satyam posted a stronger-than-expected five-fold jump in net profit to Rs 308 crore, helped by a fall in the rupee value, while its consolidated revenue rose to Rs 1,718 crore, up 34 percent.

Tech Mahindra for the same quarter reported a 7.3 percent spike in net profit to Rs 276 crore, backed by gains from its associate firm Mahindra Satyam. Its revenue rose to Rs 1,445 crore, up 19.3 percent.

The companies said that the merger would create a new offshore services leader with more than 350 active clients, including Global Fortune 500 companies, across 54 countries.

The revenues would be well-balanced across geographies, with 42 percent from Americas, 35 percent Europe and 23 percent from emerging markets.

"The Mahindra Satyam turnaround is a shining story of determination and grit and now comes to its most important chapter, with this merger," its CEO C P Gurnani said.

The proposed scheme of merger is subject to approvals from the High Courts in Mumbai and Hyderabad, as also various other statutory approvals including those from shareholders and the lenders/creditors.

The merged entity, whose branding and new name are yet to be decided, will be headquartered in Mumbai, Nayyar said.

"We have appointed some consultants to advice us on the branding. So we can talk about the branding only after consultants give their advice."

When specifically asked if if the word 'Satyam' would find a place in the new entity or be dropped altogether, Nayyar said, "Satyam, in many ways, encapsulated strengths that the company had. If that was not the case, we would not have retained Satyam in our branding so far."

Nayyar said, "the new company will continue to contest the court cases related to taxation. Most external liabilities, other than the class action suit (in US) by the Aberdeen Group, have been extinguished."

"We'll continue to contest the income tax case, because our stand is that we had no income earlier and so there is no question of any tax."

To a query on a possible delisting of Satyam shares from the Nasdaq, Nayyar answered in the negative.

Gurnani said the merged entity will have a "cash surplus of Rs 1,800 crore and therefore we have no plan to liquidate any of our real estate assets."

"I expect zero redundancy in terms of staff or service. In fact, I expect a net addition of people. On the customer side, I only want to grow my customer base," Gurnani added.