Mumbai: Tech Mahindra Ltd will merge Satyam Computer Services Ltd with itself, buying the remaining stake in the Hyderabad-based firm in an all-stock transaction worth Rs 5,150 crore and creating a software services provider with the size and reach to compete with bigger rivals.
The combined entity will have an annual revenue of $2.4 billion (Rs 12,142 crore), with more than 350 clients across industry sectors in 54 countries and 75,000 staff. It will rank as India’s fifth biggest software services firm, behind Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd and HCL Technologies Ltd.
The boards of the two companies met on Wednesday and approved the merger at a share swap ratio of 2:17, giving shareholders two Tech Mahindra shares for every 17 owned in Satyam Computer—rebranded as Mahindra Satyam after its purchase in April 2009 by the Mahindra group company.
At that ratio, the deal is valued at Rs 5,150 crore, based on Tuesday’s closing price of Tech Mahindra, Reuters reported. The deal pegs the value of Satyam Computer at Rs 8,980 crore, roughly 3% higher than its market value on Tuesday.
“The merger of these two companies will generate revenue that will be a tad shy of $3 billion. This will help us compete in the category of the big boys,” Vineet Nayyar, vice-chairman and managing director of Tech Mahindra and chairman of Satyam Computer, told reporters in Mumbai. “Secondly, this will enable us to be leaders in certain areas within the country, hopefully, going forward.”
Investors bought the rationale behind the merger, sending up Tech Mahindra’s stock 5.5% to Rs 683.90 on BSE on Wednesday. Satyam Computer’s stock gained 4.6% to Rs 77.55, both outpacing the benchmark Sensex’s 1.7% rise. While 3.278 million Tech Mahindra shares were traded on both BSE and National Stock Exchange, 48.75 million shares of Satyam changed hands.
The merger, which, Nayyar said, is subject to regulatory approvals and could take as long as nine months for completion, will cap the rehabilitation of Satyam Computer after its near collapse in the wake of India’s biggest corporate fraud.
In January 2009, Satyam founder B. Ramalinga Raju confessed to having misstated accounts to the tune of Rs 7,136 crore over several years by inflating cash and bank balances and playing down liabilities at the company he set up in 1987. His confession caused an employee exodus and flight of clients from the company that then ranked as India’s fourth biggest software services firm.
Tech Mahindra bought almost 43% of Satyam in an auction overseen by government-appointed directors, beating two other contenders to acquire the firm that Nayyar last year compared with a patient emerging from a near-death experience. The merger will help trim costs, enable the combined entity to offer a wider range of services including new technologies.
“We now have the enablers by which we can leverage into new-age technologies like mobility, cloud, security services, and we clearly are now in a position to give better value propositions to our customers,” Satyam’s chief executive C.P. Gurnani said.
“Over the past three years, we’ve gone past the stabilization and investment phases, and are now in the growth phase. Over the past six quarters, Satyam has grown steadily and we now don’t just want to be recognized for technical solutions but for business solutions,” said Gurnani.
He added there would be no redundancies after the merger’s completion, but there will be net additions given that there are hardly any overlaps in the customer bases of Tech Mahindra and Satyam Computer.
On a pro-forma (for the sake of form) basis, the Mahindra group will own 26.3% in the combined entity, BT Group Plc will own 12.8%, public shareholders of Satyam will have 34.4% and the remaining 16.1% will be held by the public shareholders of Tech Mahindra.
About 10.4% of the combined entity’s share capital will be held by a separate trust as treasury stock, to enable it to raise money quickly to tap growth opportunities.
Currently, the $14.4 billion Mahindra Group holds a 42.65% stake in Satyam Computer, 21.28% is held by institutional investors and 30.12% by non-institutional investors.
“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 firms,” said Sudip Bandyopadhyay, chief executive of Destimoney Securities.
BT, Tech Mahindra’s largest customer in revenue terms, will contribute 17% to the revenue of the new entity, said A.S. Murthy, chief technology officer, Mahindra Satyam, on the sidelines of a video conference in Hyderabad. Murthy, for a brief while after the Satyam scam broke out, served as the chief executive officer of the company.
The firm’s revenue break-up will be 47% from telecom, 17% from manufacturing, 10% from technology and media, 11% from banking and financial services, 5% from retail and 7% from other verticals, Tech Mahindra’s chief financial officer Sonjoy Anand said.
Yogendra Kalavalapalli in Hyderabad contributed to this story.
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