Mahindra Satyam, Tech Mahindra boards to consider merger today

Mumbai: The boards of Tech Mahindra Ltd and Mahindra Satyam (earlier Satyam Computer Services Ltd) will meet on Wednesday to consider merging their operations, a move that would create India’s fifth largest software services company by market value in the climax of a nearly three-year-old acquisition saga.

The two companies, in separate statements on Tuesday, announced the board meetings, which will be followed by a media briefing where the contours of the merger will be outlined. How the merger will be structured or what the new name of the combined entity will be isn’t known as yet.

Shares of both companies rose after the announcements. Tech Mahindra shares gained 5.1% to Rs 648.35 and Satyam Computer stock rose 4.7% to Rs 74.15 on BSE. They outperformed the 0.3% gain in both the benchmark Sensex and the BSE IT index.

“The ideal share-swap ratio according to valuations of stocks in that space should be about one share of Tech Mahindra for every eight held in Satyam Computer, but practically it could be skewed in favour of the latter’s shareholders,” said an analyst with a foreign brokerage, who did not want to be named, citing his company’s policy.

Based on current share prices, the value of one Tech Mahindra share amounts to the value of 8.7 Satyam Computer shares.

Tech Mahindra, part of the $14.4 billion (Rs 72,435 crore) Mahindra Group that has businesses ranging from automobiles to aviation to financial services, purchased Satyam Computer in an April 2009 auction overseen by government-appointed directors.

Satyam was put on sale after plunging into a crisis triggered by founder chairman B. Ramalinga Raju’s January 2009 confession that he had over the years misstated accounts to the tune of Rs 7,136 crore by inflating profits, cash and bank balances, and suppressing information on liabilities at the company he founded in 1987. It is India’s worst case of corporate fraud.

Integrating the operations of Tech Mahindra and Mahindra Satyam will create a software services firm with a market value of Rs 16,988.17 crore based on Tuesday’s share prices of both entities. That will rank it behind HCL Technologies Ltd, the No. 4, with a market capitalization of Rs 34,067.62 crore.

Before the accounting scandal broke, Satyam Computer was ranked India’s fourth largest information technology (IT) services company by revenue.

The merger will have “two levels of benefits”, said Sudin Apte, principal analyst and chief executive officer of IT research firm Offshore Insights.

“The first is that it will reduce IT and physical infrastructure costs,” Apte said. “It will also increase operational efficiencies since the marketing, human resources and finance departments can be merged.”

He added: “More important is the fact that the combined entity has the opportunity to cover lost ground by focusing on new-generation solutions like mobile apps, cloud computing, software as a service, since both Tech Mahindra and Mahindra Satyam have capabilities in these spaces.”

For Tech Mahindra, which has primarily focused on and earns most of its revenue from the telecom industry, the merger will reduce its dependence on the telecom space in general and its largest client, the UK’s BT Group Plc, in particular, analysts said.

The combined entity will also have the advantage of scale and will be able to compete for larger contracts, benefiting from a diversified presence servicing clients across many industries.

At Wednesday’s meetings, the boards will also consider the amalgamation of Satyam Computer subsidiaries Venturbay Consultants Pvt. Ltd, C&S System Technologies Pvt. Ltd, CanvasM Technologies Ltd and Mahindra Logisoft Business Solutions Ltd with Tech Mahindra. That will help them consolidate the IT/software and related businesses, they said in the stock exchange filings.

john.k@livemint.com