Vineet Nayyar, executive vice-chairman of both Tech Mahindra Ltd and Mahindra Satyam Ltd, revealed on Tuesday that the two companies would be merged. While it’s not entirely surprising that the two information technology firms would be merged eventually, it’s interesting to note that the company management is talking of a merger less than three months after the acquisition.
The company had created a special purpose vehicle to acquire Satyam, which some analysts had felt was done to ring-fence itself from any negative fallout of the acquisition. For instance, J.R. Varma of the Indian Institute of Management, Ahmedabad, had blogged around the time of the acquisition, “If Satyam’s liabilities turn out to be larger than the cash and other assets, Tech Mahindra can walk away and put Satyam into bankruptcy. If the liabilities turn out to be small, then Tech Mahindra can merge Satyam into itself and absorb the surplus assets.”
With the company already talking of a merger, one is tempted to think that the management’s assessment of the “net worth” of the company has enhanced. This view is supported by another statement by the company that client attrition has practically stopped since the time of the acquisition. Besides, the company’s open offer for 20% of Satyam’s capital is unlikely to get any response. As a result, Tech Mahindra is likely to subscribe to a fresh issue of shares and Satyam will end up with Rs2,900 crore in cash (including the initial investment for a 31% stake). Currently, there’s cash sitting in Satyam’s books, which has effectively been funded by debt on Tech Mahindra’s books. In the event of a merger, the cash can be used to pay back the debt. It must be noted here that Tech Mahindra is making an attempt to reduce its reliance on debt through a planned QIP (qualified institutional placement) of about Rs1,000 crore.
According to an IIFL Cap report, Satyam investors stand the risk of an unfavourable swap ratio in the event of a merger. This is because the promoter group holds about 44% in Tech Mahindra and will effectively hold less than 20% in Mahindra Satyam.
According to the brokerage, it, therefore, makes more sense to invest in the Satyam story through Tech Mahindra.
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