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Mahindra Satyam, Tech Mahindra get court nod for merger

5 min read . Updated: 05 Jul 2013, 09:04 PM IST Yogendra Kalavalapalli

A file photo of Tech Mahindra’s campus in Pune. For Tech Mahindra, the operational merger with its affiliate would help reduce its dependence on the telecom sector, which now contributes 97% of its revenue. Photo: Hemant Mishra/Mint (Hemant Mishra/Mint) — A file photo of Tech Mahindra’s campus in Pune. For Tech Mahindra, the operational merger with its affiliate would help reduce its dependence on the telecom sector, which now contributes 97% of its revenue. Photo: Hemant Mishra/Mint (Hemant Mishra/Mint)

Merger will produce the sixth largest entity in India’s IT industry

Hyderabad: The Andhra Pradesh high court on Tuesday endorsed the merger of software services firms Satyam Computer Services Ltd and Tech Mahindra Ltd , removing the final hurdle in the union of the two companies that will produce the sixth largest entity in India’s information technology (IT) industry.

The ruling ends a 8-month-long legal battle waged by parties that claimed to be unsecured creditors and a clutch of minority shareholders of Satyam who challenged the company’s merger with Tech Mahindra, which bought the Hyderabad-based firm in April 2009 at an auction overseen by government-appointed directors.

Judge N.R.L. Nageswara Rao dismissed all petitions seeking to bar the merger and ordered that the so-called scheme of amalgamation—a detailed merger plan—be filed with the Registrar of Companies within 30 days.

All debts, liabilities, duties and obligations of Satyam, re-branded as Mahindra Satyam following the acquisition, will be the responsibility of Tech Mahindra with effect from the appointed date of merger, the judge said.

“We are pleased with the decision of the court and our faith in the judiciary stands vindicated," a Satyam spokesperson said in an email. “The next step will be to formally conclude the integration process and accelerate our ambitious focus towards becoming a stronger force to reckon with in the IT industry."

Satyam shares rose 4.2% to ₹ 111.05 at close of trading on the BSE and Tech Mahindra stock gained 2.9% to ₹ 968.20 on a day the benchmark Sensex fell 1.53% and the IT index fell 0.66%.

The combined entity will have annual revenue of $2.9 billion, more than 350 clients across 54 countries and 75,000 employees, with 42% of sales coming from North America, 35% from Europe and the balance from other regions.

It will create an IT company that would, in terms of combined annual revenue, rank behind Tata Consultancy Services Ltd , Cognizant Technology Solutions Corp., Infosys Ltd , Wipro Ltd and H CL Technologies Ltd .

Satyam was India’s fourth-largest IT firm by revenue when it fell into a crisis that resulted in its sale to Tech Mahindra.

Satyam’s chief executive officer C.P. Gurnani , who is also managing director of Tech Mahindra, has set the target of increasing revenue to $5 billion by the end of 2015, as the unified entity attempts to sharpen its competitive edge and gain market share using the combined strengths of the two companies.

Sridhar Vedala, chief executive of outsourcing advisory firm QS Advisory, said the combined entity would position itself as a top IT company rather than in the tier-II space that includes the likes of iGate Corp. and MindTree Ltd .

“They have shifted from a mid-cap company to a large company. This will enable them to go for large contracts," said Ankita Somani, IT research analyst with Mumbai-based securities house Angel Broking Ltd.

For Tech Mahindra, the operational merger with its affiliate would help reduce its dependence on the telecom sector, which now contributes 97% of its revenue, a share that will fall below 50% in the combined entity, Somani said.

For Satyam, the union may help finally put behind it the scandal that its founder B. Ramalinga Raju caused when, in January 2009, he confessed to having misstated accounts to the tune of ₹ 7,136 crore over a period of several years. His confession triggered a flight of employees and client defections that resulted in the sale of the firm he founded in 1987 and built into India’s fourth largest software services provider.

“The positive of this announcement is that it results in the dilution of the Satyam brand name. Whatever negative connotations that brand name had because of the legacy issues, that goes out," said Pankaj Kapoor, director at Standard Chartered Securities.

The high court, while sanctioning the merger, said pending investigations and prosecution against Ramalinga Raju and others will continue. Tech Mahindra should cooperate with investigating agencies such as the Serious Fraud Investigation Office and Enforcement Directorate, it said.

The scheme of amalgamation of the two companies would be backdated to April 2011 as per the terms of the merger, Mahindra Satyamchairman Vineet Nayyar said on 16 May.

The merger proposal has been cleared by various bodies, including the Competition Commission of India, BSE Ltd, National Stock Exchange and the Bombay High Court.

The companies announced their intention to combine on 21 March last year, but the merger proposal was stuck in the Andhra Pradesh High Court, which clubbed it with two separate petitions—one challenging the merger swap ratio of two shares of Tech Mahindra for every 17 Satyam shares, and another filed by purported creditors claiming ₹ 1,230 crore they said they lent to Satyam.

Infrastructure Leasing and Financial Services Ltd (IL&FS) opposed the merger of the two firms on behalf of its entity Ekadanta Greenfields Pvt. Ltd, which it acquired when taking over the Raju family-controlled Maytas Infra Ltd in 2009. IL&FS said it would appeal the order.

“We will take appropriate steps to fight it legally. We will file an appeal and fight (it) out," said G. Venkateswar Reddy , company secretary of IL&FS. IL&FS is seeking recovery of ₹ 23 crore, including interest, it claims is owed to it.

Minority shareholders said they would not appeal the judgement.

“Since we are not in position to prove it, we are not going to contest the merger, we don’t want to delay the merger anymore," said G.N. Ravi, one of the petitioners.

To be sure, the minority investors were not against the amalgamation but protested that the merger swap ratio was “unfair".

“Ours was more of a principled thing," Ravi said. “We wouldn’t have minded if the judge had changed the ratio… I thought there will at least be a sort of statement from the court saying companies should be more transparent."

Even as the amalgamation awaited final court approval, the two companies have already been operating as a single entity business-wise.

“It just formalizes what clients have been seeing for the last 12-18 months," said Sudin Apte, chief executive officer and research director of Offshore Insights. “From a client perspective, it doesn’t add any incremental value,"

Apte pointed to the joint strategies of the two firms— integrating sales teams, a unified marketing campaign, approaching customers together and borrowing each other’s services.

Anirban Sen in Bangalore contributed to this story.

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