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BENGALURU : Larsen and Toubro Infotech Ltd (LTI) and Mindtree Ltd, the two publicly traded units of India’s largest engineering company, agreed to merge to form India’s fifth most valuable software company, beating Tech Mahindra Ltd.

Shareholders of Mindtree will get 73 shares of LTI for every 100 held. Parent Larsen and Toubro Ltd will own 68.73% of LTI Mindtree, as the merged entity will be known. The transaction is subject to shareholder and regulatory approvals. The merged entity will be valued at 1.35 trillion at Friday’s share prices, surpassing Tech Mahindra’s 1.25 trillion market capitalization.

combining Strengths
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combining Strengths

Mindtree chief executive and managing director Debashis Chatterjee will lead the combined entity, while LTI’s chief executive Sanjay Jalona resigned, citing personal reasons. He will serve his notice period but will not stay on to oversee the integration.

The proposed merger will create an entity with combined sales of $3.5 billion that will be able to bid for bigger orders and offer a wider range of services to clients, given larger customers’ preference for hiring fewer vendors that can offer end-to-end services.

The merger makes sense at multiple levels, according to Abhisek Mukherjee, co-founder and director of management consulting firm Auctus Advisors. “Other than their complementary portfolios, it will create a meaningful scale for the combined entity. Scale is becoming a prerequisite to qualify for and win large deals, which is the holy grail for all IT services companies. Better access and conversion of large deals by the combined entity is something to watch out for. This will drive both revenue and margin expansion," he said.

On the flip side, organizational turbulence is something that challenges such mergers of equals, Mukherjee said. “Both LTI and Mindtree have deep leadership strength, and how potential overlaps are managed will determine how quickly the combined entity stabilizes," he said.

On Friday, shares of Mindtree fell 3.9% to 3,374.65 while those of LTI declined 3.6% to 4,593.10 on BSE.

The merger comes at a time technology services companies face record employee turnover as rivals try to lure workers with bigger paycheques and promotions, as customers continue to digitize their businesses to meet the challenges of doing business in the post-pandemic era.

Larsen and Toubro said LTI and Mindtree’s complementary strengths would result in a stronger portfolio of offerings.

“This merger represents our continued commitment to growing the IT services business, in line with our strategic vision. The highly complementary businesses of LTI and Mindtree will make this integration a ‘win-win’ proposition for our customers, investors, shareholders, and employees," said A.M. Naik, group chairman of Larsen and Toubro.

Larsen and Toubro acquired Mindtree in 2019, marking the first hostile takeover of a company in India’s IT industry. The founders of the Bengaluru-based Mindtree initially resisted the takeover but couldn’t prevent the Mumbai-based company from acquiring a controlling stake.

Mindtree’s profit rose 49.1% from a year ago to 473.1 crore in the March quarter, while revenue gained 37.4% to 2,897.4 crore.

Meanwhile, LTI’s profit increased by 16.8% to 637.5 crore and revenue jumped 31.6% to 4,301.6 crore.

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