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Home / Opinion / Views /  The merger of IT subsidiaries augurs well for L&T

Three years ago, Larsen and Toubro Ltd (L&T) forked out 10,800 crore for a hostile buyout of Mindtree Ltd. The Bengaluru-based IT services company will be merged with Larsen and Toubro Infotech (LTI), another listed IT services company of the engineering conglomerate, Bloomberg has reported, citing people familiar with the development.

Many observers, including Mint, had said at the time L&T bought Mindtree in the summer of 2019 that its merger with LTI could pose risk, the two being culturally diverse companies; as though marrying a horse-power driven organization with a one that works on brain-power, that too in the mode of startups. And so, that the board of L&T avoided rushing into merging all the IT businesses suggests a careful, calibrated approach.

The immediate question that comes to mind concerns L&T Technology Services Ltd, the smallest IT firm but with a larger share of the giant’s products and platforms business. Will it be merged with Mindtree and LTI? Ideally, it should be. L&T owns 74.05% of the shareholding of LTI, the largest of the three IT services companies it owns, while it owns 61% of the shares of Mindtree. L&T owns 73.95% of L&T Technology Services Ltd.

Next, what can the consolidating ownership in its IT subsidiaries deliver for L&T?

First, this merger of two (or three?) companies will make L&T only the third Indian conglomerate to have built a successful IT business of scale (after Tata Sons which has the Tata Consultancy Services Ltd and Mahindra Group which has Tech Mahindra Ltd, country’s fifth-largest IT services company).

Over the last three decades, at least half a dozen Indian conglomerates, including the RPG Group, CK Birla Group and ITC Ltd, have struggled to scale their IT businesses.

TCS built its business from scratch or organically. Tech Mahindra’s business has been built on acquisitions (Mint’s Twich+ newsletter said that 65% of incremental revenue at Tech Mahindra over the last decade came from acquisitions).

L&T’s IT business is a decent mix of organic and inorganic businesses.

LTI ended with over $2.1 billion in revenue in the year ended March 2022. Mindtree ended with $1.4 billion in revenue last year. L&T Technology Services Ltd is expected to end with $880 million in revenue last year. On merging the three, L&T’s combined IT business will touch $4.4 billion in revenue at the end of March 2022, making it India’s sixth-largest IT services firm, behind the $5.3 billion Tech Mahindra.

Second, higher profitability of the services business can boost L&T. It can dip through dividends into the combined operating profit of nearly $800 million of three IT businesses.

Third, this merger augurs well for the giant’s employees and clients. A larger company attracts the best talent in the market and opens up in-house opportunities for those at the two companies. Clients prefer large IT vendors that can offer the full stack of services.

Finally, since there is minimal overlap between services offered by LTI and Mindtree, the merged entity can leverage on the potential for complementary. LTI gets nearly 45% of its business from big banks and insurance companies. Mindtree gets about a quarter of its business from Microsoft Corp., its largest customer, and another fifth of the revenue from retail giants. Global banks are working to improve their services to consumers as they get ready to compete with fintech startups. For this reason, banking behemoths like JP Morgan Chase and Co. are looking at how retail giants, like Walmart Inc., using data analytics and artificial intelligence, to see how to improve their business efficiencies. Effectively, this means engineers at Mindtree can work in tandem with the employees at LTI to further scale up the business from its current rooster of banking clients.

Then comes the question of who should lead the combined IT merged business of the L&T group? There’s no dearth of candidates. Both LTI and Mindtree have had leaders that steered their respective ships impressively. Two in particular strike as well-poised for new challenge.

Sanjay Jalona, the former Infosys executive hired by A.M. Naik in 2015, has seen the revenue increase from $208.6 million in the April-June quarter of 2015 to $570.4 million in the January-March period of 2022—a compounded quarterly growth of 3.67%. That’s an industry-leading performance across the ten largest homegrown IT services companies over twenty-seven quarters, according to an analysis by Mint. In the summer of 2016, Jalona had told Mint that his dream was to make LTI another Infosys. LTI then had less than $1 billion in revenue while Infosys had $9.5 billion in revenue. A merger between all the three IT services allows Jalona and L&T to turn their dream into a reality.

Then there’s the former Cognizant executive, Debashis Chatterjee, who took over as CEO of Mindtree in August 2019. He stabilized Mindtree after its founders moved out and saw its revenue increase from $271 million in the July-September period of 2019 to $383.8 million in the latest March quarter, a CAGR of 3.54%.

All in all, the merger augurs well in more respects than one.

 

 

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