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Mar 21, 2012, 05.32 PM IST
By Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities Limited: Tech Mahindra, Mahindra Satyam merger - Marriage Made in Heaven and Honeymoon to Start?
1. The announcement of merger between Mahindra Satyam and Tech Mahindra is done. The swap ratio indicated is 2 shares of Tech Mahindra for every 17 shares of Mahindra Satyam. More or less, this swap ratio is in line with our estimates.
2. This swap ratio of 8.5:1 will make the merger transaction "market-price" neutral. Meaning thereby, there may not be any arbitrage opportunity left for the shareholders of both the companies.
3. However, the swap ratio close to 9:1 appears to be "value" decretive for the shareholders of Mahindra Satyam and "value" accretive for the shareholders of Tech Mahindra.
4. This final swap ratio of 8.5:1, then the combined entity will be having the market cap to the tune of about Rs 17,000 Crores. The combined entity will become 5th largest IT company in terms of Market Cap.
5. With this size, the combined entity stands a good chance of getting bigger business, bigger projects and bigger clients. Further, the combined entity can cater to more project verticals in comparison to the standalone basis by these companies.
6. However, it will take considerable effort and time for the combined entity to reach the league of Infosys / TCS.
7. As of now, Tech Mahindra's stake in Mahindra Satyam is to the extent of 42.7%. Post this merger, it will be interesting to observe what will be the treatment for this cross holding. As per regulations, there are two ways of handling this.
8. One way is, create a trust to hold this cross holding shares called "treasury shares". If they follow this route, then the value of these "treasury shares" comes to about Rs 4,132 Crores. And, they can issue these shares in the future whenever they need funds.
9. Second way is, they can extinguish these shares and hence, the EPS of the combined entity will go up.
10. British Telecom, other promoter of Tech Mahindra, will be closely watching this space as they hold about 23.20% stake in Tech Mahindra. As the swap ratio is 8.5:1, then British Telecom will hold about 11.11% stake in the combined entity.
11. Overall, it is a merger which is proving to be win-win for all the parties involved and is a logical transaction, as this Mahindra group to consolidate their IT assets under one roof.
12. As said by management, Tech Mahindra and Mahindra Satyam merger is appearing to be "marriage made in heaven". And, if they can execute their future business properly, one can expect that 'honeymoon' period to last longer.
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