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Mar 20, 2012, 05.52 PM IST
The announcement of merger between Mahindra Satyam and Tech Mahindra is widely anticipated. The market will be keenly watching the nuances of the merger structure and swap ration between Mahindra Satyam and Tech Mahindra, says Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities Limited
By Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities Limited.
1. The announcement of merger between Mahindra Satyam and Tech Mahindra is widely anticipated. The market will be keenly watching the nuances of the merger structure and swap ration between Mahindra Satyam and Tech Mahindra.
2. It needs to be seen what course of action will be adopted by the company in their merger planning. It may be any of the following methods: (a) Tech Mahindra buying Mahindra Satyam, or (b) Mahindra Satyam buying Tech Mahindra, or (c) Merger between Tech Mahindra and Mahindra Satyam.
3. Keeping the several factors (such as brand image) into account, most likely method they will adopt appears to be option (a). That is, Tech Mahindra buying Mahindra Satyam.
4. One more aspect which will be closely watched by the market would be the nuances regarding the "Swap Ratio" of the merger.
5. There can be different bases to determine the likely swap ratio for the merger deal. The swap ratio can be based on different bases such as Networth, EPS, Market Price, etc
6. It needs to be seen what kind of base will be used by the companies to arrive at the final swap ratio. However, on the basis of the current market prices where the shares of Mahindra Satyam and Tech Mahindra are trading, the likely swap ratio is appearing to be close to 9:1. That is, 1 share of Tech Mahindra will be issued for every 9 shares of Mahindra Satyam.
7. Any swap ratio close to 9:1 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.
8. 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.
9. If the final swap ratio is close to 9:1, 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.
10. If the final swap ratio is close to 9:1, then the current Mahindra Satyam shareholders will hold about 51% in the combined entity and the Tech Mahindra shareholders will hold about 49% in the combined entity.
11. Irrespective of the swap ratio, the impact on the promoter group 'Mahindras' will be limited, as they hold virtually similar percentage of stake in both the entities. That is, they hold about 42.65% stake in Mahindra Satyam and 47.65% stake in Tech Mahindra. However, any swap ratio in favour of Tech Mahindra may prove to be slightly better for 'Mahindra' group.
12. British Telecom, other promoter of Tech Mahindra, will be closely watching this space as they hold about 23.20% stake in Tech Mahindra. If the swap ratio is 9:1, then British Telecom will hold about 11.44% stake in the combined entity.
13. Overall, it is very fascinating to see that Mahindra Satyam could able to come out of the crisis of unprecedented magnitude.
14. This underlines that the crisis management has proved to be quite robust in the Indian corporate world, thanks to the timely co-ordinated efforts of all the regulators involved.
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Tags: Jagannadham Thunuguntla, SMC Global Securities Limited, Mahindra Satyam, Tech Mahindra, merger
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