10 things to know about Mahindra Satyam, Tech Mahindra merger

The Boards of Directors of Tech Mahindra and Satyam Computer Services Limited in their respective meetings held today approved a proposal to merge Mahindra Satyam with Tech Mahindra.

The Mahindra name is likely to be retained in the combined entity. The entire process will take 6-9 months.

In a statement to the Bombay Stock Exchange Mahindra Satyam said, "All assets and liabilities of the company will be transferred to and vested in Tech Mahindra at book values."

The swap ratio has been decided at 2:17, which means that Mahindra Satyam shareholders will get two shares of Tech Mahindra for every 17 shares they hold.  

Satyam was sold in April 2009 to Tech Mahindra, after the founder of the Hyderabad-based company admitted to one of the largest accounting frauds in India.

Here are 10 things to know about the merger.

1. Shares of the two companies moved in tandem and closed off the day's high. Tech Mahindra gained 5.5% to end at Rs 683.90 on the BSE. Mahindra Satyam shares advanced 4.6% to Rs 77.55. The BSE Sensex closed 285.5 points or 1.65% higher at 17,601.71.

2.  The swap ratio is 2 shares of Tech Mahindra (face value of Rs 10 each), for every 17 shares of Mahindra Satyam (face value of Rs 2 each). "The swap ratio is in-line with yesterday's closing price and 2 weeks and 6 months average. It is a fair swap ratio for the two stocks. I don't see any immediate reaction on the two stocks," Hitesh Shah, Director (Research) at IDFC Securities told NDTV Profit.

3. The swap ratio of 8.5 shares of Satyam for every share in Tech Mahindra is positive for Tech Mahindra at current prices, traders and analysts said. "Investors will look forward for diversification of revenue stream," Sanjive Hota, senior research analyst at Sharekhan, said. Tech Mahindra stock could see some near-term upside due to the longer-term benefits, which could come in the form new set of investors, Citi said in a note.

4. According to the merger scheme approved by both the Boards, the merger is proposed to be undertaken through a Court approved Scheme of Arrangement under Sections 391 to 394 of the Companies Act, 1956. The proposed Scheme of Arrangement will be subject to the approvals of the Bombay High Court at Mumbai and the Andhra Pradesh High Court at Hyderabad. The merger will further be subject to various statutory approvals, including those from the shareholders and the lenders / creditors.

5. On a pro-forma basis, the Mahindra Group will own 26.3% in the combined entity, British Telecom will own 12.8%, 10.4% will be held as treasury stock, 34.4% to be held by the public shareholders of Mahindra Satyam and the balance 16.1% will be held by the public shareholders of Tech Mahindra.
6. Tech Mahindra will issue 10.34 crore new shares, thereby increasing its outstanding shares to 23.08 crore and its equity capital to Rs 230.8 crore.

7. Implications: The merger will result in the creation of a new offshore services leader with revenues of approximately $2.4 billion in revenues, approximately 75,000+ strong work force and 350+ active clients (including Fortune Global 500 companies), across 54 countries. The combined entity will create a diversified company in terms of geographical reach and revenues mix (Americas will contribute 42%, Europe 35% and Emerging Markets 23% to the overall revenue). The combined entity will become 5th largest IT company in terms of market cap.

8. The merged entity will have a net cash of Rs 1,800 crore on its books against a net debt of Rs 1,100 crore currently. The earnings per share of the merged entity would be Rs 79 per share.

9. 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.

10. Since the swap ratio is close to 9:1, the merger transaction is deemed "market-price" neutral, which means that there may not be any arbitrage opportunity left for the shareholders of both the companies. "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", Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities Limited said.

Anand Mahindra, Chairman, Tech Mahindra said, "This merger will help propel the combined entity into the top tier of Indian software and services companies, achieving the Group’s key objective of being in a leadership role in each of our focus business areas”. Vineet Nayyar, Vice Chairman and Managing Director of Tech Mahindra and Chairman of Mahindra Satyam said, “This merger is a key part of our strategy to deliver industry leading performance”.