Mahindra Satyam and Tech Mahindra are likely to announce a merger plan today. The move was widely expected. In January, Mahindra Satyam Chairman Vineet Nayyar had said that the two firms would merge by the end of this year. The Mahindra name is likely to be retained in the combined entity.
Tech Mahindra had acquired the scam-hit Satyam Computer Services in 2010 and re-branded it as Mahindra Satyam with the eventual goal of merging the two firms. In January 2009, erstwhile Satyam Computer’s founder and then Chairman B Ramalinga Raju had admitted to fudging account books to the tune of thousands of crores of rupees.
The most important factor to watch for markets would be the swap ratio, which is the ratio in which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition. On the basis of the current market prices where the shares of Mahindra Satyam and Tech Mahindra are trading, the likely swap ratio appears to be close to 9:1. That is, 1 share of Tech Mahindra will be issued for every 9 shares of Mahindra Satyam.
Here are 10 things to know before the announcement is made.
1. The boards of Tech Mahindra & Mahindra Satyam will meet today to finalise the merger plans for the two technology ventures. In a statement to the Bombay Stock Exchange Mahindra Satyam said, "Satyam Computer Services Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on March 21, 2012, inter alia, to consider the Amalgamation of the Company with Tech Mahindra Limited..."
2. Shares of both companies traded higher ahead of the board meeting. At 0918 hours, Tech Mahindra stocks rose nearly 2.5% higher on the BSE at Rs 664. Shares of Mahindra Satyam jumped 2.2% at Rs 75.80. The BSE Sensex gained 0.2% or 33.47 points at 17,349.
Tech Mahindra had acquired the scam-hit Satyam Computer Services in 2010 and re-branded it as Mahindra Satyam with the eventual goal of merging the two firms. In January 2009, erstwhile Satyam Computer’s founder and then Chairman B Ramalinga Raju had admitted to fudging account books to the tune of thousands of crores of rupees.
The most important factor to watch for markets would be the swap ratio, which is the ratio in which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition. On the basis of the current market prices where the shares of Mahindra Satyam and Tech Mahindra are trading, the likely swap ratio appears to be close to 9:1. That is, 1 share of Tech Mahindra will be issued for every 9 shares of Mahindra Satyam.
Here are 10 things to know before the announcement is made.
1. The boards of Tech Mahindra & Mahindra Satyam will meet today to finalise the merger plans for the two technology ventures. In a statement to the Bombay Stock Exchange Mahindra Satyam said, "Satyam Computer Services Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on March 21, 2012, inter alia, to consider the Amalgamation of the Company with Tech Mahindra Limited..."
2. Shares of both companies traded higher ahead of the board meeting. At 0918 hours, Tech Mahindra stocks rose nearly 2.5% higher on the BSE at Rs 664. Shares of Mahindra Satyam jumped 2.2% at Rs 75.80. The BSE Sensex gained 0.2% or 33.47 points at 17,349.
3. Implications: The combined entity will have revenues of $2.7 billion. The combined entity will become 5th largest IT company in terms of market cap. British Telecom, which contributes 35% of revenue, will contribute only 16% of revenue in the merged entity. Exposure to telecom verticals will reduce to 55-60% against 100% currently. The combined entity will create a diversified company in terms of geographical reach. The merged entity will have a net cash of Rs 1,500 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.
4. The market will be keenly watching the nuances of the merger structure and swap ration between Mahindra Satyam and Tech Mahindra. Possible scenarios: (a) Tech Mahindra buys Mahindra Satyam, or (b) Mahindra Satyam buys Tech Mahindra, or (c) Merger between Tech Mahindra and Mahindra Satyam. Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities Limited says Tech Mahindra will buy Mahindra Satyam in all likelihood.
5. Swap Ratio of the merger will be the most important factor: The swap ratio can be based on different bases such as net worth, EPS (earnings per share), market price, etc.
6. 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.
7. Any swap ratio close to 9:1 will make the merger transaction "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, Thunuguntla said.
8. 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 crore.
9. 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.
10. 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.
(With inputs from SMC Global Securities Limited note on the merger)
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