The much-awaited merger between Tech Mahindra and Mahindra Satyam is happening finally, with the boards of the two companies meeting tomorrow to finalise the details. The merger will create India’s fifth largest information technology services firm, with a combined revenue of over Rs 10,000 crore.
In separate filings to the Bombay Stock Exchange, the two companies also said the board meeting would consider amalgamation of Satyam Computer Services along with Venturbay Consultants, C&S System Technologies, CanvasM Technologies and Mahindra Logisoft Business Solutions with Tech Mahindra, with a view to consolidating the information technology (IT)/software and related businesses and to form a single entity providing services in the sector.
What would be watched by market players keenly are the share swap ratio (the general view in the market is the ratio will be 8:1 or 9:1 in favour of Tech Mahindra — that is, one share of Tech Mahindra for eight or nine shares of Mahindra Satyam), the shareholding of BT in the merged entity and the holding of Mahindra & Mahindra (M&M).
As of December 31, 2011, M&M held 47.65 per cent stake in Tech Mahindra. Venturbay Consultants, the SPV formed to acquire Satyam Computer Services, held 42.65 per cent in Mahindra Satyam. The stock price of both the companies went up post the announcement.
While Tech Mahindra was up 5.13 per cent compared to its overnight close, Mahindra Satyam went up 4.6 per cent.
JPMorgan Chase & Co and Morgan Stanley India are bankers for the proposed merger. The other advisors include Barclays Capital and Ernst & Young. According to Jagannadham Thunuguntala of SMC Global Securities, the share swap ratio could be 9:1. “The swap ratio can be based on different factors such as Networth, EPS, market price, etc. 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 appears close to 9:1. That is, one share of Tech Mahindra will be issued for every nine shares of Mahindra Satyam,” he added.
He further added any swap ratio close to 9:1 would make the merger transaction “market-price” neutral. 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.
If the final swap ratio is close to 9:1, then the combined entity will have market cap to the tune of Rs 17,000 crore.
BT exit options
With the merger, the stake of BT will come down significantly. BT’s holding, 23.20 per cent in the company as of December 31, 2011, is expected to come down to 10-11 per cent after the merger. BT, which has been trying to sell its stake in the company, might find more takers for its reduced stake. Last year, it had appointed Credit Suisse to look at potential suitors for its stake in the company, following which several marquee private equity players were sounded out. In fact, BT has in the past publicly stated it would look at the sale of its shareholding in the company.
What happens to the cross-holdings?
The merger between the two companies will have to tackle the issue of how to treat the cross-holdings i.e. the shares that Tech Mahindra holds in Satyam.
People following the developments closely said in the merged Tech Mahindra-Mahindra Satyam entity, the Mahindras are likely to create a corporate trust to tackle the cross-holdings issue. Mahindras own 48 per cent in Tech Mahindra but nothing in Mahindra Satyam. However, Tech Mahindra owns a little over 42 per cent in Mahindra Satyam via the SPV, Venture Bay Consultants.
Upon merger, according to law, the combined entity cannot hold its own shares. There are only two routes to tackle this: cancel the shares, or put the resultant shares of the combined entity in a trust held for the benefit of the company or all its shareholders. Sources said the Mahindras are likely to opt for a trust. While both may result in similar economic benefit, the voting power is much higher in a trust.
“This is a tried and tested method adopted by most Indian companies. Reliance has done it in the past; so have ICICI and ICICI Bank, which merged. Even the Mahindras have toyed with it in the past,” said a legal advisor who has worked in similar merger scenarios. “With economic interests, you also block potential hostile or mischievous attempts on the company. If they cancel the shares, the chances theoretically will go up and Mahindras are conscious of that fact,” said another person involved in the negotiations.