L&T Infotech and Mindtree merger to start on strong foundation: Analysts

L&T Infotech and Mindtree merger: Keeping in mind strong growth momentum, analysts tracking the sector were not too confident if this would be the right time to go in for a merger.

With the buzz on merger of L&T Infotech (LTI) and Mindtree getting stronger, analysts believe that the merged entity will start on a strong foundation of growth as the combined total contract value (TCV) of both the companies at the end of FY22 was over $3 billion, but they are still skeptical on the timing of the merger.

Among the mid-cap players, both LTI and Mindtree have performed well for the fourth quarter of FY22 as well as for the full year. LTI, which crossed the $2 billion revenue mark for the fiscal post its result reported that its streak of bagging large deals continues. The total large deal pipeline was at $2 billion of which 40 per cent came from net new logos.

Similarly, Mindtree's TCV for the full year was at $1.6 billion, up 16.7 per cent year on year (YoY). For Q4FY22, the company’s TCV came in at $390 million, up 4 per cent sequentially.

Keeping in mind strong growth momentum, analysts tracking the sector were not too confident if this would be the right time to go in for a merger.

"L&T is on the horns of a dilemma, both Mindtree and LTI are performing better than the market and in fact they are some of the top performers in the market, they are both performing significantly better than the scaled competitors such as Infosys TCS and Wipro, hence a merger is highly risky," opined Peter Bendor-Samuel, CEO, Everest Group, an advisory firm.

When asked the scale that the merged entity will bring on table, Bendor-Samuel feels that what looks good on paper may not be so in reality.

“The merger adds scale and broadens the customer base as well as positions collectively better in more industry segments. It is possible that a combined entity would be able to run more effectively and enjoy economies of scale as overhead would be reduced through integration. However, these cost advantages do not always translate from paper to reality and the cost cutting can create poor morale which negatively affects firm performance,” he added.

For L&T, this merger fits in with the group's vision of becoming more services oriented. The merger has business synergies as both the companies have complimentary portfolios. For instance, communications media & technology, and retail, CPG and manufacturing are bigger focuses for Mindtree. In case of LTI it is BFS and Insurance that are the largest vertical with 32.5 per cent and 13.8 per cent respectively of revenue for FY22.

While all this is true, there is one element which is a bigger concern, that is, the impact of the merger on the management. “Merger of these two entities is a foregone conclusion. However, with the growth momentum both these companies are witnessing, a merger at this time may not be good as it would defocus the management from capturing growth to managing merger complexities,” said Pareekh Jain, founder and CEO, Pareekh Consulting, an engineering consultancy services firm. 

“Both businesses are led by very able and aggressive leadership teams, they also have different company cultures. Hence it is likely that they will lose much of one or the other leadership in a merger. This combined with merging of cultures will likely adversely affect the short-term growth of the combined entity. That said, the gamble that they are taking is that a larger entity will be better positioned as the digital transformation market matures and looks to larger firms to drive larger projects,” added Bendour-Samuel. 

One thing that will work is the size of the talent base of the merged entity. The merged entity will have a total headcount of over 81,000. Moreover, the combined client base will go above 760.

The merged entity, which will have a market cap of over $18.8 billion, will have a combined revenue of $3.5 billion, making it the sixth largest IT services player from India.