Mega merger: LTIMindtree to join the big league with scale and ambition

L&T Infotech-Mindtree merger announced; combined entity be able to tap into $100 mn+ deals, says Naik

Larsen & Toubro (L&T) on Friday announced the merger of its two listed IT services companies – L&T Infotech (LTI) and Mindtree – and the process is expected to complete by the end of the current financial year. The merged entity, to be called LTIMindtree, will have a stronger potential to access large deals and compete with scale players, said top executives of L&T.

In terms of revenue and profit, LTIMindtree will be the sixth-largest IT player in the country, after TCS, Infosys, HCL Technologies, Wipro, and Tech Mahindra.

A M Naik, group chairman, L&T, said the merger would bring in better coordination and synergistic value, and help unlock greater value for all stakeholders. “We have seen that the performance of both the companies has been above other larger companies. The merged entity will have both the skill and resources to take on bigger challenges and deliver upon the scheme becoming effective,” Naik said at the press conference to announce the merger.

The transaction is subject to shareholder and regulatory approval. Upon the scheme becoming effective, all shareholders of Mindtree will be issued shares of LTI in the ratio of 73 shares of LTI for every 100 shares of Mindtree. The new shares of LTI issued will be traded on the NSE and the BSE. L&T will hold 68.73 per cent of LTI after the merger.

The share prices of both companies were down as the merger buzz got strong during the day. At the close of trading on Friday, the LTI stock was down 3.64 per cent to Rs 4,593 per share compared to the last closing, while the Mindtree stock settled at Rs 3,374.65, down 3.88 per cent, on the BSE.

Given that recent industry shifts (prominence of large deals, preference for end-to-end offerings, etc) are benefitting at-scale players, the two companies have decided that the time is appropriate to combine the strengths of both organisations to better serve the customers, said an L&T group statement.

Naik said currently the average deal size that the two companies were able to bag individually was around $25 million, while the combined entity would be able to tap into the $100 million and above deals. “Moreover, a majority of verticals that both these companies have are not overlapping. The leadership team of Mindtree knows what vertical they are strong on, and LTI knows what they are strong on. There may be minor overlaps, but on the whole, it is a very excellent value proposition scheme,” he said.

S N Subrahmanyan, vice chairman, Mindtree, said: “The ambition with this merger is to make one plus one five. The purpose and idea of this merger is to capture the synergies from both the companies. Within both the companies we have strategic plans up to 2026, which have been approved by the boards. The idea is to hit those targets. We also want to see if the merged entity can achieve more than that.”

For now, the two companies will continue to function independently. A steering committee will be set up to oversee the transaction till the merger process is complete.

The merger comes as IT services companies have seen a surge in tech spending and demand from customer as they embrace digital transformation. 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 complementary portfolios. For instance, communications media & technology, and retail, CPG and manufacturing are bigger focuses for Mindtree. In the case of LTI, it is BFS and insurance that are the largest verticals with 32.5 per cent and 13.8 per cent share of revenue, respectively, for FY22.

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. Naik was hopeful that the merger will also bring down attrition. “The combined entity will have a positive impact on employee morale as they will end up being part of a bigger entity. I think the attrition can certainly come down by 1 percentage point or so,” he added.

Management in-charge

While the combined entity will be helmed by Debashis Chatterjee, CEO & MD, Mindtree, there are already concerns if the resignation of Sanjay Jalona, CEO & MD, LTI, will lead to a senior-level churn.

The company, while announcing the merger, also said the board of directors had, at their meeting held today, noted and accepted the resignation of Jalona. “His last working day will be decided mutually,” wrote LTI in a stock exchange filing.

Subrahmanyan said: “Sanjay has built the company to what it is now. But he is resigning for personal reasons. I do not think this will impact the senior-level management at LTI.”