Tech Mahindra acquires US-based LCC for $240mn

Information technology services firm Tech Mahindra on Thursday announced signing of a definitive agreement to acquire US-based Lightbridge Communications Corporation (LCC) for an enterprise value of $240 million, one of its biggest foreign acquisitions to date. The all-cash deal would be funded through internal accruals, the company said.

LCC, among the largest global players in the network services management, is expected to hit a revenue of $430 million for the calendar year 2014. Its Ebitda (earnings before interest, tax, depreciation and amortisation) margin is higher than eight per cent. The 5,700 employees of the US firm, across 50 countries, are to join Tech Mahindra after the acquisition, taking the latter’s total headcount to 100,000.

LCC has built 350 networks and designed more than 350,000 cell sites for over 400 customers globally; the acquisition is expected to bring 20-30 new clients to Tech Mahindra.

Analysts tracking the sector have given a thumbs-up to the deal. That is because it gives Tech Mahindra an entry into the fast-growing segment of network services, at cheap valuations. At an enterprise value of $240 million, LCC’s valuation comes to about 0.56 times on the basis of sales, and to seven times by Ebitda. The company has a debt of $85 million on its balance sheet.

The Tech Mahindra stock, which has been rising for some time — on Thursday, it gained three per cent over its previous close — is expected to climb further on BSE in Friday’s trade.

Acquisitions have been an important part of strategy for Tech Mahindra, which aims to become a $5-billion company by the fourth quarter of 2014-15. Since its 2009 buyout of Satyam Computer Services, the company has acquired six companies, besides going for a merger with Mahindra Engineering Services. The latest acquisition would help Tech Mahindra reach its target of becoming a $5-billion company, the management said.

"This deal enhances our exposure in the networking services space. We will now be the largest and most comprehensive provider of technology services to communication service providers. LCC, with 30 years of experience, is a pioneer in this field, whose market size according to research firm Gartner is an estimated $40 billion. We also get access to over 5,000 networking professionals who will help us scale up our operations," said Tech Mahindra CEO & MD C P Gurnani.

Tech Mahindra expects to close the acquisition by the first quarter of the 2015 calendar year. The management is also confident that the teams, after integration, will work to improve the margins from the present 17 per cent to 20 per cent.

Shashi Bhusan, research analyst at Prabhudas Lilladher, said: "We see the acquisition of LCC as an attractively valued one. It is to be funded through internal accruals (cash outflow of Rs $230 million). But there is a lot of synergy between the companies, and cross-selling opportunities. The management team of Tech Mahindra and LCC will work on improving margins and growth trajectory of the combined entity."

The current LCC management would join the Tech Mahindra team, with CEO Kenneth Young heading the networking services business. Explaining the growth trajectory of the company, Young said: "We were a $120-million company in 2008. For 2014, we are expecting to be a $450-million one. We have had a very steady growth, both organically and inorganically."

LCC was started by Rajendra Singh in 1983. With its acquisition, Tech Mahindra will become the only Indian IT services provider in the networking services management space, which is dominated by the like of Alcatel Lucent and Ericsson.