L&T Infotech, Mindtree slide up to 5% after merger announcement

Shares of Larsen & Toubro Infotech (LTI) and Mindtree were down up to 5 per cent on the BSE in Monday’s intra-day trade after the two companies announced a merger on Friday in an all-stock amalgamation of Mindtree with LTI.  Shareholders of Mindtree will receive 73 shares of LTI in exchange for 100 shares in the former. 

Among the individual stocks, Mindtree slipped 5 per cent to Rs 3,206.90, while LTI was down 2 per cent to Rs 4,486.35 on the BSE in trade today.  At 01:43 pm; Mindtree was down 3.5 per cent and LTI by 1 per cent, as compared to a 0.59 per cent decline in the S&P BSE Sensex.

In the past one month, the stocks of Mindtree and LTI have dipped up to 25 per cent, as against a 8 per cent decline in the benchmark index. The combined entity will be known as ‘LTIMindtree’ and will be led by Mr. Debashis Chatterjee, Mindtree’s current CEO. LTI’s CEO Mr. Sanjay Jalona has resigned, and his last working day will be decided mutually.

Post the merger, LTI promoters will have a 43.9 per cent stake while Mindtree promoters will have a 24.8 per cent stake in the combined entity, taking total promoter shareholding to 68.7 per cent.

The merged company will become the fifth largest IT services company in India with a combined MCap of US$18 bn, surpassing TechM.

The combined entity will have revenues of US$3.5 billion (bn) as on FY22. With a strong presence across geographies and minimal overlapping in terms of vertical mix, the combined entity will have a strong client base of 750+ clients.

 “We note that share swap ratio implies that Mindtree has been valued at -0.6 per cent lower than Friday’s closing (Rs 3,374), assuming LTI’s share price (Rs 4,593) as base in the swap,” ICICI Securities said in a note.

However, the brokerage sees some near term disruptions. “We believe that since the steering committee has been formed to oversee the merger process and merger would take nine to twelve months to complete, we do not rule out a few large potential deals going to competition till the integration process is completed,” it said.

The brokerage also believes that due to unexpected exit of LTI CEO, it cannot rule out vulnerability at the second layer of management at LTI and possible poaching by competition in this strong demand environment.

“We believe retention of talent is a key for merged entity to start on a positive note,” it said.

“We retain our Neutral rating on both stocks as we see near-term risks offsetting the long-term opportunity accruing from the larger entity. We see the share prices fairly factoring in a supportive demand environment,” Motilal Oswal Financial Services said in a sector update.