Tech Mahindra-Mahindra Satyam merger is market neutral

Focus now shifts to fundamentals, as winning big new deals would determine further upside

The swap ratio of the Mahindra Satyam and Tech Mahindra merger, at 8.5:1, is quite close to market expectations of 7:1 to 9:1. Analysts are terming this fair, as it’s not detrimental to shareholders of either company. However, the ratio leaves no arbitrage opportunity for investors. According to SMC’s Jagannadham Thunuguntla, anything close to 9:1 would make the merger “market-price” neutral.

Given that there is no near-term upside from arbitrage, what does the merger mean for existing and potential Tech Mahindra investors? Analysts say the stock could rise in the near term on merger-related news flow. However, the real benefits are only going to accrue over the long term. The company’s scale after the merger could bring in a new set of investors.

With the merger out of the way, analysts say, the real challenge for the company would come from the marketplace, as it will now have to prove its mettle in winning big deals. Given the challenges in Tech Mahindra’s core business and the uncertain macroeconomic scenario, Citi Investment Research and Analysis has rated the stock ‘neutral’.

However, from a business point of view, the development is positive. For starters, the merger would result in the company becoming a $2.4-billion software services entity. Also, Tech Mahindra will now have a broader service offering. As of now, its entire revenue comes from the telecom vertical, which has been shrinking over the last couple of years. After the merger, contribution from telecom would decline to under 50 per cent. Operational costs, too, will come down on merger synergies. However, Satyam’s legal issues may continue to be an overhang.

This apart, Tech Mahindra’s core business has been slowing, claim analysts, as the telecom vertical is still seeing pain. The Satyam acquisition made strategic sense for Tech Mahindra and gave it access to verticals other than telecom.

As the merged entity’s business mix would remain skewed towards telecom, growth would be sluggish, analysts say.