Huge synergy and therefore upside potential
The long awaited and logical merger between MahindraSatyam and Tech Mahindra was announced. The swap ratio is 1 share of Tech Mahindra for every 8.5 shares ofMahindra Satyam. The closing prices of the two shares were Rs 648.35 and Rs 74.15 respectively. A straight calculation of the same would result in a small 3% arbitrage opportunity for shareholders buying shares of Mahindra Satyam and waiting for them to be issued shares post-merger of Tech Mahindra.
The merger is not merely two companies becoming one but goes beyond that. The sales for the nine months ended December 2011 would be Rs 4,761.73 crs for MahindraSatyam and Rs 4,002.63 crs for Tech Mahindra. The combined turnover for the two entities would be Rs 8,764.30crs for nine months or Rs 11,685 crs or rounded off to Rs 12,000 crs for the year ending March 2012 on nine months annualised basis.
The net profit similarly for the two entities combined would be Rs 1137crs for the nine months and Rs 1516crs on nine months annualised basis. There were three major concerns about this group of which one was prior to acquiring Satyam and two issues were post acquiring Satyam. The first was the large shareholding of British Telecom in Tech Mahindra. The other two issues were about the turnaround of Satyam by Tech Mahindra and the inevitable merger. With this merger all three issues have been resolved at one go. The holding of British Telecom post-merger would be 12.8% while the Mahindra group will own 26.3%. There will treasury stock of 10.4% which would translate into a stock of 2.4 cr shares which at today’s current market price of Rs 690 would be valued at Rs 1,656 crs. The other two issues are automatically resolved as the merger is being done and the turnaround has happened.
The value of the treasury stock at R 1,656 crs is more than the net profit for the combined entity giving it considerable leverage going forward. This could be used for capital or for getting a strategic investor on board as required.
This merged entity would have size and would be the 4th/5th biggest Indian IT company after the Trio of Infosys, TCS and Wipro and neck to neck with HCL. The combined entity needs to leverage the advantages it would have in terms of size and reach of the combined entity. Secondly the domain knowledge and size would enable it to bid for bigger size tickets as well. All in all it’s a win-win situation and profitable for investors of the merged entity. It makes little or no difference in which company you are invested as there is not much of an arbitrage opportunity available.
