Tech Mahindra - Satyam Merger: Is It A Good Time To Buy?

The much awaited merger of Tech Mahindra and Mahindra Satyam came into being on March 21, 2012. The exchange ratio recommended is two shares of Tech Mahindra (face value of Rs 10) against 17 shares of Mahindra Satyam (face value of Rs 2).  In simple words, those investors holding 17 Satyam shares would be allotted two shares of Tech Mahindra. With this Tech Mahindra will issue 10.34 crore new shares, further increasing its outstanding shares to 23.08 crore. The merger will be effective from April 1, 2012. 

According to Vineet Nayyar, Vice Chairman and MD, Tech Mahindra and Chairman, Mahindra Satyam, “The merger is a key part of our strategy to deliver industry-leading performance.” The combined entity would be having a market cap of around Rs 17,000 crore and would be India’s fifth-largest software firm.
  
The competencies of both the companies would be used interchangeably, benefitting from the merger. Tech Mahindra’s expertise in system integration and Satyam’s expertise in enterprise solutions will create synergy in the merged entity. The merger of the companies will have revenues of approximately USD 2.4 billion, employee strength of 75,000 and more than 350 active clients across 54 countries. 

At present around 80 per cent of the revenue for Tech Mahindra comes from the service provided for the telecom industry while for Satyam a majority of the revenue comes from the BFSI sector. The merged entity will have more balanced revenue across the segment. Further revenue will be balanced across the global footprint as the US will contribute around 42 per cent, Europe 35 per cent and the emerging markets will contribute the balance 23 per cent. On the shareholding pattern of the merged entity, 26.3 per cent would be held by the Mahindra Group, 12.8 per cent by British Telecom, 10.4 per cent held by the treasury stock and of the balance 50.5 per cent would be held by the public (34.4 per cent and 16.1 per cent by the shareholders of Mahindra Satyam and Tech Mahindra respectively).
 
The markets have given a ‘thumbs up’ sign for the deal and thinks there is a win-win situation for both. From the announcement till date Satyam’s shares are up by 8 per cent while Tech Mahindra is up by 11 per cent. There may be arbitrage opportunity if the share price don’t move in tandem with the swap ratio but we would advise investors to stay away as one may see Tech Mahindra’s share price falling post the merger. Buying Satyam’s stocks would not be advisable as it is soon going to merge. We believe one would have to adopt a wait and watch approach before investing in Tech Mahindra as there are a couple of issues which are still clouded. 

The first of such issues is that a decision from the IT Department is still pending as regards the tax recoveries to be made from Satyam. The management, during an analyst meet, said that the revenues were fictitious and so there are very less chances of paying tax on them so that the decision most probably would be in favour of the company. Further, the management did not comment about the listing of Satyam on the NYSE (which was earlier delisted). Satyam had earlier posted losses in its books and still there is no clarity whether Tech Mahindra will carry forward such losses, which might save some tax going ahead. The management also did not say anything about the future plans of the merged entity. 

The price to earnings multiple of the merged entity would approximately come around 12.50 times. It is commanding a lower P/E multiple than its peers like Infosys and Wipro which have a P/E of 19x. This is due to the uncertainty about the growth of the company. We would advise our readers to first see how the wind blows before taking buying Tech Mahindra’s shares.