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MERGERS AND ACQUISITIONSMERGERS AND ACQUISITIONSMERGERS AND ACQUISITIONSMERGERS AND ACQUISITIONS
Merger of Tech Mahindra and Mahindra SatyamMerger of Tech Mahindra and Mahindra SatyamMerger of Tech Mahindra and Mahindra SatyamMerger of Tech Mahindra and Mahindra Satyam
PROJECT REPORT: group 2
Faculty: Submitted by:
Prof. Prantik ray
Abhishek singh (G11002)
Neeraj mohan (G11027)
Sumit Mittal (G11050)
Vishal sinha (G11059)
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1.0 Tech Mahindra
1.1 About the Company
Tech Mahindra is part of the US $14.4 billion Mahindra Group and is a leading global systems
integrator and business transformation consulting organization, focused primarily on the
telecommunications industry. Tech Mahindra expanded its IT portfolio in 2009 by acquiring the
leading global business and information technology services company, Mahindra Satyam (earlier
known as Satyam Computer Services).
Tech Mahindra’s capabilities spread across a broad spectrum, including Business Support Systems
(BSS), Operations Support Systems (OSS), Network Design & Engineering, Next Generation Networks,
Mobility Solutions, Security consulting and Testing. The solutions portfolio includes Consulting,
Application Development & Management, Network Services, Solution Integration, Product
Engineering, Infrastructure Managed Services, Remote Infrastructure Management and BSG
(comprises BPO, Services and Consulting). With an array of service offerings for TSPs, TEMs and ISVs,
Tech Mahindra is a chosen transformation partner for several leading wireline, wireless and
broadband operators in Europe, Asia-Pacific and North America.
In the Telecom sector, Tech Mahindra has niche and proven domain expertise, distinctive IT skills,
research and development, innovative delivery models and approach to off-shoring. Company’s
solutions enable clients to maximize returns on IT investment by achieving faster time to market,
reduced total cost of ownership resulting into high levels of customer satisfaction. Tech Mahindra’s
achievements have been recognized by various industry analysts, forums and clients – winning
several prestigious awards and accolades.
Tech Mahindra has a global footprint through operations in more than 31 countries with 17 sales
offices and 15 delivery centers. Assessed at SEI CMMi Level 5, Tech Mahindra's track record for value
delivery is supported by over 42,500 professionals who provide a unique blend of culture, domain
expertise and in depth technology skill sets. Its development centers are ISO 9001:2008 & BS7799
certified.
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1.2 History
1.3 Board of Directors
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1.4 Financials
Source : Myiris.com
1.5 Financial Highlights
• Combined Revenue CAGR growth at 32.1% from 2006 to 2011
• 4 times increase in Revenue from 2006 to 2011
• Operational Profitability increased 3 fold between 2006 and 2011
• Only niche/ single vertical company to reach a billion dollar in revenue
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2.0 Mahindra Satyam
2.1 About the Company
Mahindra Satyam formerly Satyam Computer Services, was founded in 1987 by B Ramalinga Raju.
The company offers consulting and information technology (IT) services spanning various sectors, In
June 2009, the company unveiled its new brand identity “Mahindra Satyam” subsequent to its
takeover by the Mahindra Group’s IT arm, Tech Mahindra on April 13,2009. It is ranked #5 in Indian
IT companies and overall ranked #153 by Fortune India 500 in 2011.
2.2 Financials
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2.3 Financials Combined Entity
2.4 Highlights
• Revenue grew 8 times from $ 280 Mn in 2006 to $ 2255 in 2011
• EBIDTA grew 5.3 times from $60 Mn in 2006 to $ 319 in 2011
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2.5 Snapshot of the Key Elements of the Combined Entity
2.6 Synergy$2bn+ global business & IT services provider focused on leveraging
1. Marquee clients across verticals
2. Leadership in digital convergence; well positioned in Manufacturing, BFSI, Retail & Healthcare
3. Strong positioning in Enterprise services
4. Synergies across customer base
3.0 Deal Background
History: The Satyam Computer Services scandal was a corporate scandal that occurred in India in
2009 where Chairman Ramalinga Raju confessed that the company's accounts had been doctored.
He acknowledged that company overstated its profits and revenues and operating margin. This
causes the free fall of stock to 11.50 rupees on 10 January 2009, their lowest level since March 1998,
compared to a high of 544 rupees in 2008. Fraud leads to several arrests. The Indian Government
has stated that it may provide temporary direct or indirect liquidity support to the company. On 11
January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief
Kiran Karnik and former SEBI member C Achuthan to Satyam's board. On 13 April 2009, via a formal
public auction process, a 46% stake in Satyam was purchased by Mahindra & Mahindra owned
company Tech Mahindra, as part of its diversification strategy. Effective July 2009, Satyam
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rebranded its services under the new Mahindra management as "Mahindra Satyam" with a new
corporate website www.MahindraSatyam.com.
Before current merger tech Mahindra is already having a 43% stake. Tech Mahindra pursue this deal
through a swap ratio of two shares of its own to every 17 share held by Satyam shareholders.
Various analyst and investment companies like Bloomberg has valued this deal of approx. 1.8 billion.
4.0 The Deal
2:17 Swap Ratio
• The Board of Directors at Tech Mahindra and Mahindra Satyam approved the merger ratio
of 2 Tech Mahindra shares for every 17 shares of Mahindra Satyam.
• The Mahindra Group will own 26.3% in the combined entity, British Telecom will own 12.8%,
10.4% will be held as treasury stock, 34.4% to be held by the public shareholders of
Mahindra Satyam and the balance 16.1% will be held by the public shareholders of Tech
Mahindra.
• Tech Mahindra will issue 103.4m new shares, thereby increasing its outstanding shares to
230.8m and its equity capital to INR2,308m.
5.0 Motivation behind the deal of Tech Mahindra and Mahindra Satyam
Tech Mahindra is a pioneer company in high end systems and business transformation consulting
organization has clear focus on telecommunications industry. Its counterpart Mahindra Satyam is a
pioneer in international business and information technology consulting and Services Company.
The combined entity will have more than 75000 human capital , over 350 clients and a revenue of
approx. $2.4 billion through new offshore services. It will also lead to diversified global footprint and
global share which is expected as
Americas: 42%
Europe: 35%
Emerging markets: 23%
This merger will help to upgrade their process and performance of business. This merger will open
up new horizon for opportunities. Following are the major reason for the merger.
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• The key motivation behind the deal is to decrease Tech Mahindra's reliance on its largest
client, British Telecom
• British Telecom accounts 35 % of the Tech Mahindra revenue. It will drop to around 19 %
after Tech Mahindra absorbs Satyam’s client base
• The joint entity will have a unified go to-market strategy with revenues spread across
telecom, manufacturing, media & entertainment, banking and insurance, along with retail
and healthcare
• The merger will create the fifth largest software services exporter by market cap and
revenues, as well as headcount, behind TCS, Infosys, Wipro and HCL Technologies.
We can compare the combined entity with peer companies.
Source: TechMahindra_SPA_220312.pdf
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6.0 Valuation of the deal
Following Assumptions are taken while doing the valuation:
1. Revenue growth is taken in line with NASSCOM’s predict of 11-14% (SPA-The Financial
Advisors’ Report)
2. Risk free rate is taken as 8.81% 91 day T- bill rate (source:
http://www.rbi.org.in/home.aspx)
3. Risk premium taken as 10.76% (source: Prof. P. Mohanty’s Website)
4. Terminal Growth rate is taken as 6%.
5. Reduction in operating cost due to synergy is taken as 5%.
6.1 Tech Mahindra valuation:
We have used Discounted cash flow of valuation approach in valuing Tech mahindra. The CAGR from
2008-11 in sales is 11%. We have taken 8% growth rate in 2012 and 2013 and 9% in 2014-16. This
was due to bad macro scenario, TechM’s over-exposer to telecom and overreliance to British
telecom, which is retendering projects. The operating margin’s are taken as 20% of sales throughout
the forecast period. CAPEX is taken as 1% of sales. TechM Debt/ equity ratio is 53.88 % making it
high debt company.
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The enterprise value of TechM comes out to be Rs 9,238 Cr.
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6.2 Mahindra Satyam Valuation: the Enterprise value of Mahindra Satyam comes out to be Rs 8478
Cr
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6.3 TechMSatyam Valuation:
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The Enterprise value of combines entity comes out to be Rs 18,204 Cr.
Swap Ratio :
Comparative Ratios Pre and Post Merger:
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7.0 Post-Merger Challenges
The merged entity has become the fifth largest Indian IT Services Company. And thus the strength of
a bigger balance sheet, increased level of expertise and knowledge base and enlarged client base will
enhance its ability to bid for the larger projects but it would be possible only after it can overcome
the following challenges.
Seamless integration of the entities: The biggest challenge for the merged entity would be the
seamless integration of both the entities avoiding any major conflict and chaos and achieving the
potential synergies. As per our group’s estimation, a significant source of synergy would be the
reduction in cost (around 5%). The merger will add some economic value only if co-ordination and
synchronization is there to achieve the benefits of synergies and potential opportunities.
Management challenges
Though both the entities before merger have similar culture still there are many other challenges
that management has to overcome. One such challenge is regarding collection days, while the
Mahindra Satyam took 87 days to collect outstanding sales, Tech Mahindra required 111 days (based
on data as on September 30, 2011). This is on the higher side compared with the DSO of 60-80 for
top IT players. After the merger, the company will have an exposure to diverse verticals and solution
platforms. Management has to make sure that the company can overcome this challenge and
convert it into an opportunity and a competitive advantage.
Pending legal cases
There are several pending legal cases related to the fraud at Satyam which can become a major
challenge for the merged entity. The estimated cost of these litigations can be more than Rs 3,000
Crores, which can severely impact the cash flows of the company.
8.0 Final comments & Recommendation
The ‘valuation’ done by our group shows that both the entities will benefit from the merger. All the
stakeholders (except few higher level managers who might risk their position in the restructuring
process) shall benefit from the merger (provided the implementation is successful as per the plans).
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There has been a run-up in the stock price after the announcement of merger which indicates
positive market sentiments/expectations. This is likely to offer more stability to Tech Mahindra,
which traditionally has been a single vertical player catering to telecom operators across the globe.
Also, it will gain from benefits of scale. The combined entity will figure among the country's top IT
exporters, which will improve overall visibility of its offerings and may impart a positive bias to its
valuations in future.
The merger will also increase the number of shares available (free float) for trade in public
shareholders of the merged entity compared to the current free float of Tech Mahindra, thereby
adding to the scrip's liquidity. We believe that focus would now shift to the execution and realization
of synergy.
Thus, our analysis clearly appreciates the decision of many shareholders to buy the shares of the
company on the announcement of the deal. Few days after the announcement, market has digested
the news which is clearly visible in the significant increase in the share prices of the company (up
from 683.9 on 20 Feb to 724.8 on 22 Mar). Based on our recommendation, the company is poised
for long term growth and holds promises for its shareholders in future.