In the largest acquisition in Indian software services space this year, Tech Mahindra will buy out US-based Lightbridge Communications Corporation (LCC) for US $240 million (over Rs 1,486 crore) in an all-cash deal. The acquisition -- expected to close by March 2015 -- will help the country's fifth-largest software services firm further strengthen its presence in the rapidly growing telecom and enterprises network market.This is Tech Mahindra's largest acquisition so far. In last two financial years, the Mumbai-headquartered firm has acquired seven firms, including Satyam Computer Services, Hutchison Global Services and Comviva Technologies.
Headquartered in Virginia (US), LCC is one of the world's largest independent global providers of network engineering services to the telecommunications industry. It has 5,700 employees in over 50 countries, of which 800 are in the US. With an annual revenue of about US $430 million, LCC has built 350 networks and designed more than 350,000 cell sites for over 400 customers worldwide.
Speaking to reporters in a conference call, Tech Mahindra Executive Vice Chairman Vineet Nayyar said total cash outflow for the deal is expected to be between US $200-220 million as LCC has a shareholder debt of about US $85 million, some part of which Tech Mahindra may pay later. It will be funded through internal accruals, he added.
"We welcome a diverse workforce of 5,700 network professionals across five continents and more than 50 countries. We expect network services to be a major growth engine for our organisation," Nayyar said. Subject to regulatory approvals, the transaction is expected to close by the fourth quarter of 2014-15, he added.
"We have a lot of common clients but the deal will give us access to 20-30 new clients in parts of Asia, Israel and Latin America. The acquisition positions us as a pre-eminent partner for network services globally," Tech Mahindra MD and CEO C P Gurnani said. It will also help further differentiate Tech Mahindra's offerings to both communications and enterprise customers, he added.
Market watchers said the acquisition is the largest so far this year in the Indian IT services space. In July this year, India's third-largest software services firm Wipro had acquired the IT services division of Canadian company Atco for US $195 million. In September this year, NASDAQ-listed Cognizant said it will acquire US-based TriZetto Corporation for US $2.7 billion in an all-cash deal. However, since Cognizant is not listed on Indian bourses, Tech Mahindra's acquisition is the largest so far this year.
"This is the largest acquisition for Tech Mahindra," said Angel Broking VP Research (IT) Sarabjit Kour Nangra, adding that with this acquisition, the firm will also address the rapidly growing market opportunity as telecom companies and enterprises accelerate network upgrade cycle.
Asked if the deal would help the company reach the annual US $5 billion revenue club, Nayyar said he is hopeful. "After the deal closure, I am hoping we will have a run rate of US $1 billion a quarter (including LCC) and may be US $1,250 million. That would put us there," he said.
Kenneth Young, CEO of LCC, will work with Manish Vyas (Business Development -- Communication Solutions at Tech Mahindra) and Ayon Banerjee (Senior VP -- Corporate Business Development) to build the business further. Ernst & Young was Tech Mahindra's diligence partner and Dechert LLP was its legal advisor for the deal. Jefferies LLC acted as sole financial advisor to LCC and Covington & Burling LLP served as its legal advisor.
Greyhound Research CEO Sanchit Vir Gogia said the acquisition makes Tech Mahindra the largest player in the network services space among IT services firms in India. "LCC's subject matter expertise and Tech Mahindra's local advantage makes this deal a formidable entity in the telecom space. LCC not only brings in software defined architecture, but also managed services capabilities," he added.
The buyout will also help Tech Mahindra boost revenues from the North American market. Americas accounted for 49% of the company's revenues in September quarter. During the same quarter, Tech Mahindra's net profit stood at Rs 719.7 crore, while its revenues were at Rs 5,487.9 crore. Post-deal, Tech Mahindra's total headcount will cross 1.10 lakh, including the employees of LCC. Shares of Tech Mahindra rose 3% to close at Rs 2,704.20 apiece on the BSE today.
LCC, which was set up by Rajendra Singh in 1983, also fits in Tech Mahindra's goal of becoming a major player in network services. Previously, Tech Mahindra Chairman Anand Mahindra had said that the company would look at buyouts in India and in overseas markets. "We are open to all. I am open to smaller ones that may take us to newer areas. Sometimes (for) the most innovative cutting edge areas, a small garage start up may have the technology. Some entrepreneurs might want to sell or scale up. We are open to all kinds of acquisitions," he had said.
During its second quarter investor call in October, Tech Mahindra's Global Head (Telecom) Manish Vyas had said: "We clearly are in the lookout for the right set of people and assets to come and complement the capabilities that we have already built over the last few years... But it is not something that we have been suddenly waking up to, it's something that we have been working on for quite a period of time. We have been working on this ever since we decided about 18 months back that we will be going pretty heavy into this area in terms of Network Services and Managed Services space."
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