As Mahindra Satyam and Tech Mahindra set about selecting merchant bankers and advisors to facilitate their merger, which of the two companies is likely to benefit more from the deal?
As Mahindra Satyam and Tech Mahindra set about selecting merchant bankers and advisors to facilitate their merger, which of the two companies is likely to benefit more from the deal? The question appears to have the Street curious, if not intrigued.
Experts believe that while the valuations are attractive for both, it is Mahindra Satyam that has a slight edge in terms of operational momentum.
“While Tech Mahindra’s valuation is also attractive, its nearly 100% exposure to the telecom vertical, especially 37% exposure to British Telecom, is a source of concern. Growth in the telecom vertical has been one of the weakest for Indian IT services companies in recent past,” Sagar Rastogi and Anantha Narayan, analysts at Credit Suisse, wrote in a recent note to clients.
For Mahindra Satyam, as of September, the enterprise solutions segment formed about 40% of the total revenues.
While it can be argued that given the current macroeconomic condition, spending on enterprise solutions can be discretionary, the segment, however, has continued to register fast growth, as evident in the results of SAP and Oracle.
Experts expect Mahindra Satyam’s margins to expand and estimate it to record a compounded annual growth rate of 20% in earnings before interest and tax over the FY 12-14 period.
Satyam also has a number of other factors working for it.
“We believe Mahindra Satyam’s operations have now settled down, both in terms of customer acceptability and employee morale. It continues to have a strong positioning in the enterprise solutions segment relative to peers. A flatter employee pyramid — it recently went for campus recruitment, for the first time since 2007 — and reduced general and administrative costs and possible improvement in pricing are potential margin drivers,” said Rastogi.
Also, Satyam further improved its performance in the quarter ended September, with profit rising nearly 6% to Rs238.24 crore and revenues growing 10% to Rs1,577.71 crore compared with the June quarter.
As such, Satyam has a strong presence in the manufacturing and banking, financial services and insurance segments, and hence a more diversified portfolio.
A top Satyam official had earlier told DNA that Tech Mahindra is consciously driving Satyam towards the enterprise mobility segment. “It is not that Satyam will not take other projects. But, the focus would be on enterprise mobility since Satyam is traditionally known for its enterprise solutions and Tech Mahindra is a leader in mobility. So, the focus would combine both the strengths going forward.”
At the same time, Tech Mahindra’s revenue growth from British Telecom is expected to fall by 9% over FY12.
“Initially, we all thought that Tech Mahindra has bailed out Satyam. But going by the current scenario, it seems the other way round,” said an expert, requesting anonymity.
Others, however, see Tech Mahindra bringing its own advantages to the table.
“The top management team of Tech Mahindra is extremely strong and dynamic. This will definitely add a lot of value to the merger as and when it happens. After all, it is the same management team which bailed out Satyam. Also, one can’t ignore the list of clients the company has,” said Ankita Somani, analyst at Angel Broking, a brokerage firm.
The company is also seeing good traction in the non-BT part of its business. In fact, over the past three years, the segment has grown at 25% CAGR. “Tech Mahindra appears to be seeing robust demand for managed services, especially in Europe. We estimate 13% revenue CAGR from this segment of the company’s clients between FY11 and FY14,” said the Credit Suisse report.
Overall, the merger will be positive as there is little overlap in term of their strengths, said an expert. “The two companies have been working as a single entity for some time now. So, the problem of cultural integration between the two companies should be far behind.”
The merger, when it eventually happens, will make the company the fifth-largest Indian IT firm. The combined entity would have a slightly higher proportion of revenues from application development and maintenance compared with larger peers. It will also have a fairly well-balanced split of revenues by geography.
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=tracking}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
)
)
)
)
)
)
)
)
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}