Satyam-TechMa to gain from synergies

The merger of Tech Mahindra and Satyam would give scale and complementary synergies and increase competitiveness of the combined entity, say experts.

Govind Agarwal, Arshad Pervez and Samir Tulshan of JM Financial said in a note on Tuesday, “Merger creates a scale player with wide set of complementary offerings (telecom expertise from Tech Mahindra, enterprise solutions from Satyam). Merger will increase the competitiveness of the merged entity in large deals. We expect gradual expansion of the P/E multiple for the combined entity.”

The Andhra Pradesh High Court gave its nod on Tuesday for the merger to create India’s fifth largest IT firm with combined revenues of $2.5 billion, 80,000 employees and 50+ clients across 54 countries.

The merger can de-leverage Tech Mahindra’s debt of Rs 1,380 crore, as of March 31, 2013, as Mahindra Satyam’s has cash reserves of Rs 2,922 crore.

“With the merger approval coming through, one of our key catalysts has materialised, resulting in removal of a big overhang on the stock. We forecast 12% revenue ($)/ EPS CAGR for the proposed merged entity over FY13-FY15 estimated,” Rishi Jhunjunwala and Girish Ramkumar of Goldman Sachs said in a note on Tuesday.

In fact, ever since both companies have been working as a combined entity after the merger announcement last year, Tech Mahindra has seen some stabilisation in margins – despite continued losses from its telecom vertical – and has even been able to make two acquisitions (Hutchison Global and Comviva), from the replenished cash reserves.

But analysts did not see the new entity, which may be unveiled in two months, a threat to the top four software firms.

“The merger is on expected lines, and hence shares of both companies have moved up barely 1% since the news. Given that Mahindra Satyam already has a very good client portfolio and there is not much overlap with no new offering and mostly repeat business, there will be no risk to incumbent software firms. Scaling up organic business will aid the combined entity in guarding its number 5 status,”said Ankita Somani of Angel Broking.

However, concerns remain as the minority shareholders who are against the merger can appeal to the Supreme Court.

The other concern is around the US Immigration Bill that could worsen things for the new entity.

Surendra Goyal and Rishi V Iyer of Citi Research in a note also advised investor caution based on the loss on the part of business from large telecom clients, further worsening of IT spends in the telecom sector and rupee appreciation.