Analysis: Tech Mahindra-Mahindra Satyam merger

There are no near-term benefits from the merger

After its board meeting on Wednesday, Tech Mahindra approved the merger of Mahindra Satyam with itself at a swap ratio of 17:2. Effectively, for every 17 shares of Mahindra Satyam, investors will get two shares of Tech Mahindra. While close to the market’s expectations of seven to nine shares of Mahindra Satyam for every share in TechM, most analysts believed that Mahindra Satyam should command a premium to TechM’s valuations. With this ratio of 8.5:1, the market believes there is no arbitrage opportunity for investors. Explains SMC’s Jagannadham Thunuguntla, any swap ratio close to 9:1 will make the merger transaction "market-price" neutral.

However, from a business point of view, this development is positive as the market has been awaiting it for a while now. The merger will give TechM a strategic advantage and access to other verticals. This apart, from a cost perspective too, the acquisition gives the company scale and synergy. However, Satyam’s legal issues may continue to be an overhang. According to Citi, there could be some risks with regards to the legal overhang.

Given that there is no near-term upside on arbitrage, what does this merger mean for existing and potential investors of Tech Mahindra? Analysts say that the Tech Mahindra stock could move up in the near-term upside due to the related news flow – it is already up 3 per cent after the announcement on Wednesday. However, the real benefits of the merger are only going to accrue over the long-term. The scale of the company after the merger could bring in a new set of investors. However, given the challenges in TechM’s core business and our concerns on the macro-economic situation, Citi’s rating on the stock continues to be neutral.

This apart, TechM’s core business has been slowing, claim analysts, due to its highly concentrated domain and client strategy. The Satyam acquisition made strategic sense for TechM and gave it access to other verticals besides telecom. But compared to peers, the business will remain concentrated, believe analysts, when compared to its peers.