The merger of Mahindra Satyam (Satyam) into Tech Mahindra has been speculated ever since the latter acquired a controlling stake in the beleaguered software major in mid-2009.
The only surprise element for investors in Satyam therefore, lay in the swap ratio for the deal.
The actual share exchange ratio of 2:17 announced now (8.5 shares of Satyam will fetch 1 share of the parent's) mildly favours Satyam shareholders. Therefore, Tuesday's closing prices of the two shares suggested that the Satyam stock would gain marginally by 3 per cent, to adjust for the swap ratio.
Re-rating possible
But the actual price action on Wednesday proved different. The Tech Mahindra stock, rising by 5.2 per cent, in fact delivered bigger gains than Satyam (up 4.3 per cent). The gains for Tech Mahindra stock are explained by the fact that from a business perspective, the parent company could be a bigger beneficiary of this merger.
To start with, software is one business where size certainly matters. Top-tier IT companies with diversified revenues from across verticals and geographies, have displayed greater resilience to a fluid global scenario in the last four years. In this case, the $2.4 billion in revenues will catapult the combined entity to a place among the top five software companies by market cap.
Higher institutional interest resulting from scale could contribute to the Tech Mahindra enjoying much better PE multiples in the market - post merger. Top-tier software companies currently enjoy PE multiples in the range of 16-18 times. Mid-tier ones barely enjoy double-digit PEs.
Two, Satyam's sizeable exposure to the US and its strengths in verticals such as financial services and manufacturing could provide the much-needed diversification to Tech Mahindra's software operations. Tech Mahindra's focus on the telecom vertical, its reliance on British Telecom as a key client and a chunk of its revenues originating from Europe, have been nagging concerns for investors in the company. Telecom may still bring in over half of the revenues for the combined entity, but the client concentration worries may abate, especially as the new entity may be able to gain traction with larger clients.
Satyam investors gain
Notably, by valuing the Satyam stock at about Rs 76, Tech Mahindra is paying 31 per cent more for the business today, than it did when it bought a controlling stake from the government in April 2009.
Investors in the Satyam stock who did not tender their shares to the open offer made by Tech Mahindra way back in June 2009 today have reason to feel good about their decision.
Though the stock is down from its highs of 2009, the merger price of Rs 76 is a good 31 per cent above the open offer price of Rs 58 that the Mahindra group offered during the initial open offer. Selling the Satyam stock and investing in the Sensex basket instead, would have given investors a gain of only 14 per cent.