Tech Mahindra - Mahindra Satyam merger: marriage made in heaven, honeymoon to start

The announcement of merger between Mahindra Satyam and Tech Mahindra has been made is more or less in  line with our anticipated swap ratio close to 9:1, where we had said that at this ratio, the merger would be "value" decretive for the shareholders of Mahindra Satyam, but value accretive for the shareholders of Tech Mahindra. Here is a 1o-point quick eyeview on the deal.

1. The announcement of merger between Mahindra Satyam and Tech Mahindra is done. The swap ratio is 2 shares of Tech Mahindra for every 17 shares of Mahindra Satyam. More or less, this swap ratio is in line with our previous estimate of 1:9.
   
2. This swap ratio of 8.5:1 will make the merger transaction "market-price" neutral. Meaning thereby, there may not be any arbitrage opportunity left for the shareholders of both the companies.
   
3. With this final swap ratio of 8.5:1, the combined entity will have a market cap of about Rs17,000 crore. The combined entity will become the fifth-largest IT company in terms of market cap.
   
4. With this size, the combined entity stands a good chance of getting bigger business, bigger projects and bigger clients. Further, the combined entity can cater to more project verticals in comparison to the standalone basis by these companies.
   
5. However, it will take considerable effort and time for the combined entity to reach the league of Infosys / TCS.
   
6. As of now, Tech Mahindra's stake in Mahindra Satyam is to the extent of 42.7 per cent. Post this merger, it will be interesting to observe what will be the treatment for this cross-holding. As per regulations, there are two ways of handling this.
   
7. One way is, create a trust to hold this cross-holding shares called "treasury shares".  Through this route, the value of these "treasury shares" comes to about Rs4,132 crore. And, the combined company can issue these shares in the future whenever they need funds. Or theses shares can be extinguished the EPS of the combined entity will go up.
   
8. British Telecom, the other promoter of Tech Mahindra, will be closely watching this space as it holds about 23.20-per cent stake in Tech Mahindra. As the swap ratio is 8.5:1, then British Telecom will hold about 11.11 per cent stake in the combined entity.
   
9. Overall, it is a merger which is proving to be a win-win for all the parties involved and is a logical transaction, as this would enable the Mahindra group to consolidate its IT assets under one roof.
   
10. As said by the management, the Tech Mahindra and Mahindra Satyam merger is appearing to be "marriage made in heaven". And, if the compaqny can execute its future business properly, one can expect that 'honeymoon' period to last longer.

*Theauthor is Strategist & Head of Research, SMC Global Securities Limited