Tech Mahindra snaps up the rest of Mahindra Satyam

Tech Mahindra, which already owns 43% of Mahindra Satyam (formerly Satyam Computer Services), said this week that it will buy the remainder of the company to form India’s fifth-biggest software services company. The stock deal is valued at about $1.2 billion.

The combined entity will have a market cap of about $3.4 billion, revenues of about $2.4 billion, employ more than 75,000 people and do business with about 350 clients across 54 countries.

Based on the agreed swap ratio of two Tech Mahindra shares for every 17 shares of Mahindra Satyam, on a pro-forma basis, the Mahindra group will own 26.3% in the combined entity, BT will own 12.8%, 10.4% will be held as treasury stock and the rest will be held by the public shareholders of both companies.

This is the biggest M&A transaction to-date in India’s IT industry. Indeed, the combined entity will be well positioned alongside the top Indian IT companies — from TCS to Infosys, Wipro and HCL — with a leadership position across a number of verticals and service offerings, said a person close to the transaction.

Given the potential for a prolonged downturn in Europe, it’s important to look at where revenues are expected to be generated from — but it’s balanced, with 42% expected to come from the Americas, 35% from Europe and 23% from emerging markets. The combined entity will benefit from operational synergies, economies of scale, sourcing benefits and standardisation of business processes.

The merger is the culmination of one of the most high-profile corporate turnaround stories in India. Satyam nearly folded after its founder Ramalinga Raju admitted in January 2009 that the books were cooked — the fraud pertained to both balance sheet entries and profit-and-loss items.

Satyam was sold in April 2009 to Tech Mahindra, a unit of Mahindra & Mahindra, and was later renamed Mahindra Satyam. Tech Mahindra was already a big player — servicing clients ranging from BT and Vodafone to AT&T and Motorola, and France’s Alcatel-Lucent.

This deal fully integrates the companies.

“The Mahindra Satyam turnaround is a shining story of determination and grit, and now comes to its most important chapter, with this merger,” said CP Gurnani, director and CEO of Mahindra Satyam. “As enterprises the world over look to bolster their IT strategies to keep pace in the connected world, this merged entity will provide the perfect blend of capability to address this evolving market” he added.

Ernst & Young acted as merger advisers and, along with KPMG, submitted a report on the share exchange ratio. Morgan Stanley provided a fairness opinion to Tech Mahindra. J.P. Morgan provided a fairness opinion to Mahindra Satyam. Enam Securities and Barclays acted as advisers to Tech Mahindra. AZB Partners acted as legal advisers.