Three years after acquiring a strategic stake in Satyam Computers (now Mahindra Satyam), IT services firm Tech Mahindra is merging what was once the country’s fourth largest IT company, with itself in a deal valued at $1.4 billion, as per VCCircle estimates.

As per the swap ratio, a shareholder of Mahindra Satyam will get 2 shares of Tech Mahindra for every 17 shares held by him/her. This ratio values Mahindra Satyam at around $1.9 billion. If all the shares of Mahindra Satyam were taken into account, it would have created 138.4 million new shares of Tech Mahindra(based on total outstanding shares of Mahindra Satyam as of December 31, 2011). 

Given that some of the shares will be extinguished, resulting into a total issue of 103.4 million shares of Tech Mahindra, the transaction translates into total issue of shares worth Rs 7,071 crore ($1.4 billion), as per the last traded price of shares.

The difference of around $500 million could be explained by provision for liabilities.

Tech Mahindra scrip rose 5.48 per cent to close at Rs 683.9 a share on the BSE on Wednesday while Mahindra Satyam shares last traded at Rs 77.55 a unit, up 4.59 per cent, in a strong Mumbai market.

Mahindra & Mahindra Ltd will own 26.3 per cent, British Telecommunications Plc will own 12.8 per cent and TML Benefit Trust will hold 10.4 stake (as treasury stock) of the combined entity. Public shareholders of Tech Mahindra will own 16.1 per cent of the merged company while Mahindra Satyam shareholders will own 34.4 per cent of the combined firm.

Ernst & Young and KPMG were the joint valuation advisors; Morgan Stanley (for Tech Mahindra) and JP Morgan (for Mahindra Satyam) were the independent fairness opinion bankers; Enam and Barclays were the advisors in the deal and AZB & Partners was the legal advisor.

The merger will create the fifth largest software services exporter by market cap and revenues, as well as headcount, behind TCS, Infosys, Wipro and HCL Technologies.

The combined entity will have revenue of about $2.4 billion, EBITDA of $392 million and will be employing over 75,000 people across geographies. The merged entity will have a total of 347 active clients, with a particularly strong presence in digital convergence and enterprise solutions.

One big change for Tech Mahindra will be derisking of business, which is heavily tilted towards telecom vertical as of now (96 per cent of business, which will come down to a little less than half of the merged entity).

The deal would also complete a long-drawn saga of Satyam which went down from being one of the top IT firms to an auditing-scandal-tainted company. The scandal was orchestrated by its own promoters, led by Ramalinga Raju (See the timeline here).

Tech Mahindra became the highest bidder to acquire a strategic stake in the company, which also catapulted Tech Mahindra to the big league. Initially, it had acquired 31 per cent stake through a preferential allotment for around $350 million and later raised its holding. As of December 31, 2011, it held 45 per cent stake.

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