Mahindra Satyam finally merges with Tech Mahindra

Almost three years after acquiring beleaguered full service IT firm Satyam Computers, Tech Mahindra, the IT firm of auto major Mahindra & Mahindra, on March 21 announced the merger of both the legal entities. On April 13, 2009, when telecom specialist IT firm Tech Mahindra (Tech M) bought Satyam Computers the intent was very clear: to integrate operations of both and have a united client-facing company.

Talking about the merger, Vineet Nayar, Vice Chairman, Managing Director and CEO of Tech M said, "We are doing the merger now because we were waiting till Satyam reached a steady state. Last quarter, it had EBITDA of nearly 16 per cent. It's a merger of equals."

Why should Tech M and Mahindra Satyam be merged?
Tech M's 95 per cent revenue comes from providing software services to telecom companies, of which British Telecom (BT) is the largest and contributes about 35 per cent to Tech M's revenue.

It could never transition itself into becoming a full service IT firm like Infosys or Wipro. Satyam could change the game for Tech M. In the past three years, however, the company has been unable to bring about that change internally. The sales and marketing teams are separate and so are the management and the client delivery engines.

The merger would be of little relevance if the functions are not aligned. CP Gurnani, CEO of Mahindra Satyam, said that in those areas where there is zero overlap, like sales and delivery, there will be no changes.

But HR, legal, finance and resource management will be integrated. But this would hardly help in client cross-selling and mining, which accounts for more than 95 per cent of IT firms' revenues. Together both the firms have more than 350 clients, and there are a lot of expansion opportunities especially when IT deals worth *$47 billion are up for renewals in 2012/13.

However, the good news is that the merged entity, whose name isn't yet decided, will be the fifth largest Indian IT firm, making revenues north of $2.4 billion. The joint entity will have a market capitalisation of close to $3.5 billion.

Gurnani also mentioned that the combined entity will have zero employee redundancy and that there will in fact be a net addition of employees, over and on top of the current employee base of 75,000.

By the end of the day the street also rewarded Tech Mahindra, which closed at Rs 683.90, up by 5.5 per cent and Mahindra Satyam shares closed at Rs 77.55 up by 4.6 per cent. The first day after the announcement was good, but the marriage is yet to be consumed. The honeymoon period has just begun.

*(An earlier version of this story erroneously mentioned $13 trillion instead of $47 billion.)