India's Tech Mahindra, Satyam Agree on Merger Details

Indian software conglomerate Tech Mahindra will purchase the remaining stake in Mahindra Satyam and merge with the company to create one of the nation's largest technology services companies.

Already maintaining a 43 percent stake in Satyam, Tech Mahindra will complete the acquisition through a stock swap where it hands over two of its own shares for every 17 held by Satyam's shareholders. Bloomberg has valued the deal at around $1.8 billion.

The relationship between the two companies began in January of 2009 when Satyam founder Ramalinga Raju acknowledged that the company had been overstating its profits, revenues and operating margins, resulting in a stock freefall, several arrests and a government-initiated purging of Satyam's entire board.

The 100 billion-rupee accounting fraud, known as the largest in the history of India, forced Satyam to reach out to potential partners to stay afloat. Tech Mahindra won a controlling piece of Mahindra Satyam – then known as Satyam Computer Services (News - Alert) – in April of 2009.

Investors and analysts had expected Tech Mahindra to acquire the remaining stake in Satyam for some time, seeing as its shares have tumbled 57 percent since the beginning of 2009.

“It is nearly three years since Indian IT services firm Tech Mahindra secured a majority stake in local rival Satyam, so the only surprise about today’s news that the two companies are to merge is that it has taken so long to happen,” Ed Thomas, senior analyst at Ovum (News - Alert), told TMC in a statement.

“That is not to say that this announcement bring the saga to an end. It will take the rest of the year for the merger process to be concluded and no name for the combined entity has yet been announced,” he added. “On this latter point, it will be interesting to see if the Mahindra Group, which will own over one-quarter of the new operation, decides to finally rid itself of the Satyam brand, which was badly tarnished by the accounting scandal that came to light.”

Ajay Parmar, co-head of investment banking at Emkay Global Financial Services Ltd. in Mumbai, told Bloomberg (News - Alert) that the key motivation behind the deal is to decrease Tech Mahindra's reliance on its largest client, British Telecom, which accounts for 35 percent of Tech Mahindra’s revenue. Chief Financial Officer Sonjoy Anand said that the number will drop to around 19 percent after Tech Mahindra absorbs Satyam's client base. British Telecom also owns a stake in Tech Mahindra.

Following the completion of the merger, the combined company will generate revenues of nearly $3 billion, making it the fifth-largest software company in India.