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Submitted by: Abhishek singh (G11002) Neeraj mohan (G11027) Sumit Mittal (G11050) Vishal sinha (G11059)
Tech Mahindra has a global footprint through operations in more than 31 countries with 17 sales offices and 15 delivery centers. Assessed at SEI CMMi Level 5, Tech Mahindra's track record for value delivery is supported by over 42,500 professionals who provide a unique blend of culture, domain expertise and in depth technology skill sets. Its development centers are ISO 9001:2008 & BS7799 certified.
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1.2 History
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1.4 Financials
Source : Myiris.com 1.5 Financial Highlights Combined Revenue CAGR growth at 32.1% from 2006 to 2011 4 times increase in Revenue from 2006 to 2011 Operational Profitability increased 3 fold between 2006 and 2011 Only niche/ single vertical company to reach a billion dollar in revenue
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2.4 Highlights Revenue grew 8 times from $ 280 Mn in 2006 to $ 2255 in 2011 EBIDTA grew 5.3 times from $60 Mn in 2006 to $ 319 in 2011
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2.6 Synergy$2bn+ global business & IT services provider focused on leveraging 1. Marquee clients across verticals 2. Leadership in digital convergence; well positioned in Manufacturing, BFSI, Retail & Healthcare 3. Strong positioning in Enterprise services 4. Synergies across customer base
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rebranded its services under the new Mahindra management as "Mahindra Satyam" with a new corporate website www.MahindraSatyam.com. Before current merger tech Mahindra is already having a 43% stake. Tech Mahindra pursue this deal through a swap ratio of two shares of its own to every 17 share held by Satyam shareholders. Various analyst and investment companies like Bloomberg has valued this deal of approx. 1.8 billion.
5.0 Motivation behind the deal of Tech Mahindra and Mahindra Satyam
Tech Mahindra is a pioneer company in high end systems and business transformation consulting organization has clear focus on telecommunications industry. Its counterpart Mahindra Satyam is a pioneer in international business and information technology consulting and Services Company. The combined entity will have more than 75000 human capital , over 350 clients and a revenue of approx. $2.4 billion through new offshore services. It will also lead to diversified global footprint and global share which is expected as Americas: 42% Europe: 35% Emerging markets: 23% This merger will help to upgrade their process and performance of business. This merger will open up new horizon for opportunities. Following are the major reason for the merger.
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The key motivation behind the deal is to decrease Tech Mahindra's reliance on its largest client, British Telecom
British Telecom accounts 35 % of the Tech Mahindra revenue. It will drop to around 19 % after Tech Mahindra absorbs Satyams client base
The joint entity will have a unified go to-market strategy with revenues spread across telecom, manufacturing, media & entertainment, banking and insurance, along with retail and healthcare
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.
Source: TechMahindra_SPA_220312.pdf
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http://www.rbi.org.in/home.aspx) 3. Risk premium taken as 10.76% (source: Prof. P. Mohantys Website) 4. Terminal Growth rate is taken as 6%. 5. Reduction in operating cost due to synergy is taken as 5%. 6.1 Tech Mahindra valuation: We have used Discounted cash flow of valuation approach in valuing Tech mahindra. The CAGR from 2008-11 in sales is 11%. We have taken 8% growth rate in 2012 and 2013 and 9% in 2014-16. This was due to bad macro scenario, TechMs over-exposer to telecom and overreliance to British telecom, which is retendering projects. The operating margins are taken as 20% of sales throughout the forecast period. CAPEX is taken as 1% of sales. TechM Debt/ equity ratio is 53.88 % making it high debt company.
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6.2 Mahindra Satyam Valuation: the Enterprise value of Mahindra Satyam comes out to be Rs 8478 Cr
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Swap Ratio :
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Seamless integration of the entities: The biggest challenge for the merged entity would be the seamless integration of both the entities avoiding any major conflict and chaos and achieving the potential synergies. As per our groups estimation, a significant source of synergy would be the reduction in cost (around 5%). The merger will add some economic value only if co-ordination and synchronization is there to achieve the benefits of synergies and potential opportunities.
Management challenges Though both the entities before merger have similar culture still there are many other challenges that management has to overcome. One such challenge is regarding collection days, while the Mahindra Satyam took 87 days to collect outstanding sales, Tech Mahindra required 111 days (based on data as on September 30, 2011). This is on the higher side compared with the DSO of 60-80 for top IT players. After the merger, the company will have an exposure to diverse verticals and solution platforms. Management has to make sure that the company can overcome this challenge and convert it into an opportunity and a competitive advantage. Pending legal cases There are several pending legal cases related to the fraud at Satyam which can become a major challenge for the merged entity. The estimated cost of these litigations can be more than Rs 3,000 Crores, which can severely impact the cash flows of the company.
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There has been a run-up in the stock price after the announcement of merger which indicates positive market sentiments/expectations. This is likely to offer more stability to Tech Mahindra, which traditionally has been a single vertical player catering to telecom operators across the globe. Also, it will gain from benefits of scale. The combined entity will figure among the country's top IT exporters, which will improve overall visibility of its offerings and may impart a positive bias to its valuations in future. The merger will also increase the number of shares available (free float) for trade in public shareholders of the merged entity compared to the current free float of Tech Mahindra, thereby adding to the scrip's liquidity. We believe that focus would now shift to the execution and realization of synergy. Thus, our analysis clearly appreciates the decision of many shareholders to buy the shares of the company on the announcement of the deal. Few days after the announcement, market has digested the news which is clearly visible in the significant increase in the share prices of the company (up from 683.9 on 20 Feb to 724.8 on 22 Mar). Based on our recommendation, the company is poised for long term growth and holds promises for its shareholders in future.
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