This article has been written by Syed Muheeb and Aditi Aagya pursuing Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Introduction

Laursen & Turbo’s (“L&T”) subsidiary – Laursen & Toubro Infotech (“LTI”), has merged with MindTree, which are two independently listed companies, in one of the biggest deals in India. The merged entity will be called as LTI-MindTree (“LTI-MT”) becoming the 5th largest IT service company in terms of market capitalization. The scheme of amalgamation is approved by both benches of the Mumbai and Bengaluru National Company Law Tribunal (“NCLT”) between the creditors and shareholders of both entities under Sections 230–232 of the Companies Act of 2013. The reasoning behind this move is to consolidate their position in banking, financial services and insurance (“BFSI”) while also entering other new verticals. The merged entity will be led by MindTree’s Debashis Chatterjee, who will be the CEO and MD. This article analyses key aspects involving and affecting  the merger and internal conditions which prompted 

About L&T Infotech

LTI was incorporated in 1997 as a subsidiary of L&T. It provides an edge to its clients by leveraging business-to-IT solutions. It has a global presence with operations in 50 countries and a manufacturing footprint extending up to 8 countries apart from India; they have over 485 clients around the world, including 23 software development centres and 44 sales offices. LTI has also acquired eight key competitors since its inception, including GDA Technologies Inc. in 2006 for USD 27 million. They have also acquired AugmentIQ Data Sciences, a Pune based company. Because of this acquisition, they will service one of the world’s largest credit bureaus. Leading up to the merger, LTI became an Elite Services Partner of Snowflake, the data cloud company.

About Mindtree

MindTree  (“MT”) is an Indian company incorporated in 1999 as MindTree Consulting Private Limited, with its registered office address in Bangalore and its structure in four industry verticals. BFSI, RCM, TMS and TH. It currently has a global presence in over 20 countries, including India. It has acquired over seven key competitors, such as Aztecsoft for 467 million dollars and Magnet 360 for 50 million dollars, which was also their last acquisition before being merged with LTI. In June 2019, L&T became the majority stakeholder in Mindtree by acquiring a 60% stake. L&T executed a Share Purchase Agreement (“SPA”) to the tune of Rs. 32,690 million at a price of Rs. 980 per share, after which, in 2021, MT acquired the NxT business of L&T. 

Swap ratio and deal consideration

As part of the consideration, 73 full paid up equity shares of Rs. 1/- each of the new entity LTI MindTree will be issued and allotted for every 100 fully paid equity shares of Rs. 10/- shares held in MT. After the LTI – MindTree merger, the parent company, L&T, which is the promoter of both independent entities, will have a combined stake of 68.73%. In total, the multinational conglomerate L&T has paid close to Rs. 11,000 crore for the takeover, which includes a Rs. 4,988.82 crore payout for buying a 31% stake at a leveraged share price of Rs. 980 a share. Combined entity pro-forma revenue is also expected to remain at $3,513 million, enabling tier status upgrades and bids on large deals. Besides, the EBIT margins of both entities combined stand at 17.8%, which is lower compared to the competitor’s rate of 20%. 

Furthermore, the merged entity will have a combined client base of over 700 and a headcount of 90,000 employees, taking its overall employee base of software businesses, which includes L&T Technology Services (“LTTS”), to a sprawling 1.2 lakh employees spread across 30 countries and 5 continents. The cash and investments of both Mindtree and LTI stand at an amazing $991 million.

SWOT analysis

The SWOT analysis, which is the aspects such as strengths, weaknesses, opportunities and threats of the merged entity LTI MindTree Ltd, is highlighted below:

Strengths of LTI-MT

LTI-MT has numerous strengths that allow it to thrive in the current marketplace. The strengths are:

• Financial position: The entity has been effectively using its huge capital to generate profit, due to which the return on capital employed (“RoCE”) has been steadily improving. It is also efficient in managing assets to generate  profits, thereby improving the return on assets (“ROA”). The company also has low debt coupled with increasing revenue every quarter.
• Long term: The merged entity will be a force to reckon with in the long term, and a purchase at current valuation may yield suboptimal long-term returns. The entity can scale, resulting in winning market share, winning large deals vs. large players and cross sell to Fortune 500 clients because of its higher cash flow, complementary verticals and access to a talent pool across the globe. 
• Complementary services: The two companies have complementary service offerings, with LTI’s strengths in IT consulting, application development, and maintenance and MindTree’s expertise in digital transformation, cloud services, and data analytics.
• LTI individually: LTI has a strong employee and client base of 40,000 and 475, respectively and a diversified revenue stream within the IT related sectors such as consulting, IMS, and MS. This results in diversity in the revenue stream. Lastly, the financial growth of LTI individually has gone up to 336.7% returns on Nifty 500 in the past 5.5 years, with proven high levels of client satisfaction and reputation. 
• MT Individually: MT has 7 acquisitions, which include the acquisition of Bluefin Solutions, which strengthens its European presence. MT  is also a leader in providing services for digital technologies. 40% of workforce has digital competencies and with its presence across different industry verticals such as travel and hospitality, retail – CPG and manufacturing), and BFSI, with not a single vertical taking up more than 40% of revenue, it has resulted in de – risked business model. 

Weaknesses of LTI-MT

There are certain aspects of LTI-MT that are currently in decline that can be worked upon; they are: 

• Short term: The company has a decline in net profit with falling profit margin quarter on quarter which is of particular concern in the short term. As per ICICI Swot analysis,  ‘the company is also trading at premium valuations; however, the earnings outlook is weak. Coupled with roadblocks on corporate governance issues, adverse governmental policies are areas that need fresh consideration and focus.^’ 
• Overdependence and efficiency: Both LTI and MindTree have a significant portion of their revenue coming from a few key clients, which poses a risk of overdependence and volatility. It has also been highlighted that the entity has been inefficient in using shareholder funds due to lack of transparency and trust with customers.
• Integration and regulatory challenges: There are also integration risks from two sources, as pointed out by Kotak Institutional Equities – attrition among rank and file in delivery and sales teams. Any attempt by the regulatory body to impose hostile visa norms could significantly affect employee expenses.
• Low margins and lack of growth: MT’s EBIDTA margins are at a lower level, standing close to 15% while its peers stood at 20%, showing it is less efficient and LTI, despite being in industry for a considerable amount of time, has failed at its growth rate when compared with its competitors like TCS and Infosys. 

Opportunities of LTI-MT

There is optimism and goals heading into the merger, with a few potential areas for the entity to focus on. They are:

• Net Margin Gap: With both revenue and cost synergies between LTI and MT, there is potential for a net margin gap between LTI – MT and Tata Consultancy Service (the main competitor), which is currently at 300-500 bps. This could potentially lead to faster peer set earnings growth coupled with higher margins, which is its current weakness.
• Consolidate position: Both LTI and MT, with their complementary services, have an opportunity to consolidate their positions in the BFSI vertical and also rapidly scale high tech, retail,and consumer packaged goods, which are some of the high growth verticals.
• New services: The combination of LTI and MT expertise and capabilities will enable the merged entity to offer new services and solutions to their clients, which could cause new revenue streams. This potential relies on R&D investment, which was a weakness of LTI individually. But, with the combined capital, the potential of LTI-MT is immense.

Threats of LTI-MT

There are certain environmental factors that can potentially be harmful to the new entity’s growth if not addressed. They are: 

• Economic uncertainty: The fundamental concern with the current economic situation is the Covid-19 pandemic. One year after the violent outbreak, it still has its effects on the market and a potential new wave concern in China is a cause for concern for both companies with their ideal target price. 
• Intense competition: The IT services market is a highly competitive market with established players like TCS, Wipro, Accenture and IBM. Client retention is key to warding off the threat of competition, and the merger uncertainty could be a potential window for poaching clients. Which needs to be addressed and dealt with by the LTI-MT. 
• Management resignation: There are growing concerns about the resignation of top management. The CEO and MD Jalona of LTI were instrumental in growth of LTI over the past 7 years and his departure is of particular concern.

Impact on stakeholders

With a swap ratio of 73:100 the LTI-MT is issuing 12 crore new LTI shares to MT’s existing shareholders, coupled with a 31% dilution for LTI’s existing shareholders. The key individuals of both companies and credit agencies believe that the potential of this merger will bring in higher value for each of its stakeholders, with clients benefiting from diversified end-to-end offerings and high value bids against big players, which will potentially improve win rates.

Partners of LTI-MT on the other hand, will gain wider access to a multitude of opportunities, such as collaborations, augmented intellectual capital and implementation abilities. Investors in the long term will have a strong consolidated financial position and profitability improvements. Moreover, the Chairman of L&T Group, Mr. Naik, also forecasts the attrition rate of the tech industry to come down by 4-5% within the next 12 months of the merger, which is currently standing at 23-24% because of various geopolitical issues. 

Conclusion

The merged entity of LTI MindTree has the potential to outpace the Tier-1 set growth rate over the next 10 years, as per Girish Pai, Head of Equity Research at Nirmal Bang Institutional Equities (NBIE), while during this initial phase of integration there is volatility. Based on the SWOT analysis, there is tremendous growth for the LTI-MT in the long term with its diversified presence and complimentary services. It, however, needs to ensure investment in R&D/ Innovation and client retention for a period of 12 months in order to curb the gap between its competitors, more specifically TCS. This is one of the biggest M&A deals in India, has a high impact on the entire industry of IT services and indeed has the potential to become the next behemoth. 

References

1. https://iide.co/case-studies/swot-analysis-of-lti/ 
2. https://bodhicapital.net/resources/stockPitches/LTIMindtree.pdf
3. https://www.livemint.com/market/mark-to-market/lti-mindtree-merger-faces-near-term-risks-11652030667832.html 
4. https://investors.larsentoubro.com/upload/AnnualRep/FY2019AnnualRepFull%20Annual%20Report%202018-19.pdf 
5. https://www.thehindubusinessline.com/info-tech/lti-mindtree-merger-takes-effect-latter-to-delist-from-bourses-on-nov-24/article66135921.ece 
6. https://hr.economictimes.indiatimes.com/news/industry/lt-merges-software-arms-into-lti-mindtree-creating-6th-largest-it-co-with-a-over-rs-1-53-lakk-cr-mcap/95521827 
7. https://www.thehindubusinessline.com/info-tech/huge-runway-awaits-for-ltimindtree-post-merger/article66235284.ece

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