- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
LTI – Mindtree Merger
Another consolidation is happening in the Indian IT services sector with the merger of LTI – Larsen & Toubro Infotech and Mindtree.
My initial insight from the announcement is that 𝐋𝐓𝐈 𝐰𝐢𝐥𝐥 𝐩𝐚𝐲 𝐌𝐢𝐧𝐝𝐭𝐫𝐞𝐞 𝐬𝐡𝐚𝐫𝐞𝐡𝐨𝐥𝐝𝐞𝐫𝐬 𝟎.𝟕𝟑 𝐋𝐓𝐈 𝐬𝐡𝐚𝐫𝐞𝐬 𝐟𝐨𝐫 𝐞𝐯𝐞𝐫𝐲 𝐬𝐡𝐚𝐫𝐞 𝐨𝐟 𝐌𝐢𝐧𝐝𝐭𝐫𝐞𝐞, effectively paying a 𝟓.𝟕𝟏% 𝐩𝐫𝐞𝐦𝐢𝐮𝐦 𝐨𝐫 𝐑𝐬.𝟑𝟏.𝟕𝟔 𝐛𝐢𝐥𝐥𝐢𝐨𝐧 more than Mindtree’s market cap at today’s closing price.
Thus, the 𝐏𝐫𝐞𝐬𝐞𝐧𝐭 𝐕𝐚𝐥𝐮𝐞 𝐨𝐟 𝐒𝐲𝐧𝐞𝐫𝐠𝐢𝐞𝐬 𝐝𝐮𝐞 𝐭𝐨 𝐂𝐨𝐬𝐭 𝐬𝐚𝐯𝐢𝐧𝐠𝐬 𝐚𝐧𝐝 𝐫𝐞𝐯𝐞𝐧𝐮𝐞 𝐠𝐫𝐨𝐰𝐭𝐡 𝐝𝐮𝐞 𝐭𝐨 𝐦𝐞𝐫𝐠𝐞𝐫 – 𝐈𝐧𝐭𝐞𝐠𝐫𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐬𝐭𝐬 – 𝐓𝐫𝐚𝐧𝐬𝐚𝐜𝐭𝐢𝐨𝐧 𝐜𝐨𝐬𝐭𝐬 𝐬𝐡𝐨𝐮𝐥𝐝 𝐞𝐱𝐜𝐞𝐞𝐝 𝐑𝐬.𝟑𝟏.𝟕𝟓 𝐛𝐢𝐥𝐥𝐢𝐨𝐧 𝐭𝐨 𝐠𝐞𝐧𝐞𝐫𝐚𝐭𝐞 𝐬𝐡𝐚𝐫𝐞𝐡𝐨𝐥𝐝𝐞𝐫 𝐯𝐚𝐥𝐮𝐞.
If I dissect Mindtree and LTI from the perspective of how the market prices future growth and risk, i get the following:
1)LTI, with an 8.9% cost of equity, is marginally safer than Mindtree (9% cost of equity).
2)The price market is paying for future growth for LTI is 212% more than at no growth compared to Mindtree’s 203%
At least from the market’s perspective, the two companies have marginal variation in growth and risk.
The merger claims minimal overlap between the two firms in the customers or revenues. However, this inference should be taken from a market share perspective and not from diversification because, from a marginal investor perspective, the risk is market risk, not firm-specific.
Thus, in my view, as both firms are profitable, the rationale behind the merger seems to win 𝐦𝐮𝐥𝐭𝐢-𝐦𝐢𝐥𝐥𝐢𝐨𝐧 𝐝𝐨𝐥𝐥𝐚𝐫 𝐝𝐞𝐚𝐥𝐬 that would not have been possible if they functioned independently. Thus, this merger focuses on addressing current supply issues that IT services firms struggle with. If that holds, then there are a lot of multi-million dollar IT services deals getting bid in the market, and only a few players bid for that. So, in my view, this merger can spoil the parties of those big players.
𝘋𝘪𝘴𝘤𝘭𝘢𝘪𝘮𝘦𝘳: 𝘐 𝘩𝘢𝘷𝘦 𝘯𝘰𝘵 𝘪𝘯𝘥𝘦𝘱𝘦𝘯𝘥𝘦𝘯𝘵𝘭𝘺 𝘷𝘢𝘭𝘶𝘦𝘥 𝘔𝘪𝘯𝘥𝘵𝘳𝘦𝘦 𝘰𝘳 𝘓𝘛𝘐 𝘢𝘯𝘥 𝘢𝘴𝘴𝘶𝘮𝘦 𝘵𝘩𝘢𝘵 𝘵𝘩𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘵𝘩𝘦 𝘧𝘪𝘳𝘮𝘴 𝘪𝘴 𝘦𝘲𝘶𝘢𝘭 𝘵𝘰 𝘵𝘩𝘦 𝘮𝘢𝘳𝘬𝘦𝘵 𝘱𝘳𝘪𝘤𝘦, 𝘸𝘩𝘪𝘤𝘩 𝘪𝘴 𝘢 𝘥𝘢𝘯𝘨𝘦𝘳𝘰𝘶𝘴 𝘢𝘴𝘴𝘶𝘮𝘱𝘵𝘪𝘰𝘯.