The boards of the two independently listed firms that held respective meetings on Friday, approved the transaction to create a combined entity – LTIMindtree—that will be housed under the Larsen & Toubro Group and is poised to edge out Tech Mahindra as the country’s fifth largest IT services provider by market cap.
“ ( It) will now be able to compete with the IT majors for larger deals and will have a much bigger play in the market,” said AM Naik, Group Chairman, L&T while announcing the merger at a press conference in Mumbai on Friday.
“If the deal size is more than $100 million, the customer gives deals only to tier one companies. I think the combined entity will have that size, to be able to get much better deals in the market,” said the 79-year old technocrat noting that “currently, as I speak, there is a tremendous market potential where the customer would not have even included us with our size.”
As reported earlier by ET, Debashis Chatterjee, currently CEO and MD of Mindtree, is set to lead the combined entity. Naik said that LTI CEO Sanjay Jalona “ has decided to move on for personal reasons.”
For now, both LTI and Mindtree will continue to function independently while a steering committee will be set up to oversee the transition. Details of the committee will be announced in due time, Naik said.
In 2019, L&T had gained a controlling interest in Mindtree Ltd, raising its stake to 60% in the Bengaluru-based mid-tier IT in what is widely regarded as a rare hostile takeover of a software developer.
Today’s announcement brings the circle to a close with all shareholders of Mindtree due to be issued shares of LTI at the ratio of 73 for every 100 shares of Mindtree.
The new shares of LTI issued will be traded on the NSE and BSE. Larsen & Toubro will hold 68.73% of LTI Mindtree after the merger.
In a first reaction to the news of the merger Ashok Soota, executive chairman of IT services firm Happiest Minds Technologies, who was also the founding chairman of Mindtree said, “both the companies have been doing well and will become a more significant player after the merger. They have worked in considerable collaboration with each other already which means they have captured the synergies. There will be more efficiency.”
However, he sounded a note of caution while pointing out that there will be “two people for every senior role. There is a problem of losing talent but it is inevitable in any merger.”
Separately, analysts who spoke to ET on the merger termed ( LTI CEO ) Jalona’s exit as a cause of concern as he has been integral to the growth of LTI.
The transaction is subject to shareholder and regulatory approvals. Mindtree, with market cap of Rs 55,627 crore will merge into LTI with market cap of Rs 80,518 crore.
“When you have scale, you get invited to bigger parties. When you’re a particular size you’re not invited. So, one of the reasons behind the merger is that the management felt that to get it into bigger parties to have a bigger balance sheet and profit and loss is better and that’s what we’re trying to do,” said SN Subrahmanyan, Vice Chairman, Mindtree.
As early as 2009, L&T had made an aggressive move to acquire the then scam-hit Satyam Computer Services. It had accumulated shares in the secondary market and was also seen in the lead. The acquisition would have given L&T Infotech the scale it had aspired for but Tech Mahindra snatched it away in a nail biting bid.
In a 2016 interview to ET, Naik had said, “We lost Satyam because we were too eager to buy it…I regret losing Satyam but life has to go on.”
On Friday, while announcing the news of the merger of LTI and Mindtree Naik clarified that the group’s engineering services company Larsen and Toubro Technology Services will not be merged into the same entity as the group wants the knowledge focus of the company to not be diluted.
Naming the combined entity as “LTIMindtree” is aimed at leveraging the advantages of both the brands and creating value for all the stakeholders, according to Chairman Naik.
MindTree was founded in 1999 by Soota, Krishnakumar Natarajan, Rostow Ravanan, Subroto Bagchi and NS Parthasarathy among others.
Mindtree’s existing promoters and half of its top leadership below the CEO level had departed after a hostile takeover battle with L&T in 2019 after Cafe Coffee Day founder VG Siddharth approached L&T with the offer to sell his 20.3% stake in Mindtree.
“It appears that the original name Mindtree will not disappear. But Mindtree is more than just a lovely name. The logo was designed by a child with cerebral palsy. Now, these stories may disappear which added to its brand value,” said Soota who is also the Executive Chairman of Happiest Minds Technologies.
“Organizations must really do what we have done at Happiest Minds–designing an organization to exist in perpetuity to save these values. In a way, it is a lesson to anyone who wants to preserve and protect their organization,” he added.
Analysts are of the view that with mid-tier IT companies already commanding a larger share of the digital solutions pie, a merged entity will result in a tier 1 company with significantly lower legacy customer baggage and few overlapping businesses.
While LTI leads in BFSI with over 32% revenue share, Mindtree gets the bulk of its revenues from communications (43%), retail (22%) and travel.
“Mindtree and L&T’s subsidiary are two different companies culturally and in terms of product lines. There is not much of a service or industry overlap between the two. You can get a broader market and scale,” said Ray Wang, founder and principal analyst at Constellation Research.
“L&T is known for hardcore assets and engineering and they have bought some time to come together. Some practices such as Salesforce or customer success deals which Mindtree specializes in which will be synergised with LTI’s digital twins and asset performance which is connected to the heritage of L&T group,” he added.
As of March 2022, the two companies have 762 active clients of which 11 are above the $50 million range. Less than 20% of the client base of these companies are common.
“The whole of L&T market cap minimum will be 40% from IT services and some of the IT related businesses and startups. 60% will remain our normal business as it is today,” Naik told reporters.
Among the startups incubated by the group is L&T NxT digital business which was acquired by Mindtree last year. Currently, the Group has incubated L&T SuFIN for B2B solutions and L&T EduTech in the edtech space apart from another company which it has not formally announced.