LTI and Mindtree merge to become 5th largest IT services firm by market cap

After much speculations, Larsen & Toubro Infotech Ltd (LTI) and Mindtree Ltd announced their merger to become one entity “LTI Mindtree”. A Steering Committee will be constituted to oversee the transition till the merger process is complete. On completion of the merger, LTI Mindtree will be India’s fifth largest IT services company by market cap surpassing Tech Mahindra Ltd.

The boards of directors of LTI and Mindtree at their respective meetings held on Friday approved “a composite scheme of amalgamation of both these independently listed IT services companies under the Larsen & Toubro (L&T) Group.”

The proposed integration will see LTI and Mindtree create an “efficient” and “scaled-up” IT services provider exceeding $3.5 billion, L&T Group said. The transaction is subject to shareholder and regulatory approvals.

Current Mindtree chief executive officer and managing director Debashis Chatterjee will lead the combined entity while LTI’s chief executive Sanjay Jalona has resigned citing personal reasons. He will serve his notice period but will not stay on to oversee the integration.

Given that recent industry shifts like prominence of large deals and preference for end-to-end offerings are benefitting large players, the two companies have decided that the time is appropriate to combine the strengths of both organizations to better serve the customers.

“Significant scale benefits are anticipated through LTI and Mindtree’s complementary strengths resulting in a stronger portfolio of offerings across verticals. Enhanced customer engagement and delivery model through industrialization of delivery and streamlined value-enabling processes is expected to result in improvement in large deal capabilities. These opportunities will create a more distinctive employee value proposition and stronger partnerships with ecosystem players,” L&T Group said in a statement.

Upon the scheme becoming effective, all shareholders of Mindtree will be issued shares of LTI at the ratio of 73 shares of LTI for every 100 shares of Mindtree. The new shares of LTI so issued will be traded on the NSE and BSE. L&T Ltd will hold 68.73 % of LTI after the merger. For now, the companies will continue to function independently.

“This merger represents our continued commitment to grow the IT services business in line with our strategic vision. The highly complementary businesses of LTI and Mindtree will make this integration a ‘win-win’ proposition for our customers, investors, shareholders, and employees,” said A.M. Naik, chairman, LTI.

Speaking about the merger, S. N. Subrahmanyan, vice chairman, LTI, said, “We are confident that the proposed merger will help us build on the combined strengths of both these organizations to unlock synergies through scale, cross-vertical expertise, and talent pool. This will help us emerge as a partner of choice for large-scale tech transformations and create a distinctive employee value proposition.”

The merger of LTI and Mindtree makes sense at multiple levels, according to Abhisek Mukherjee, cofounder and director of Auctus Advisors. “Other than the complimentary portfolios of business, that many observers have pointed out, this will create meaningful scale for the combined entity. Scale is becoming a prerequisite to qualify for and win large deals, which is the holy grail for all IT services companies. Better access and conversion of large deals by the combined entity is something to watch out for. This will drive both revenue and margin expansion,“ he pointed out.

On the flip side, according to Mukherjee, organizational turbulence is something that challenges such mergers of equals. “Both LTI and Mindtree have deep leadership and how potential overlaps are managed will determine how quickly the combined entity stabilizes,” he said.

In 2019, L&T Group had acquired Mindtree in a “hostile” takeover as the founders resisted it and finally resigned from the company.

Analysts at IIFL said in an earlier note that both companies have complementary capabilities, verticals and client exposures. “We believe this may not be a bad time for initiating the merger process, as both companies now have a similar growth and margin profile, with a strong FY23 outlook,” the report said.

During the March quarter, Mindtree’s net profit stood at ₹473.1 crore up by 49.1% from a year ago while revenue stood at ₹2,897.4 crore rising 37.4%. Meanwhile, LTI posted a net profit of ₹637.5 crore, up 16.8% from a year ago as revenue jumped 31.6% from the previous year to ₹4,301.6 crore.

On Friday, shares of Mindtree were down 3.9% to close at ₹3,374.65 while those of LTI were down 3.6% to close at ₹4,593.10 on the BSE.