LTI-Mindtree Merger: LTI, Mindtree boards may meet next week to okay merger

The boards of Larsen & Toubro Infotech (LTI) and Mindtree are expected to meet in the first week of May to finalise the terms of their merger, said people with knowledge of the matter. L&T acquired Mindtree in 2019. The combined LTI will edge past Tech Mahindra to become the fifth-largest IT services provider by market cap, giving it scale to target bigger orders and even seek takeover opportunities, said the people cited above.

Mindtree CEO Debashis Chatterjee is expected to be the CEO and MD of the merged entity. He didn’t respond to queries. The CFO and CHRO are also expected to be from Mindtree. After the merger, the Mindtree brand will be discontinued, sources said.

“The boards are meeting on May 6 to finalise and bless the merger. This has been in the works for weeks,” said one of the persons. “Without scale, this vertical will remain a laggard.”

Well-diversified Presence

LTI and Mindtree didn’t respond to queries.

Parent Larsen & Toubro (L&T) owns 74.05% of LTI and 60.99% of Mindtree. LTI is trading at a 30% premium to Mindtree. The share swap ratios are still getting finalised, said the people cited above. There will be no premium given to Mindtree shares, nor a significant discount to LTI shares. The final swap ratio is expected by early May, the sources mentioned above added on condition of anonymity as these discussions are still in private domain.

The CEOs of Mindtree and LTI told ET after fourth-quarter earnings that they have been collaborating to win large deals where clients seek end-to-end technology solutions.

“Ever since this management change happened, I was given a mandate to operate Mindtree as an independent entity but also collaborate wherever there was an opportunity to do so, which I have done quite a few times in the last two and a half years during my stint,” said Chatterjee.

It is estimated that from the first year of operations, the merged entities can generate $100-120 million in cost synergies across real estate management, selling, procurement and other general and administrative expenses. The revenue synergies are expected to be around 25%.

The combined company will have a well-diversified sector mix, with no vertical contributing more than 35% of revenue, analysts said. However, TMT and BFSI will remain dominant verticals. As a conglomerate, L&T has identified digital, technology and service businesses as key growth areas.

While LTI leads in banking, financial services and insurance with over 45% revenue share, Mindtree gets a bulk of its revenue from retail (22%) and communications media technology (43%). Analysts suggest that with mid-tier companies already commanding a larger share of the digital solutions pie within the IT sector, a merged entity would result in a tier 1 IT company with significantly lower legacy customer baggage that can add more 100mn+ / 50mn+ client accounts.

As of March, the two companies had 762 active clients, of which 11 were above the $50 million range. Less than 20% of the client base of these companies are common.

With minimum client overlaps, as a joint entity, the company could be more diversified with better domain knowledge, helping it bid more aggressively for large contracts. “The merged entity will also have a diversified portfolio as two companies have strong positions in different service offerings,” said the head of research at a global financial institution.

According to analysts at IIFL, 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,” said the brokerage research firm in a note.

“We still believe growth convergence across the companies can continue over the coming quarters,” said Yogesh Agarwal, analyst at HSBC. “However, post the recent de-rating and continued relative strength in business for mid-size companies we now have a favourable stance for selected mid-size names. We do see revenue growth for mid-size companies moderating as well going forward (vs FY22).”

The combined entity will have a little over 80,000 employees, including around 4,000 sales and support staff. Both companies reported an attrition rate of around 24% as of the fourth quarter.