Mumbai, May 6 (PTI) Aiming at bigger deals from clients looking for digital services, L&T Group on Friday announced a merger of L&T Infotech and Mindtree, which will create the country’s sixth largest information technology company with combined revenue of USD 3.5 billion.
The engineering, projects and construction major, which already owns a majority stake in both the companies, said as per the all-stock deal, shareholders of Mindtree will get 73 shares of LTI (L&T Infotech) for every 100 shares they hold. L&T will hold 68.73 per cent in the merged entity which will be called ‘LTIMindtree’.
The merger is expected to be completed in the next eleven months after required approvals. The merged entity will be led by Debashis Chatterjee.
LTI’s chief executive Sanjay Jalona has resigned due to “personal reasons”, L&T’s chairman A M Naik told reporters here.
Naik said the average deal size for the companies has been USD 25 million right now, and it has already had clients suggesting a merger, which will help it participate in bigger projects. Naik said it will be able to bid for deals of over USD 100 million once the merger creates a bigger entity.
The merger announcement comes at a time when the bigger players in the IT industry have been speaking about deal sizes getting smaller as a large part of the contracts now are digital deals. The L&T management, however, said that it is not able to participate in bigger deals because of smaller revenue and balance sheet sizes, and asserted that this was the right time to go for the merger.
He exuded confidence that the revenue of the merged entity will touch USD 10 billion in five years from the present USD 3.5 billion, and stressed that all the budgets and targets of both the companies for FY23 will be chased independently.
An integration committee will be put in place to anchor the entire merger process that will create a single entity with over 80,000 people, and the same will be independent of the business teams, who will continue to chase business amid the surge in demand for IT.
“We are confident that the proposed merger will help us build on the combined strengths of both these organisations to unlock synergies through scale, cross-vertical expertise, and talent pool,” S N Subrahmanyan, chief executive of L&T, said, pointing out that while LTI is strong in areas like ERP and insurance, Mindtree is more strong on new-age digital businesses and customer service.
Naik made it clear that far from retrenching any employees, the demand for services is so strong that it will be seeking to add 15-20 per cent more people. He also said that the confidence instilled in the employees can help the confidence of workers and decrease the high attrition by 1 per cent.
For L&T, the deal is another step in the greater reliance on the services sector in the overall business composition, Naik said, making it clear that LTTS, the engineering technology services company, will continue as an independent entity to focus on its core business.
Naik said in the next 2-3 years, he sees 40 per cent of the group’s market capitalisation coming from digital and IT services companies like LTIMindtree, and the rest from the parent.
LTI was started as a unit within L&T in 2000, while Mindtree was acquired three years later in a deal which faced resistance from its promoters. However, Naik made it clear that the acquisition of Mindtree was not a hostile takeover.
The first year was spent in stabilising the business, strengthening the leadership while the rest two years were spent building the business to its potential, Naik said, adding that the valuation of Mindtree has increased by 5 times in the last three years.
LTI had reported revenues of USD 2.1 billion in FY22, while the rest USD 1.4 billion came from Mindtree.
Naik said expanding the profit margins will be one of the aims of the merged entity, but did not give a desired level.
The L&T management sounded confident about the merger passing the hurdles, claiming that the valuation has been done by experts, even as there were murmurs of Mindtree shareholders getting a raw deal.
The domestic market represents less than 5 per cent of the revenue pie for each of the two companies, even though they have done work like Aadhaar implementation (Mindtree) and income tax (LTI).
Naik said he expects the Russian invasion of Ukraine to be positive for the industry because Ukraine was home to 6 lakh software engineers of which 3 lakh have fled to neighbouring countries, hence creating a demand which Indian companies can tap into.
The LTI scrip closed 3.64 per cent down at Rs 4,593.10 a piece on the BSE, while Mindtree shed 3.88 per cent to Rs 3,374.85 a piece, as against a 1.56 per cent correction in the benchmark. PTI AA HVA
