Morgan Stanley Research: Tech Mahindra Limited: Satyam Integration Imminent

Tech Mahindra Limited: Satyam Integration Imminent, But Who Will Buy Whom?

Quick Comment – Impact on our views: Mahindra
Satyam (Satyam) is likely to report its financials for the
last two years on September 29. TechM management
has stated that TechM and Satyam are likely to be
merged after the restatement of Satyam financials. In
this note, we look at the implications of the merger for
the combined entity.
Swap ratio: TechM currently has a market cap of
US$2bn, trading at 10-11x FY11e adjusted net profits in
our view. Satyam has 1,170m shares outstanding. In
case of a share swap, the swap ratio at current price
works out to one TechM share for every 7.3 Satyam
shares or 100 shares of Satyam equaling 13.72 shares
of TechM. However, the Satyam/TechM management is
not bound to fix the swap ratio as per the current market
price.
Is combining TechM with Satyam or Satyam with
TechM the same? We do not think so. In our view,
making Mahindra Satyam the surviving entity (and
rebranding if needed) makes more sense than the other
way round. Satyam has a broader portfolio of clients and
the stock is already listed in the US. We believe
management would have to choose if it prefers a dual
listing or just wishes to stay listed in India. The former is
a better option, in our view.
Potential market cap implications: If the combined
entity manages to attain revenues of ~US$2.2bn and net
profit of US$250-300m for FY11e, the market cap for the
combined entity based on P/S of 2-3x (in-line with peers
and at a discount to larger vendors) could get as high as
US$5-7bn in our estimate (P/E of 17x-22x). We believe
the base case for the market is that TechM buys Satyam.
However, given TechM’s low shareholding of only
42.7% in Satyam, we believe this could turn out to be the
more difficult/less likely scenario. Satyam buying TechM
(promoters hold ~74% stake) is the easier option, in our
view.