Mahindra Satyam and Tech Mahindra, controlled by the Mahindra & Mahindra group, are close to appointing merchant bankers and accounting firms to value the two businesses for an eventual merger, two senior executives with direct knowledge of the development said.
The merger will enable the M&M group's technology business to become the sixth biggest software ser exporter after TCS, Infosys, Cognizant, Wipro and HCL Technologies. The combined entity is expected to have revenues of $2 billion.
This marks another milestone in Anand Mahindra's vision to diversify his business group from one limited to manufacturing multi-utility vehicles and tractors to, as he prefers to call it, a "federation" of companies with exposure to technology outsourcing, real estate and hospitality services.
While accountants hired for the merger process will arrive at a valuation, merchant bankers will help in estimating the share valuation of the two firms to determine the share swap ratio for the firms listed on Indian stock exchanges.
"Merchant bankers are being appointed, as we speak," Satyam chief executive CP Gurnani told ET on Monday. "Fair valuation will be done by two large, well-known accounting firms and share valuation will be done by two reputed, international investment bankers," said Sonjoy Anand, chief financial officer at Tech Mahindra. "We are in the final stages of appointing both." In terms of market capitalisation, the two firms almost mirror the same valuation, with Tech Mahindra owning a little over 43% in Mahindra Satyam through Venturbay Consultants.
However, this may not be the only yardstick. At Monday's close price of Rs 63.15 a share, Satyam had a market capitalisation of Rs 7,431crore while Tech Mahindra's market capitalisation stood Rs 7,256 crore at the day's closing price of Rs 570 a share on the BSE.
The process may not be a smooth affair as two pending hurdles could pose a material impact on the valuation. One is an income tax claim of about Rs 2,500 crore while the other pertains to a claim from closely held companies of Raju's extended family for around Rs 1,200 crore. These companies claim they gave money to Satyam before the fraud came to light.
"Those are still pending and it is for the valuers to decide how to treat that when it comes to arriving at a fair valuation," said Anand The merger will also considerably prune Tech Mahindra's exposure to British Telecom, an important client cum shareholder. While Mahindra Satyam is on a recovery path adding Fortune 500 clients, Tech Mahindra has been a laggard, with reducing business volumes from its primary client BT group plc.