This L&T Group Stock Has Announced Merger, Should You Buy The Stock Now?

Share exchange ratio and promoter holding

Shareholders of MindTree will receive 73 shares of L&T Infotech for every 100 shares they own. The promoter (L&T Group) will have a 68.73% stake in the merged entity, LTIMindtree. The merger is expected to be completed in 9-12 months, and till that time, the two companies will continue to operate independently; a steering committee is being constituted to oversee the transition to merger consummation.

Debashis Chatterjee, CEO and MD of Mindtree, will lead the combined entity, while Sanjay Jalona, CEO and MD of LTI, has resigned from LTI due to personal reasons.

Will the merger create value for shareholders of MindTree and L&T Infotech?

According to Emkay Global, the LTI-MTCL merger is disruptive in near term, value-accretive in medium term. According to Emkay Global, the amalgamation will drive synergies for the combined entity: 1) enhance scale for the combined business, enabling LTIMindtree to bid for larger technology deals, and drive a cohesive "go to market" strategy in various geographical markets; 2) help in exploiting the complementary capabilities of both companies, allowing the combined business to consolidate its position in the BFSI; enhance scale in high-growth verticals like high-tech, CPG, retail; and expand into new verticals; 3) enable cross-selling and up-selling opportunities to achieve a higher number of active clients (750+ clients with minimal overlap), cater to a wider customer base and diversify the combined revenue profile with reduced client concentration risks; 4) develop a competitive and cogent business model, leveraging the combined managerial and technical expertise; and 5) enable focus on opportunities for growth in customer and strategic partner relationships (75 unique partnerships) and create value through attention to corporate brand building and stronger implementation capabilities resulting from the amalgamation. Further, the amalgamation is also expected to improve the financial strength of the combined entity by realizing cost efficiencies and synergies, such as optimization of SG&A costs and consolidation of delivery operations (domestic and overseas), overseas entities, and branches. Digital transformation projects require end-to-end capabilities with scale, and the new entity will be able to address it more effectively with complementary capabilities.

Should you buy the stock now of L&T Infotech or Mindtree ahead of the merger?

According to Emkay Global, the merger has the potential to create greater value for all stakeholders: 1) clients - diversified end-to-end offerings, participation in large contracts and deeper domain expertise; 2) employees - providing better growth opportunities and ability to attract and retain the best talent; 3) partners - broader collaboration opportunities, improved integration solutions, augmented intellectual capital and stronger implementation capabilities; and 4) investors - strong consolidated financial position, profitability improvement with scale benefits in the medium- to long term; however, there is also a potential for near-term business and growth disruption, given risks of employee attrition and the impact on execution and delivery.

"While a merger between the two entities was always on the cards, management believes that the time seems opportune now as both entities have steady operations, scale and strong leadership in place, and can also avoid potential conflicts with growing scale in existing relationships and prospects. While the proposed amalgamation will be an overhang in the short term due to the leadership transition and risks of some disruptions in operations, we expect it to be positive in the medium- to long term on account of the complementary portfolio of verticals and geographies, synergies through scale, cross-vertical expertise, and talent pool. We have put our TPs for LTI and MTCL, as well as our ratings on the two stocks Under Review, as we assess the short/long-term impact of the proposed merger on earnings (revenue growth and margin profile of the combined entity) and leadership transition," the brokerage has said.