We did Tech Mahindra & Mahindra Satyam analysis 9 months back and came up with a swap ratio a little below 10 to 1. The actual swap ratio as announced by Tech Mahindra management 8.5 Mahindra Satyam shares for every Tech Mahindra share. This is quite close to what we analysed. When we did our analysis, the situations were different and Mahindra Satyam was still making losses.

Now that the swap ratio has been announced, let’s see how the stock prices will move. The stock price of Mahindra Satyam and Tech Mahindra has already seen good movement today.

We have taken actual data of last 3 quarters and projected data for March, 2012 quarters to arrive at the projected data for FY2012. Let’s do who gets what in this merger.

From the perspective of Tech Mahindra shareholders:

Tech Mahindra shareholders have gained out of this transaction as the data shows EPS accretion for it. This is well deserved gain because when Tech Mahindra acquired Satyam, it was treading on an unknown path. Thanks to the shareholders of Tech Mahindra, its visionary leadership team, and persistence on the face of odds against it, the company has stabilized and has started showing positive earnings since last 3 quarters.

From the perspective of Mahindra Satyam:

From Mahindra Satyam perspective, this is beneficial too. The swap ratio may not look as good given the fact that Mahindra Satyam has started making profits since last 3 quarters. As the calculation shows, it is EPS dilution from Mahindra Satyam perspective. However, we should not forget that the profit started accruing in as a result of Tech Mahindra acquiring Satyam and putting all its effort to make it profitable and bring it out of the mess that it was put into. In fact Tech Mahindra did take lot of beating when it decided to acquire Satyam. Its rating was downgraded and many brokers changed their recommendation. Hence it will not be an exaggeration to say that Satyam was rescued by Tech Mahindra when everyone was putting ridiculous valuation on it.

Stock price movements:

Projecting price is the most difficult part and we will not try to pretend that we have a glass screen where we can see everything. However, based on our analysis, the price of Tech Mahindra shares should touch Rs 850 in a year’s time. This is based on post-merger EPS of Rs 56.86 as shown in the table and a reasonable PE ratio of 15 which Tech Mahindra enjoys even now.

Events to watch for

There are few events that investors should keep an eye on.

First, there shouldn’t be change in swap ratio. Usually it doesn’t happen but looking at investors’ activism recently, anything is possible.

Second, companies should not face very big problem in merger. The most difficult part in any merger is stopping good employees from leaving. This is crucial for any merger, especially, in cases where a smaller firm acquires a bigger one. In IT industry, people are the business drivers and any attrition involving good people will impact the prospect of the merged entity which will show in share price.

Note:

You may read in newspapers that the swap ratio is market neutral with slightly favourable to Mahindra Satyam shareholders. This is based on market price of the stocks.

You can see that when we consider Swap ratio in terms of market price (as opposed to EPS in our case), this is favourable to Satyam. Our view is that market price is very volatile in nature while EPS is more stable. Hence we have used EPS instead of market price in our analysis.

Important: Investors should take their own decision on buy and sell.