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LTI-Mindtree merger to create US$3.5 bn revenue entity; retention of talent to be key

ICICI Securities 07 May 2022

What’s Buzzing

LTI and Mindtree have announced a merger with an all stock amalgamation of Mindtree with LTI. Shareholders of Mindtree will get 73 shares of LTI in exchange for 100 shares in Mindtree. The LTI CEO & MD have resigned due to personal reasons while the Mindtree CEO & MD have been appointed as CEO & MD of the merged entity.

Context

Shareholders of Mindtree will receive 73 shares for 100 shares of Mindtree while L&T (promoter) would own 68.73% stake in the combined entity. For now, the companies will work independently and a steering committee will be constituted to oversee the transaction till the merger process is complete. Transaction completion is subject to shareholders, creditors and regulatory approvals including from stock exchanges, NCLT and closing is expected to be achieved in nine to 12 months. The name of the combined entity would be LTIMindtree. The combined entity will have US$3.5 bn in revenues for FY22 while EBIT and PAT margin will be 17.8% and 15.1%, respectively. The combined entity will have access to US$991 mn cash pool while the combined employee strength would be 81,719 serving 750+ clients across the portfolio.

Our Perspective

As per our understanding, it was an obvious choice for the L&T group to merge these two entities operating in similar lines of business. On the positive side, the two companies have minimal overlap vertical wise (they have overlap in CPG, retail, pharma and manufacturing verticals, which form ~25% of the revenue mix), which means they can leverage on expertise across verticals i.e. LTI’s strength in BFSI (43% of revenue mix) and hi-tech media (12% of mix) while Mindtree’s strength is in communication, media (43%) and travel & hospitality (14% of mix). At the same time, the combined entities would leverage enhanced capabilities and strong relationship across partner ecosystem (cloud & product both). Hence, the combined entity is now in a better position to fight for large deals. We also believe that cost synergies would be visible over the progress of the merger. On the negative side, we cannot rule out the vulnerability of the second layer management to churn/poaching due to the exit of the LTI CEO who has built this leadership team over the years and also loss of a few client relationships to competition till the merger is completed.

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