Merger easing off client-specific risks

Merger Dynamics

- Talent war impacts IT industry

- LTIMindtree will have better supply-side situation post-merger

- The integration has to be done in a seamless manner to check discontent

- Otherwise, it may lead to exit of senior level employees

- Combined entity will have both BFSI & retail verticals

- Total manpower of the merged entity will be 80,000 people

Microsoft is a critical account for Mindtree. Post the merger, this account is likely to increase further, which will drive growth of the merged entity. Taking into account current client metrics, the merged entity will have two $100-million plus clients & nine $50-million plus clients. So, concentration risk will reduce substantially, said a Mumbai-based analyst with an international brokerage firm

Bengaluru: Client concentration risks faced by L&T Infotech (LTI) & Mindtree are likely to substantially reduce post the merger of these two mid-tier IT services companies of the L&T Group.

Post-merger, the merged entity LTIMindtree will have good numbers of marquee clients in its portfolio. Currently, L&T Infotech has more than 485 active clients, while it stands at 276 for Mindtree.

L&T Infotech has one client in the $100 million plus category, which is also the case for Mindtree. While LTI counts a US-based global bank as its number one client, it is Microsoft for Mindtree. Mindtree's exposure to its largest client, Microsoft is around 25 per cent.

"Microsoft is a critical account for Mindtree. Post the merger, this account is likely to increase further, which will drive growth of the merged entity. Taking into account current client metrics, the merged entity will have two 100 million dollar plus clients & nine 50 million dollar plus clients. So, concentration risk will reduce substantially," said a Mumbai-based analyst with an international brokerage firm.

Mid-tier IT companies usually face the client concentration risk with few numbers of clients contributing a substantial portion of revenues. This makes the portfolio not only expose to possible client-specific issues, but also volatile. Big IT firm with large number of clients provides more revenue assurance to all stakeholders.

Last week, boards of LTI & Mindtree announced merger to create a large entity named 'LTIMindtree'. Upon the merger coming into effect, all shareholders of Mindtree will be issued shares of LTI at the ratio of 73 shares of LTI for every 100 shares of Mindtree. Promoter L&T will hold 68.73 percent of LTI after the merger.

The combined entity will have revenue of around $3.5 billion, making it the sixth largest IT firm in India after Tech Mahindra. In market capitalisation term, the combined entity will be the fifth largest among Indian IT services companies.

Three years after acquisition of Mindtree by L&T, its merger with LTI will also diversify offerings of the merged entity. The combined entity will now have both sound BFSI & retail verticals. The total manpower of the merged entity will be around 80,000 people.

"Given the talent war seen in the industry in recent quarters, LTIMindtree will have better supply-side situation post-merger. However, the integration has to be done in a seamless manner to check discontent, failing which it may lead to exit of senior level employees," said another source.