To Be Merged, Tech Mahindra And Mahindra Satyam Take A Hit

On Thursday, August 30, 2012, British Telecom sold a 14.1 per cent stake (17.9 million shares) in Tech Mahindra to institutional investors for about Rs 1,394.9 crore (GBP 158.6 million) at an average price of Rs 777.73 a piece. Media reports say that BT managed to sell more shares than their initial target of 5-10 per cent. “Following this sale, BT has a 9.1 per cent shareholding in Tech Mahindra but further sales may be considered in the future,” the UK-based company said in a statement after the deal. BT though would continue to consider Tech Mahindra as their key supplier. With this stake sell, the shares of Tech Mahindra plummeted by 5.20 per cent on Thursday.

The stake sale from BT, which contributes to almost 36 per cent of Tech Mahindra’s revenues, has come in close to the merger of Tech Mahindra and Mahindra Satyam. On March 21, 2012, both the companies announced the approval of the boards of their respective companies of the proposal of merger. The exchange ratio approved was two shares of Tech Mahindra of face value of Rs 10 each for every 17 shares of Mahindra Satyam of face value of Rs 2. This move had got approvals from the Bombay Stock Exchange, National Stock Exchange and Competition Commission of India. This merger would make the newly formed entity the fifth-largest player in the IT industry in India.

Meanwhile, Mahindra Satyam fell by 1.93 per cent on the same day following the ruling by The Authority for Advance Ruling (AAR) that the company would have to deduct 30 per cent tax on the USD 125 million to be paid in a class action suit settlement. This settlement is in lieu of the suit filed by U.S. investors who held the American Depository Receipts (ADRs) of Satyam Computer Services. Investors had filed litigations against the company after its shares dropped in the wake of the accounting fraud as was admitted to by B Ramalinga Raju, former chairman of the company back in January 2009.

AAR has also raised questions on Tech Mahindra’s corporate law practices by terming its option agreement with its client AT&T entered prior to its IPO in 2006 as ‘circuitous’ and against public interests, say media reports. Prior to the company’s IPO, 9.87 million option shares representing fully paid equity shares of Tech Mahindra were sold to AT&T for USD 34.5 million via Tech Mahindra’s Mauritian entity. While according to SEBI (Disclosure & Investor Protection) Guidelines, 2000 under clause 2.6.1 thereof, there is a guideline that no unlisted company can make a public issue of equity share or any security convertible at a later date into equity share, if there are any outstanding financial instruments or any other right which would entitle the existing promoters or shareholders any option to receive equity share capital after the initial public offering, the IPO managed its way without objection from the SEBI.

Regardless of the short-term setback both these companies have witnessed due to their respective reasons, the to-be-formed company would be a robust entity that could take advantage of the expertise of each of the firms, thus complementing their positions and offerings. It would offer strong competition in the existing market and would be a stock to look out for.