Before we get to today's story, a quick recap on all the things we covered this week. On Monday we spoke about the new VPN rules, next we discussed the alleged Axis Mutual Fund scam. On Wednesday we talked about the Indian Rupee, then we discussed the National Family Health Survey and finally we saw how India can bolster Ayurveda's image

And with that out of the way let's get to today's story shall we?

The Story

In 2019, we witnessed the first-ever hostile takeover in the Indian software industry. On the one side, you had L&T, the infrastructure behemoth turned diversified conglomerate. On the other side, you had Bengaluru-based IT company Mindtree. It was a bitter fight — one fraught with mutual disgust. The founders of Mindtree weren’t exactly pleased with L&T’s brazen attack. They went public, issuing statements castigating the company — “Why can’t you build a great technology business with all your resources and capability without decimating another organisation?”

It was ugly.

But L&T pushed through. And they found a way to consummate the transaction

Remember V G Siddhartha, the founder of Cafe Coffee Day?

See, when Mindtree was founded back in 1999, the late coffee baron invested a sizeable sum. In fact, he held 20% of the company after pouring in money through the years. Unfortunately, what should have been an amazing investment eventually turned out to be a rather sad exit option. Cafe Coffee Day was saddled with millions in debt and when he was forced to pay his creditors, VG Siddhartha sold his stake to L&T in a bid to come good on his promise.

Eventually, L&T managed to gain majority control. They soon went on to buy the company and absorb it completely. However, it’s not like they couldn’t build a tech company of their own. They already had their software services subsidiary L&T Infotech (LTI) and the company had already become one of the top 10 players in the space. With this deal, they wanted something different. A different client base.

While L&T Infotech concentrated on the banking and financial services sector, Mindtree had clients from the retail and media industry. So an acquisition made sense. But what didn’t make sense was the fact that L&T insisted on running both L&T Infotech and Mindtree as two separate companies. This was a bit confusing especially when you consider the fact that a merger would have helped streamline operations.

However, that isn’t entirely an accurate assessment.

L&T had just performed an acrimonious takeover. Merging operations overnight would have definitely ruffled some feathers. So they gave it some time. They assured employees and management that the company would be run as an independent entity and they held their end of the promise.

But everybody kind of knew that a merger was inevitable. And almost 3 years after the takeover, L&T has finally decided that the time has come.

The two entities combined will now be called LTIMindtree. And it will catapult L&T into the big leagues. It will now boast the sixth largest Indian IT Services company (by revenue.) And fifth in terms of market capitalization (based on the current combined market cap) — ahead of its rival Tech Mahindra.

So, how will the merger play out?

Well, while it’s easy to throw around words like synergy and phrases like “make one plus one five” (that’s from the vice-chairman of Mindtree), executing mergers can be a tricky affair. As business journalist Sundeep Khanna points out, one need only look back at the Tech Mahindra and Satyam merger to realise that it doesn’t always play out how you imagine. TechMahindra expected the merged entity to capitalize on its size and hit the $5 billion mark in sales by 2015. That didn’t happen — it took an extra 4 years. Then there’s the fact that Tech Mahindra was heavily reliant on clients from the telecom sector and the merger with Satyam was supposed to change that. However, telecom still contributes 43% of Tech Mahindra’s revenues. The diversification gambit didn't quite work out the way they expected.

The key difference here perhaps is that both entities are already owned by the L&T Group. They’ve collaborated on multiple projects in the past two years, and things could be a tad bit easier. Having said that, both companies were also run by separate CEOs and their glassdoor reviews do indicate some differences in culture (Mindtree scores higher by the way).

Will this affect the merger? We don’t know. What we do know however is that if all goes according to plan, the combined entity could have a much more diversified revenue stream.

Currently, LTI depends on Banking and Financial Services for nearly half of its revenue. Mindtree meanwhile has a 43% exposure to Communication, Media & Technologies. The merger may help create a more balanced client portfolio.

But it’s not just that, a bigger balance sheet also extends the ability to seek out bigger deals. Currently, each firm individually bags a deal with an average size of around $25 million. But the combined entity might enter the much coveted $100 million deal club as well.

Having said that, there are a couple of questions lingering here.

Firstly — the timing.

The post-pandemic years have been a bonanza for the IT industry (we wrote about it here). Companies were trying to increase their digital capabilities quickly and deals came thick and fast. It wasn’t just the number of deals but even the size itself. Everything was bigger and better. And companies were willing to shell out big bucks to future proof themselves.

But now, there’s a lot of economic uncertainty creeping in. And so maybe you could argue that this isn’t the best time to merge operations — especially when you consider the scale of these companies.

Also, we have to ask — Will this affect talent retention?

Typically during such mergers, you see a lot of churn. And if the combined entity struggles to retain talent, this could affect future outcomes. But in many ways, investors are likely to look past these concerns. In the past few years, both L&T Infotech and Mindtree have outperformed their peers by a massive margin. So there is a general expectation that things will continue along this path.

Will it actually happen? We don’t know. Let us know your thoughts

Until next time...

Don't forget to share this Finshots on Twitter and WhatsApp