With the Indian information technology (IT) services sector witnessing strong growth momentum on the back of digital transformation, multinational conglomerate Larsen & Toubro (L&T) is all set to merge its IT services business units — L&T Infotech (LTI) and Mindtree.
A Bloomberg report stated that the merger announcement could be announced as early as next week, with details of share-swap ratios. However, mid-cap IT services firm Mindtree in its earning call said that the news is pure hearsay and it wouldn’t respond to speculation.
An email sent to L&T read: “We do not comment on speculative news.” An email sent to LTI did not elicit a response.
“The merger was always on the cards. The timing is right. Both companies have performed very well and the group wants to unlock this value, by merging these two companies into a bigger entity,” said a source in the know.
“This merger also fits in with the group’s vision to morph into a services-focused conglomerate. More importantly, the merged entity does not have any overlaps,” said another source.
The merged entity, which will have a market capitalisation of over $22.05 billion (Rs 1.68 trillion), will have a combined revenue of $3.5 billion. This will make it the sixth largest IT services player from India.
For L&T, this merger ties in with the group’s vision of becoming more services-oriented. The merger has business synergies since both companies have complementary portfolios. For instance, communications media and technology, retail, consumer packaged goods, and manufacturing are bigger focus areas for Mindtree.
In the case of LTI, it is banking and financial services, and insurance that are its largest verticals, with over 32 per cent and over 13 per cent of revenue, respectively, in the third quarter of 2021-22.
However, the merger buzz has not gone down well with the market as share prices of both companies were down. Mindtree stock was down 3.33 per cent to Rs 3,960.8 per share; LTI stock at Rs 5,866 per share was down 2.66 per cent at the end of trading day.
Analysts believe the merger is ill-timed. “A merger of these two entities is a foregone conclusion. Given the growth momentum these companies are witnessing, a merger at this time may not be sensible as it would defocus the management from capturing growth to managing merger complexities,” said Pareekh Jain, founder and chief executive officer, Pareekh Consulting — an engineering consultancy services firm.