UPDATE: Satyam, Tech Mahindra Clear Merger; Shares Rise

Tech Mahindra Ltd. (532755.BY) Wednesday announced its long-awaited buyout of Satyam Computer Services Ltd. (500376.BY), saying it will merge the once-troubled company into itself in a deal which could wipe out Tech Mahindra's entire debt and create a company with a market value of nearly $3.4 billion.

The combined company, which will be India's sixth-largest software exporter by sales, will have an annual revenue of $2.4 billion.

While the merger was long expected, the method and the share swap ratio were the two key points that investors were looking out for.

In separate statements, the two companies announced a swap ratio of two Tech Mahindra shares for every 17 Satyam shares held -- more or less in line with investor expectations.

Following the merger, the U.K.'s BT Group PLC--one of the parents of Tech Mahindra along with Indian automobile major Mahindra & Mahindra Ltd.--will own 12.8% of the combined entity, while the Mahindra Group will hold 26.3%.

Tech Mahindra shares rose on the swap-ratio news, trading up 2.4% at INR663.95 in a Bombay Stock Exchange market up 0.2% at 0610 GMT. Satyam shares were up at 0.5% at INR74.55.

A huge positive for Tech Mahindra is that Satyam has cash reserves of INR25.61 billion, nearly double Tech Mahindra's debt burden of INR13.76 billion--which was incurred mainly to buy a stake in then-beleaguered Satyam.

Also, investors of Tech Mahindra are backing the growth prospects of the combined entity: While it was earlier focussed on the ailing telecom industry, it will now have exposure to several outsourcing sectors, such as financial services, manufacturing and retail, said Jagannadham Thunuguntla, head of research at SMC Global Securities.

"It is a fair swap ratio, with no room for arbitrage left," he added.

The merger--which will be complete in six-nine months--comes at a time when India's software industry is bracing for a growth slowdown in the next fiscal year starting April, with economic troubles continuing to dog clients in its main markets of the U.S. and Europe.

But a combined entity, with 75,000 employees and more than 350 clients across 54 countries, will have synergies and be better prepared to meet the challenges, say analysts.

For Satyam, Wednesday's announcement completes the burial of ghosts from India's biggest-ever corporate scandal.

In January 2009, founder and then-chairman B. Ramalinga Raju brought Satyam to the verge of collapse, revealing that he had been cooking the company's books for several years and that he had overstated profits by more than $1 billion.

Pune-based Tech Mahindra bought a 42.7% stake in Hyderabad-based Satyam in April 2009 in a government-conducted auction.

Satyam has since then been recovering from the fraud, with a steady improvement in financial performance, though it is yet to clear several legal cases pending against it in the aftermath of the 2009 scandal.

The combined entity now faces the task of clearing those legal hurdles and paying any potential damages.

After the merger, public shareholders of Satyam Computer and Tech Mahindra will hold 50% of the combined company.

Also Wednesday, the two companies said that about 204 million Satyam shares will be transferred to a trust of which Tech Mahindra will be the beneficiary. Further details weren't immediately available.

 
  --By Kenan Machado and Dhanya Ann Thoppil, Dow Jones Newswires; [phone]; [e-mail]