Three years ago, Larsen & Toubro Limited (L&T) forked 10,800 crore for hostile buyout of Mindtree Ltd. The Bengaluru-based IT services company will be merged with Larsen & Toubro Infotech (LTI), another listed IT services company of the engineering conglomerate, Bloomberg reported citing people familiar with the development.
Several observers, including Mint, said when L&T bought Mindtree in the summer of 2019 that its merger with LTI could pose risks, both of which are culturally diverse companies; Like marrying a horse-powered organization that works on brain-power, that too in startup mode. And therefore, that L&T’s board avoided haste in merging all IT businesses, suggests a careful, calibrated approach.
Smallest IT firm L&T Technology Services Ltd., but with a large part of Vishal’s products and platforms business the immediate question that comes to mind. Will it merge with Mindtree and LTI? Ideally, it should be. L&T holds 74.05% stake in LTI, the largest of the three IT services companies, while it holds 61% in Mindtree. L&T holds 73.95% stake in L&T Technology Services Ltd.
Next, what can consolidated ownership in its IT subsidiaries provide for L&T?
First, this merger of two (or three?) companies would make L&T only the third Indian conglomerate to have built a successful IT business on a large scale (after Tata Sons which has Tata Consultancy Services Ltd. and Mahindra Group which has Tech Mahindra Ltd. , the fifth largest IT services company in the country).
Over the past three decades, at least half a dozen Indian conglomerates, including the RPG Group, CK Birla Group and ITC Ltd, have struggled to scale up their IT businesses.
TCS has built its business from scratch or organically. Tech Mahindra’s business is built on acquisitions (the Mints Twitch+ newsletter noted that 65% of the incremental revenue at Tech Mahindra over the past decade came from acquisitions).
L&T’s IT business is a good mix of organic and inorganic businesses.
LTI ended the year ended March 2022 with over $2.1 billion in revenue. Mindtree ended last year with revenue of $1.4 billion. L&T Technology Services Ltd. is expected to end last year with revenue of $880 million. Upon merging the three, L&T’s combined IT business will touch $4.4 billion in revenue at the end of March 2022, making it India’s sixth-largest IT services firm after $5.3 billion Tech Mahindra.
Second, the high profitability of the service business can give a boost to L&T. This could dip the three IT businesses’ combined operating profit of nearly $800 million through dividends.
Third, this merger augurs well for the company’s employees and customers. A larger company attracts the best talent in the market and opens up opportunities in-house for both the companies. Customers prefer large IT vendors who can offer a full stack of services.
Lastly, since there is minimal overlap between the services offered by LTI and Mindtree, the merged entity can take advantage of the complementary potential. LTI gets about 45% of its business from large banks and insurance companies. Mindtree gets about a quarter of its business from Microsoft Corp, its biggest customer, and a fifth of its revenue from the retail giant. Global banks are working to improve their services for consumers as they prepare to compete with fintech startups. For this reason, banking giants like JPMorgan Chase & Co. are looking at how retail giants like Walmart Inc. can use data analytics and artificial intelligence to improve their business efficiencies. Effectively, this means that Mindtree engineers can work closely with LTI employees to grow the business from their existing roster of banking customers.
Then comes the question, who should lead the combined IT merger business of L&T Group? There is no dearth of candidates. Both LTI and Mindtree have leaders who steer their respective ships effectively. Two in particular strike are ready for the new challenge.
Sanjay Jalona, a former Infosys executive who was appointed by AM Naik in 2015, has seen revenue grow from $208.6 million in the April-June quarter of 2015 to $570.4 million in the January-March period of 2022 – a compounded growth of 3.67%. quarterly growth. This is an industry-leading performance among the ten largest domestic IT services companies in twenty-seven quarters, according to an analysis by Mint. In the summer of 2016, Jalona told Mint that his dream was to make LTI another Infosys. At that time, LTI’s revenue was less than $1 billion, while Infosys’ revenue was $9.5 billion. With the merger of the three IT services, Jalona and L&T could turn their dream into reality.
This is followed by former Cognizant executive, Debashish Chatterjee, who took over as Mindtree’s CEO in August 2019. Mindtree stagnated after its founders exited and its revenue grew from $271 million to $383.8 million in the July-September period of 2019. Latest March quarter, CAGR of 3.54%.
Overall, merger augurs well in more than one case.