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Section a group-3&4 wipro mindtree acquisition
- 1. Wipro Ltd. makesan offer to buy MindTree Ltd MERGERS & ACQUISITION Submitted by DIVYA WALIa, pgp05 PRIYANKA VERMA, pgp05 AKSHAY GUPTA, pgp05055 AMBICA JAIN, pgp05056 Anusha krishnan, pgp05008 Miranda joseph, pgp05029 Anugraha satheesh,pgp05059 Athulya lekshmi, pgp05061
- 2. WIPRO Ltd.-ACQUIRER BFSI 26% MFG & Hi-tech 18%RCTG 14% ENU 16% GMT 14% HLS 12% Industrywise Revenue Split Americas 51% Europe 28% APAC and OEM 11% India and Middl e East 10% Geography wise Revenue Split •Wipro Ltd., incorporated in the year 1945, is a Large Cap company (having a market cap of Rs137670.88 Cr.) operating in Information Technology sector MAJOR STRENGTHS Heritage of R&D services gives a strong technological edge to the company Broad based and balanced portfolio across industry verticals, service lines and geographies Early innovation in remote infrastructure services and rapid growth has led to a large, fast growing Infrastructure services practice Strong delivery processes through investments in automation, artificial intelligence and next gen delivery Early investments in the Digital business to capitalize on the next wave of growth driven by digital transformation
- 3. Why think ofan acquisition? The growth rate for Wipro Ltd is relatively constant compared to its competitor The Digital Opportunity Estimated to be an over $225Billion market by 2020, 80% of incremental investments of enterprises are expected to be in and around Digital, driven by need to go 'Digital' to address the consumer. Other reasons Wipro is sitting on cash- 156672 mn of excess cash Mindtree is a good target because it is professionally managed and good corporate governance practices
- 4. Mindtree Ltd.-target •MindTree Ltd.,incorporated in the year 1999, is a Large Cap company (having a market cap of Rs 12606.09 Cr.) operating in Information Technology sector MAJOR STRENGTHS Digital Expert Thinking Alliance and partnerships Customer centricity Leadership and corporate governance People focus, learning and high performance culture RCM 22% BFSI 23%HTMS 33% TH 16% Others 6% Industry wise Revenue Split US 62% Europe 25% india 4% Rest of the world 9% Geography wise Revenue split Promoters 12% Foreign Institutions 38% Other Companies 20% General Public 11% NBFC and Mutual Funds 7% Foreign - Others 6% Shareholding Pattern
- 5. Synergies + Operational synergy •Entry intoPES and R&D services domain- Mindtree concentrates more on R&D software service • Network effect New customer groups-Access to each others’ clients Word of Mouth- wide customer base •Move from traditional approach Mindtree developed their own IP for Bluetooth technology. It is world’s first Bluetooth smart 4.2 IP provider •Employee cost reduction Lower Revenue per Employee(RPE) Mindtree focus on digital practice through acquisition of companies with technology platform •Mindtree has former key employees of Wipro- hence cultural integration is possible •Shared overhead and avoid overlapping distribution channel such as sales and websites Financial synergy •Underutilized borrowing capacity- Mindtree is a zero debt company
- 6. Valuation- DCF Wipro andMindtree are valued separately and then the combined entity is valued including synergy assumptions Cost of capital Calculated Synthetic beta from beta values available for peer companies Adjusted it downward for the stable period calculations-long term beta WACC=14% Mindtree and WACC=11% for Wipro Revenue drivers for Mindtree Segments % of revenue CAGR ITS-Manufacturing & retail 18% 31% ITS- BFSI (Banking Financial services and Insurance) 21% 27% ITS- Travel Media & Services 20% 14% ITS- Others 7% 17% PES (Product Engineering Service) 34% 22% For mindtree, 3 stage valuation is used– 5 year high growth period and then 4 year intermediate growth period For Wipro, a 2 stage model is used Terminal Value Terminal growth is calculated based on GDP growth of markets US, Europe and other emerging markets GDPs were taken, found out weighted average based on sales
- 7. Valuation- DCF- WACC& TERMINAL GROWTH
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- 11. Valuation- ReLATIVE •Price toEarnings multiple is used andPEG ratio based on earnings is also used •Weights to peers based on asset size and revenue growth Advantage •Since Wipro has less debt and Mindtree has zero debt, EPS is not highly manipulated – so P/E ratio is reliable •P/E ratio can be calculated easily Disadvantage •Relied on a single value indicator, EPS •EPS historical growth was not consistent, so PEG ratio calculation used the average growth (Per share) WIPRO MINDTREE DCF method 518 1330 Relative valuation 600 1535 Market value 550 1500 Valuation- SYNERGY Synergy (in mn) Wipro equity value 1279141 Mindtree equity value 111367 Combined equity value 1434593 Value of synergy 44085 Synergy Value Description Sales synergy 1% of sales Access to well diversified clients of Mindtree and Mindtree services can be sold to Wipro customers, access to new technology and processes Cost synergy 0.7% of operating expense Employee cost reduction, overhead cost reduction, sales and website cost reduction RPE (wipro=2.9 mn) (Mindtree=2.34 mn)
- 12. Why to gofor cash purchase •Wipro has excess cash of 156672 million •The Market To Book value of Wipro is 3.7 which is low compared to its peers •The stock may be undervalued and hence stock purchase is not appropriate • Can retain control over the firm •Shareholder approval of Wipro is not required •Mindtree shareholders may have a tax disadvantage and hence a premium is paid Peer company Market Value Book value MV/B V P/E Infosys 1110 220.9 5.0 10.25 TCS 2560 258.5 9.9 24.99 HCL 980 139.0 7.0 10.54 Wipro 550 150.2 3.7 15.58 The notes to financial statement says “The 9375 million ECB is an unsecured borrowing and the Company is subject to certain customary restrictions on additional borrowings and quantum of payments for acquisitions in a financial year” •The entire cash is not drawn down and chose CASH+ STOCK purchase Price range 1500 (MV) per share to 1857 per share (1330+527) Premium to MV 23.8% Deal 140000 mn in cash and 15452 mn worth Wipro shares (total=155452) Shares given 28.09 mn ie, 1.14% of total shares DEAL Structuring DIRECT MERGER
- 13. Form of acquisition-DIRECT MERGER 41.05% 11.33% 45.24% 15.29% 13.71% 73.36% Shareholding Pattern Non institution Institution Promoter MINDTREE WIPRO •Go for a direct merger with the approval of target board and shareholders •Can form a subsidiary to complete the merger– surviving corporation •Mindtree was co founded by 3 ex Wipro executives- It has many key members as Wipro alumni including CEO Krishnakumar Natarajan •So the integration would be smooth as key employees are accustomed with Wipro culture Advantage •Can achieve the synergy as integration is easier in friendly takeovers Disadvantage •Requires the approval of Mindtree board and shareholders •Hence time consuming Alternative- Cash for stock •Buy the promoter shares and Go for a tender offer and acquire 51% control stake