LTIMindtree’s investments in higher-value services could shuffle the TWILTCH deck

The Situation: Consolidation through M&A is typical of mature markets where large organizations seek to scale out by expanding into existing markets, targeting new ones, and adding capabilities and talent. The merger of LTI and Mindtree is unique; the initial hostile takeover of Mindtree happened in 2019, but both entities were deliberately kept separate. Where do things stand now?

From the outside-in perspective, both organizations were on a successful trajectory. So, what has changed? What does it mean for the broader market? And most importantly, could the merger disrupt the pecking order of the leading Indian service providers?

The announcement in detail

In its announcement, LTI stated its rationale for the merger was recent industry shifts, namely the “prominence of large deals and a preference for end-to-end offerings that would benefit larger service providers.” HFS noted a marked increase in the number of IT services engagements, which are usually $5 million to $20 million. Most mega-sized deals are renewals of existing large engagements, usually with some scope expansion. However, this preponderance of smaller-scale deals is pressing the need for broader and deeper resources from service providers to cater to the excess customer demand.

At the same time, Mindtree announced that its CEO Debashis Chatterjee (“DC”) would lead the new entity, not LTI’s CEO Sanjay Jalona, despite overseeing significant growth in the LTI organization, most notably a revenue increase of 26% over the last fiscal year and a doubling of its revenues since taking the helm in 2015. Jalona has subsequently departed the organization. LTI opted for Chatterjee despite his shorter CEO experience; he has overseen LTI’s growth since taking the Mindtree CEO role in 2019. A longtime Cognizant leader, DC has two decades of Cognizant growth experience that clearly appeals to the LTI board. He has already brought former Cognizant colleagues to the firm to bolster a similar growth model.

If approved by shareholders and regulators, all shareholders of Mindtree will be issued shares of LTI at the ratio of 73 shares of LTI for every 100 shares of Mindtree. The new LTI shares so issued will be traded on the NSE and the Indian BSE (formerly Bombay Stock Exchange) market. After the merger, parent Larsen & Toubro Limited, an Indian engineering conglomerate, will hold 68.73% of LTI. The merged entity will rebrand as LTIMindtree Ltd.

To play at the big kids’ table, you need to be a grown-up

Post-merger, the new entity would close the gap with the leading Indian-heritage TWITCH providers (Tech Mahindra, Wipro, Infosys, TCS, Cognizant, and HCL). As Exhibit 1 outlines, LTIMindtree would become the seventh-largest provider in India based on revenues. The combined LTIMindtree will exceed $3.5 billion in revenues and comprise a workforce of more than 81,000 FTEs. From a revenue perspective, 69% of pro forma revenues come from the Americas, 17% from Europe, and 14% from the rest of the world. By contrast, the offshore ratio exceeds 80%. However, in terms of market capitalization, LTIMindtree would even surpass Tech Mahindra, and that captured the imagination of the Indian press. But with that attention to breaking into the TWITCH stranglehold come changed market expectations. What was good until now will become a hygiene factor moving forward. It would no longer suffice to focus on implementations and being a challenger organization; the focus must shift to end-to-end capabilities and transformation with a global reach.

Exhibit 1: LTIMindtree will become India’s seventh-largest provider (by revenue)

Data: Company information
Source: HFS Research, 2022

Where are the synergies?

The companies’ portfolios are complementary. Mindtree will add considerable muscle in communications, media, and technology (together comprising 43% of its revenues) to LTI’s portfolio, which has banking, financial services, and insurance (BFSI) as the main vertical. This combination creates a more balanced portfolio for the new entity. Regarding geographical reach, both entities have strong exposure to the North American markets. Thus, the synergies will largely come from taking cost out of the merged operations while getting this additional industry play that Mindtree brings.

Reflecting on some of our recent discussions with both companies, we see LTI entrenched in capital markets, accounting for most of its BFSI revenue. This is different from its peers, where banking tends to lead. Here, the issue of scale touted in the merger announcement is more tangible. LTI is playing the angle that it is not a mid-tier in the capital market but that it has matured into a big player. Both growth and wins suggest there may be something to this. Similarly, it displays strength around Temenos; capital market firms are hungry for specific talent, so this clearly helps. In energy, LTI played the scale card differently. It points to the combined domain expertise with its parent company, the engineering conglomerate Larsen & Toubro. LTI boasts a powerful collaborative ecosystem and an ability to “talk the industry talk” better than most. And last, Mindtree has been investing in domain capabilities rather than technical capabilities in health by investing in US-based COPE Health Solutions, a consultancy in value-based care. An additional strategic lever of this investment is a strategic partnership helping craft a differentiated ecosystem, thus ringfencing Mindtree’s willingness and ability to engage in emerging ecosystems.

Looking at the ambition to be considered for bigger deals, it is not just a question of scale. If the new company wants to be more relevant, it must invest in consultative and transformational capabilities, where the highest-value engagements are being captured. LTI successfully met Horizon 1 requirements, and Mindtree got recognition for pushing experience-led outcomes for more innovative Horizon 2 requirements. Thus, LTIMindtree should consider targeted M&A as an effective way of demonstrating an ecosystem mindset underlining broader transformational capabilities. Infosys’ recent dalliance with EY is a good example of referencing ecosystem credentials. Last, those broader capabilities need to be conveyed through effective engagement and marketing programs. Those programs need to weave the joint capabilities together in crisp narratives to achieve the success the new venture is aspiring to.

What are the implications for India’s mid-market?

Indian mid-market providers have two main characteristics. First, they have typically grown faster than their larger peers. Second, private equity has taken a strong interest. Most active are Virtusa owner Baring, Coforge, Straive (formerly SPi Global), and Hinduja Global, which sold Hexaware to Carlyle for $3 billion in the largest M&A transaction thus far. Furthermore, Blackstone acquired a majority stake in Mphasis in 2021. Investors are flexing their muscles as they initiate change management programs, as we can see with Virtusa.

Thus far, Baring has resisted putting its respective assets together, possibly holding out for M&A moves of the Western service providers. Especially recessionary times could lead to attempts to take out costs. However, we still haven’t seen any large-scale acquisition from any Indian incumbents. Nobody had the appetite to make an opportunistic bid for Kyndryl or create value out of the infrastructure business Atos is trying to spin out. There is no obvious playbook that could change dynamics among the Indian mid-tier providers.

Exhibit 2 highlights that LTI is outgrowing the mid-tier segment. Yet, the gap between the TWITCH providers and LTI are still significant, possibly explaining some of the rationales for the merger.

Exhibit 2: LTI was outgrowing the Indian mid-tier market

Data: Company information; Hexaware and Virtusa were taken private; thus, the data is incomplete
Source: HFS Research, 2022

The merger must immediately address economic uncertainty and avert rampant staff attrition

There had been rumors about the merger for a while, but its timing still stands out. Because of the war in Ukraine and broader supply-chain disruptions, major economies face the prospect of recession. Thus, the inevitable heavy change management at the new entity will face significant headwinds. Further complicating the situation is that the acquired Mindtree will provide the CEO, and LTI’s stalwart Sanjay Jalona has been squeezed out. There will likely be more disruptive movements within the organization as DC consolidates his leadership team and merges the corporate cultures.

Additionally, LTIMindtree must immediately address the record attrition all the leading Indian-heritage service providers are experiencing (see our recent post). While the increased staff capacity gives the new company more room to maneuver regarding bidding on larger deals, if management does not handle staff morale well during the merger, it would deliver a strong message to staff regarding LTIMindtree’s strategy and plans; thousands of staff could take flight and join competitors or startups in this environment.

Don’t forget that LTIMindtree—like TCS—is part of a broader conglomerate. Larsen & Toubro is an engineering and construction firm providing its subsidiary with additional channels. As the largest shareholder, it also drives the political decisions of its future.

The Bottom Line: LTIMindtree should look at moving up the value chain rather than focusing on scale

While LTI stated its ambition is scale, it needs to balance this goal with more consultative and transformational capabilities. It should focus on evolving to become a transformation partner rather than an implementation partner. To ensure that it can reshuffle the TWITCH pack, it must create the nuanced messages crystalizing this broader ambition.