Wipro Ltd. makes an offer to buy MindTree Ltd

MERGERS & ACQUISITION

Submitted byDIVYA WALIa, pgp05PRIYANKA VERMA, pgp05AKSHAY GUPTA, pgp05055AMBICA JAIN, pgp05056

Anusha krishnan, pgp05008Miranda joseph, pgp05029Anugraha satheesh,pgp05059Athulya lekshmi, pgp05061

WIPRO Ltd.-ACQUIRER

BFSI26%

MFG & Hi-tech18%

RCTG14%

ENU16%

GMT14%

HLS11%

Industry wise Revenue Split

Americas51%

Europe28%

APAC and

OEM12%

India and Middle East10%

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 STRENGTHSHeritage of R&D services gives a strong technological edge to the companyBroad based and balanced portfolio across industry verticals, service lines and geographiesEarly innovation in remote infrastructure services and rapid growth has led to a large, fast growing Infrastructure services practiceStrong delivery processes through investments in automation, artificial intelligence and next gen deliveryEarly investments in the Digital business to capitalize on the next wave of growth driven by digital transformation

Why think of an 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 reasonsWipro is sitting on cash- 156672 mn of excess cashMindtree is a good target because it is professionally managed and good corporate governance practices

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 STRENGTHSDigital Expert Thinking Alliance and partnerships Customer centricity Leadership and corporate governance People focus, learning and high performance culture

RCM22%

BFSI24%HTMS

33%

TH16%

Others6%

Industry wise Revenue Split

US62%

Europe25%

india4%

Rest of the world9%Geography wise Revenue split

Promoters12%

Foreign Institutions37%

Other Companies20%

General Public11%

NBFC and Mutual Funds

7%

Foreign - Others6%

Shareholding Pattern

Synergies

+

Operational synergy•Entry into PES 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

Valuation- DCF Wipro and Mindtree are valued separately and then the combined entity is valued including synergy assumptions

Cost of capitalCalculated Synthetic beta from beta values available for peer companiesAdjusted it downward for the stable period calculations-long term betaWACC=14% Mindtree and WACC=11% for Wipro

Revenue drivers for MindtreeSegments % of

revenueCAGR

ITS-Manufacturing & retail18% 31%

ITS- BFSI (Banking Financial services and Insurance)21% 27%

ITS- Travel Media & Services20% 14%

ITS- Others7% 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 periodFor Wipro, a 2 stage model is used

Terminal Value

Terminal growth is calculated based on GDP growth of marketsUS, Europe and other emerging markets GDPs were taken, found out weighted average based on sales

valuation

Valuation- DCF- WACC & TERMINAL GROWTH

Valuation- MINDTREE

Valuation- WIPRO

Valuation- SYNERGY

Valuation- ReLATIVE •Price to Earnings multiple is used andPEG ratio based on earnings is also used•Weights to peers based on asset size and revenue growthAdvantage•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 easilyDisadvantage•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 reductionRPE (wipro=2.9 mn) (Mindtree=2.34 mn)

Why to go for 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 companyMarket Value

Book value

MV/BV 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

DIRECTMERGER

Form of acquisition- DIRECT MERGER

Series1

41.05%

11.33%

45.24%

15.29%

13.71%

73.36%

Shareholding Pattern

Non institution InstitutionPromoter

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

THANK YOU