Tech Mahindra said it has bought US-based network services provider Lightbridge Communications Corp (LCC) for an enterprise value of $240 million, as the IT arm of the Mahindra Group looks to reach its target of $5 billion in revenue in 2015. The company had earlier said that it would be hard for it to reach that level without large acquisitions. LCC, which was started in 1983, also fits in with TechM's goal of becoming a serious player in network services. TechM is the only Indian IT company in the $40 billion network services space, which is dominated by network equipment makers like Alcatel-Lucent and Ericsson.
LCC is expected to have revenue of about $430 million in 2014 and has an operating margin of about 8%. LCC has $85 million in debt on its books -enterprise value includes outstanding debt. The deal will hurt TechM's earnings per share marginally this year, but will add to EPS starting 2015, company executives said on the call. TechM, which will fund the deal through internal cash flows, expects an outflow of about $200-220 million due to this deal.
The deal will add 20-30 customers to TechM's fold. LCC CEO Kenneth Young, who will be reporting to Gurnani, has committed to improving the margins and growth of the company, it said.Part of the margin improvement will come through increased synergies to moving work to development centres in India.
About 800 of LCC's employees are based in the US, with the rest in Europe, Latin America and Africa. The company has a small presence in Southeast Asia and does not have any development centres in India.
The acquisition of US-based Lightbridge Communications Corporation will help Tech Mahindra to strengthen its presence in the global market for wireless network design and deployment.
Considering that the telecom segment constitutes half of Tech Mahindra's revenue, the integration will offer a long-term synergy to the combined entity . In the short-term, however, there may not be any significant improvement in the consolidated profits and profitability since LCC operates at a much lower operating margin compared with that of Tech Mahindra. In addition, LCC's revenue size is smaller. After integration, its revenue would be over 7% of the combined top line of over $3.4 billion.
Lightbridge Communications Corp (LCC), a privately-held US company , claims to be one of the largest independent network engineering companies in the world offering network design, deployment, consultancy and solutions to enhance network performance.The deal is expected to be completed by the first quarter of 2015.
While the short-term benefits are limited, there are a few factors that go in favour of Tech Mahindra. First, the deal doesn't seem to be expensive. Tech Mahindra has valued LCC at $240 million. LCC is estimated to report $430 million in revenue for 2014. This means Tech Mahindra will pay just over half of the full year revenue of LCC. Deals in the sector have traditionally been valued at 1.5-3 times sales.
Another positive factor is that Tech Mahindra will get an easy access to over 5,000 network engineers of the 30-year old company and to its more than 400 clients across geographies. This should enhance Tech Mahindra's offerings in the telecom solutions segment.
However, improving the profitability of the acquired business will be an uphill task. LCC operates at around 8% margin compared with Tech Mahindra's FY14 margin of 22.2%. In that case, to bring LCC's margin at par with rest of the business should be a priority.
The deal will be funded through internal accruals. Tech Mahindra had over $550 million in cash and bank balance and current investments at the end of the September 2014 quarter.
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