Lightbridge Communications Corporation to boost Tech Mahindra's global presence

ET INTELLIGENCE GROUP: 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 per cent 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 fullyear 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 per cent margin compared with Tech Mahindra’s FY14 margin of7 22.2 per cent. 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.