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TCS acquiring CMC

Project Report on MACR Submitted to: Prof. J. S. Matharu

Prepared & Presented by: ADITI VAISH 2010013 ALOK PALIWAL 2010024 GAURAV GUPTA 2010072 HIMANSHU ARORA 2010078 PRADUMNA MOHANTY 2010290

Tata Consultancy Services Limited (TCS)

A global IT services, business solutions and outsourcing company
A subsidiary of the Tata Group conglomerate The second-largest India-based provider of business process outsourcing services. In 2004, TCS became a publicly listed company It has 142 offices across over 47 countries and generates around 20 per cent of India's IT exports. The 76th Most Trusted Brand according to The Brand Trust Report The highest ranked Asia-based company and second highest ranked globally in the Information Technology & Services company category.

CMC(Computer Maintenance Corporation) Limited

An Information Technology services, consulting and software company CMC was incorporated on December 26, 1975, as the 'Computer Maintenance Corporation Private Limited The Government of India held 100 per cent of the equity share capital

In 1977, it was converted into a public limited company

It features on top ten companies in India CMC has 18 offices, 150 service locations, 520 non-resident locations and over 10,551 employees worldwide. CMC Americas a subsidiary, services clients in the US

CMC(Computer Maintenance Corporation) Limited

The Indian government divested 16.69 per cent of CMC's equity to the General Insurance Corporation of India and its subsidiaries who, in turn, sold part of their stake to the public in 1996 CMC's shares were listed on the Hyderabad Stock Exchange and the Bombay Stock Exchange (BSE). On 26 December 2001, CMC was privatized by the Government of India in a strategic sale to India-based Tata Consultancy Services (TCS) for Rs 1.52 billion

Tata Sons now holds 51 per cent share in CMC, while the Government of India holds 32.31 per cent and the public hold another 16.69 per cent

Introduction about Acquisition

On 5th Oct 01 GOI sold its 51% stake to TATA sons. The reserve price was Rs. 140.92 per share and TATAs bought it at Rs.197.73 per share. Tata Sons has also come out with an open offer to acquire another 16.69 per cent stake in the company at Rs.281.26 per share.

In 2004, the government divested its remaining 26.5 per cent stake to the public @ Rs.485 per share.

Reasons for acquisition

For TCS this was strategic acquisition CMC had significant domestic market share in software development- 85% domestic sales

1/3rd revenue came from GOI & as part of the deal, for the next two years TCS is guaranteed government business.
CMC brings to the table its expertise in infrastructure development, its domestic orientation and its presence in very specialized areas of education and training. CMC growing @ 23% for last 5 years but Indian IT industry @ 45%- Untapped potential. In niche areas such as maintenance and support, which is an Rs450 cr. domestic market, CMC is the undisputed king with an overwhelming 70 per cent market share.


For TCS, this acquisition provides it with an opportunity to consolidate its operations in India TCS implemented a performance-based pay structure in CMC where the variable pay is determined by an EVA (economic value analysis) model used by TCS The functional areas integrated were finance, HR, sales and marketing, services, R&D, and product integration CMC also had expertise in power and utilities and this helped TCS expand its practice in this area Both TCS and CMS had solutions for the stock exchanges

CMC had products for the logistics management that could be integrated with the industry solutions of TCS

The Pre-disinvestment process

In August 1990, the Government approved to increase CMCs authorized capital to Rs.35 cr. and that additional equity capital be raised in the market. The Government also decided that its holding in CMC should not be less than 60%
In 1992, the Government disinvested 16.69% equity In April 1999, CMC was referred to the Disinvestment Commission, but it was withdrawn as Government decided raising of additional equity via private placement or by directly going for public issue CMC could not raise the funds till November 2000 by way of either private placement of shares or through public issue On 1st February 2001, the Government decided to bring down its equity to 26% by way of induction of a strategic partner and also by way of other means

Reserve price Rs. 140.92 per share TATAs came out with a price of Rs. 197.73 per share This was a 40% premium, which was calculated using relative pricing method. This represented goodwill and would be shown in the balance sheet of TCS next year.

Valuation based on Department of Disinvestment, Ministry of Finance

Disinvestment department came out with the valuation of CMC based of four methods:
DCF (for 100% equity): Rs. 213.5 cr. Asset valuation method: Rs. 37.6 cr. Balance sheet method : Rs.72.7 cr. Comparable companies : Rs.102.5 cr.

Discounted Cash Flow

NI = 25.09 NCC = 8.61 FCI= 108.8 - 95.28 = 13.52 WCI= (37.69-14.73) - (29.96-19.99)=12.99 Net borrowing= 34.14 - 40.56 = -6.42 FCFE= NI + NCC - FCI WCI + Net borrowing FCFE= 15.79 cr.

2 stage H-model
V= D0(1 + gt)/(r gt) + D0H(gs gt)/(r gt). H= t/2 = 2 CAPM= 18% gt= 8%

gs= ROE* (1-dpr)= (25.09/64.70)* (1-.35)= 25.20 %

V= 211.46 cr.

Comparable companies method

Open offer
As per the requirements under the SEBI Takeover Code, the strategic partner had announced an open offer for acquiring shares from the market. Tata consultancy services' open offer for the shares of CMC has met with negligible response In response to this open offer, 96 applications were received for 18,561 shares, i.e., 0.12% of CMCs paid-up capital. Less than 1 per cent of the total public offering of CMC was turned in to TCS in the 45-day open offer period The open offer price was kept at Rs 281.26 per share.

It was the six-month average price under the SEBI takeover guidelines.
TCS stake in CMC now stands at 51.12 per cent.

Legal and regulatory issues

Prior to the divestment, the CMC share had been riding high, bucking the market trend Market value reached Rs. 315 while TATAs paid just Rs. 197 This has led to suspicions that the share price manipulated to fail the privatization.

CMC has a low floating stock of around 17 per cent (83.31 per cent is with the government) and it does not need much money to manipulate prices.

Post-acquisition performance
Performance Indicator Operating Revenue Domestic 448.53 640.27 +43% Financial Year 2001 Financial Year 2006 % change

Total Net Value addition EBITDA PAT Employee Strength Employee productivity CMC Share price

537.68 182.24 35.45 25.09 2862 53.06 236.65

828.79 287.56 44.08 44.11 3431 72.69 540.30

+54% +56% +24% +76% +20% +37% +129%

Stock performance performance

Long term stock performance

Stock price movements


Brief Notes on Privatised Central Public Sector Enterprises (CPSEs)- Department of divestment, Ministry of finance. CMC stock price @ TCS stock price @ SEBI takeover guidelines, CMC share price hike needs probe: Shourie- TOI (3 oct 2001) Few click on TCS open offer for CMC- ET (18 Feb 2002) Rising prices may torpedo Tata's CMC bid ET (11 Dec 2001) Bhatnagar Mohini, (Oct 2001)TCS acquires CMC. NSE live quote data Capitaline databases Our milestones @ Presentation to analysts @ CMC annual reports Baijal Pradip, Disinvestment in India: I lose and you gain, 2001 A painless privatization- (15 Oct 2001) TCS Media reports