Tech Mahindra to acquire US network services provider Lightbridge Communications for $240 million

MUMBAI: Tech Mahindra said it bought US-based network services provider Lightbridge Communications Corp for an enterprise value of $240 million, as the information technology arm of the Mahindra Group looks to reach its stretch 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. "This is our largest acquisition outside India. LCC has about 5,700 employees and this deal will take our headcount to one lakh," Executive Vice President VineetNayyar said on a conference call after the deal was announced. 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. TechM, which will fund the deal through internal cash flows, expects an outflow of about $200-220 million due to this deal.

"Margins of the combined company will fall initially but we will be working on them. The mission will be to bring combined company to 20% EBITDA margins in the next few quarters," Chief Executive CP Gurnani said. The deal will add 20-30 customers to TechM's fold. Lightbridge Communications 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. "Prima facie it appears to be a good deal. They are entering a new business line in network services and this will help them improve their offering," Sagar Rastogi, analyst at Ambit Capital, told ET. He said the deal has brought TechM within striking distance of its $5 billion revenue target.