Happiest Minds shares fall 12% after ITC unveils stake buy, merger plan

India's Happiest Minds shares plummeted up to 12.2% on Tuesday following news that ITC had plans to acquire a significant stake and merge its unit with the IT services provider. This news sent shockwaves through the market, raising concerns about the lengthy integration process. Meanwhile, ITC's shares jumped as high as 4.7% in early trade in Mumbai.

The deal comes at a crucial time for India's IT industry, which is striving to bolster its capabilities against the disruptive force of AI in the software market. ITC announced a target of $1 billion in revenue for the combined entity by fiscal year 2028. The merged company is expected to be operational in the second or third quarter of 2028, according to Happiest Minds' MD, Venkatraman Narayanan.

However, analysts warn of uncertainty and potential leadership changes post-merger. Karan Uppal, lead IT analyst at PhillipCapital, stated that the merger could lead to "leadership churn" at Happiest Minds, with ITC Infotech likely to take the helm. ITC Infotech, a wholly-owned subsidiary of ITC, will purchase 22.1% of Happiest Minds for approximately $140 million in cash. The deal must still receive approval from the Competition Commission of India.

Morgan Stanley sees the acquisition as beneficial for ITC, potentially expanding the subsidiary's presence in the United States, broadening its client base, and enhancing its capabilities. However, Happiest Minds' shares were trading 11.5% lower at ₹360 as of 11:19 a.m IST, while ITC shares were up 3.7% at ₹264.8.