Financial Chronicle, 17/1/2011
The acquisition of Patni Computers by Nasdaq-listed iGate last week followed a trend — investors dumped the stock fearing that iGate was buying a company larger than itself, besides saddling itself with huge debt. While iGate lost nearly 20 per cent shares in two days, shares of Patni too fell.
Whenever a listed company announces a big-ticket acquisition, the stock tends to fall due to concerns of stretched financials and huge debt burdens involved in funding takeovers on their balance sheets. But, this also allows smart inves-tors to go for bargain buys. So, as an investor, is it a good idea to invest in these stocks, when they fall with the expectation that they will gain later?
For big-ticket acquisitions, it is believed that it would result in a huge debt burden on balance sheets of Indian acquirers and hence, were perceived as investor-unfriendly.
FC Invest spoke to experts, who said that investors can take a bet on stocks of good companies, which would help them judge the execution strategy for a successful integration that would be beneficial in the long run.
We look at some of the mega acquisitions by Indian companies and analyse how their stocks performed.
Shares of Tata Steel took a beating after it announced a $12-billion offer to buy Anglo-Dutch steelmaker Corus Group in January 2007. The process of acquisition concluded only after nine rounds of bidding. After the deal, the shares ended down 9 per cent at Rs 463.95 as investors felt the company was paying too high a price and the purchase could strain the finances at least for the short term. The acquisition was funded by more debt and cash. Eventually, after the deal, the shares were under constant pressure and going into 2008, when the financial crisis and global recession took centrestage, the stock plunged to Rs 216.85 by the end of the year. As the economy improved in 2009, things looked good and the stock bounced back and closed at Rs 617.60 by the end of 2009, up 184 per cent.
Similarly, the announcement in 2007 that Hindalco was buying Canada’s Novelis for $6 billion in 2007, resulted in the stock plunging to Rs 172-levels, after the acquisition. The stock closed at Rs 51.65 in 2008. The deal also involved a debt component of $2.4 billion. As the commodity boom returned, Hindalco shares closed at Rs 160.75, after the merger. Tata Motors had bought Jaguar Land Rover (JLR) for $2.3 billion in March 2008.
Two months before the acquisition, the company had a market capitalisation of Rs 24,000 crore. Five months after the deal, it had plunged to Rs 6,500 crore. The stock plunged from Rs 705.12 in March 2008 to Rs 344 in September 2008. Tata Motors’ market cap has now moved up to Rs 74,618.34 crore, more than 10 times its bottom in 2009. The stock hit Rs 1,381.40 in December, before slipping to Rs 1,178 on Friday.
These examples show investors who held on, or those who bought at the low price are now reaping rich dividends. “All these deals were done when the market was at its peak and so the valuation was viewed as costly. Also, the acquisitions are initially dilutive to earnings and these were big-ticket acquisitions, which burdened the balance sheets. However, these companies have scored because of their execution strategies and a successful integration has helped them regain lost value. So, one should look at the execution skills of the company before making a ‘buy’ call on stocks, which are down after a deal is announced,” Jagannadham Thunuguntla, equity head of SMC Capital, said.
Last year, Bharti Airtel agreed to buy the African assets of Zain for $9 billion in cash in the second- biggest overseas acquisition by an Indian company. In its third attempt to expand in Africa, New Delhi-based Bharti, also inherited $1.7 billion of Zain’s debt. After the deal, the company’s shares were hovering around Rs 310.95 and plunged to Rs 293.53. But slowly, investors started to see value in the deal and the stock is now trading at Rs 342.70.
“If you look at the acquisitions, most of the targets where loss-making companies operating in a troubled environment. In addition, the debt portion involved in many deals, caused a knee-jerk reaction after the deal was announced. But it tends to subside once the company gets into the integration mode and starts to realise benefit from the acquisition. In case of companies, with a proven track record, if the stock falls over 15 per cent on an acquisition announcement, it is a good time to accumulate,” Vivek Karwa of Chennai-based financial advisory firm Vridhi said.
“It all comes to the final execution in terms of big-ticket acquisitions. You see these targets meaningfully contributing to the earnings in the long term, which is also reflected in the share prices. So, the track record of the company matters when it comes to taking a ‘buy’ call,” Alex Matthew, head of research at Geojit BNP Paribas Financial Services, said.