Closing The Deal

The recent open offers have shown a pattern that the share price rises after an open offer is announced and drops after the offer is closed. Are there any opportunities here for investors?

In less than two years since the takeover code has come into existence, there have been over forty open offers. The objective of these open offers varied from consolidation of stake to strategic acquisition. It may appear that open offers are only for those investors who have a holding in the company that is being acquired. But that is not the case.

We looked at a dozen companies that have seen an open offer in the past year and explored the possibility for new investors. Our finding: Buying when the open offer is announced on the market and selling the shares in the market before the offer closes can give stupendous returns in a very short time. But this strategy can be dangerous. There are days on end when the scrip keeps hitting a circuit filter in a single direction.

 

In the open offer route the offer price is always at a premium to the prevailing market price at the time of the offer. This throws up a good opportunity for investors to make a fast buck. Once the open offer is announced publicly or news about the open offer hits the market, the price starts moving with rising volumes.

The most widely held notion among investors is that at these times it is better of to avoid investing in the scrip which is sought to be bought. This is due to the spurt in the volatility of the scrip as some smart investors find this an attractive route to make a fast buck. Let us look at the various opportunities available to the investor.

Fleet-footed fast bucks

Merind which was trading at Rs 130 levels rose to Rs 249 in eight trading days. An investment at that point of time days would have provided the investor with a phenomenal 76 per cent return. Indian Aluminium (Indal) which was ruling at Rs 60 levels till mid-February 1998 went up to Rs 100 by the end of the month - a 66 per cent return in a fortnight.

Does this mean that it is possible to get these kinds of returns? The answer is yes it is possible. This is due to the fact that it provides investors to make near riskless profits. The market is abound with profit hungry arbitragers who will come into play in the market. These players will reduce the gap between the market price and the offer price.

Another reason for the investor to act quickly is the presence of circuit filters which will stop trading once the price crosses a prescribed level in the market. Yet another reason is liquidity in the scrip.

For example, Wimco is one of the scrips in which the liquidity is low and the average daily trading volumes are in the range of 1000 shares. So, to get these mind boggling returns, the investor must be fleet-footed. The liquidity is another crucial factor for investors to book profits as you may not find a counterparty in a low liquidity scrip like Sahney Paris Rhone and even Wimco.

Let us take the case of Raasi Cement, a company which was taken over by India Cements. The open offer for acquiring a 20 per cent stake in Raasi Cement was at Rs 300 per share. The day the news broke out, Raasi Cement was quoting at Rs 161. In just nine trading days the price went up to Rs 270. Assuming that the investor had bought at Rs 161 and sold at the high of Rs 270 a return of 67 per cent. Supposing he had opted for the open offer route to exit after buying at Rs 161 he would have got a return of 86 per cent return in just two months.

In Sandvik Asia, the foreign partners wanted to acquire a controlling stake in the Indian arm. The open offer was at Rs 1,800 per share. If an investor had bought the share on the day of public announcement at Rs 1600 and sold it to the foreign partner they would have got a 12.5 per cent return in just about two months time. During the same period the share price had touched a high of Rs 2,020 and if the investors were able to sell it at say Rs 2,000 a 25 return in just over three months time. From then on the price has been on a downward move and is currently trading at Rs 1,300.

The Wimco case is also similar where the price went up to Rs 32 from Rs 29.75 and from then on it started coming down. It is currently trading at Rs 13 per share. The returns in both these cases are far from phenomenal.

Short selling to high returns

Another opportunity that the open offers have thrown open is that once the open offer period closes, the share price starts moving down. This is due to the market readjusting the price back to what it thinks is the fair value of the stock.

For example, the share price of Indal was quoting at Rs 145 the day after the offer was closed. From there it went down to Rs 123 in just a week - a 15 per cent return in just four days. From there on it has come down to Rs 67.50 in two months.

Beware of liquidity

Sahney Paris Rhone another company which witnessed open offer by its technical collaborator to acquire a 20 per cent stake from the market at Rs 117.40 per share. The offer was announced publicly on November 11, 1997 and the price started moving up from Rs 68 on that day to a high of Rs 100 in mid-January 1998. If the investor had bought on the day the offer was announced, there was a 47 per cent in two months but the price started falling and is currently trading at Rs 62.40. This is one good example of a scrip which should be avoided due to the absence of liquidity. Its average daily volumes ranged in the 100 to 200 shares, plus it remains untraded for a number of days in a month.

Is the premium justified?

This brings up the question why acquirers are offering to buy shares at prices much higher than the prevailing market price. For shareholders to part with their holdings the price should be attractive. Secondly, to mobilise the targeted stake, the price should be attractive as different shareholders have their own opinions on the price at which they are willing to sell.

Thus a broad spectrum of investors need to be satisfied. For example, the acquisition of Raasi Cement by India Cements is a strategic move. In this case the company is able to consolidate its position in the industry in the southern region. Through this route it will be able to grow at a much faster rate than by a greenfield venture. The cost involved in setting up a new cement plant would have been much higher than the cost it incurred in buying out the stake in Raasi Cements. Looking from this angle the price offered by the acquirer can be justified.

Indal is another case where a hard battle was fought between the local acquirer Sterlite and the foreign collaborator Alcan. Sterlite initially came out with a Rs 90 offer for a 20 per cent stake which was countered by Alcan. Then there were offers and counter offers by both the parties and finally Alcan offered to pay straight cash of Rs 175, while Sterlite offered a package of straight cash and optionally convertible preference shares with a value of Rs 225. Finally the Alcan offer went through.

The entire struggle took the share price to a high of Rs 170 and after the dust settled, it is currently back to where it was before all this started a fall of 60 per cent in two months time. The fall could be due to the fact that other than the foreign collaborators stake increasing, nothing else has changed. Hence the market brought it down to these levels.

In the case of foreign firm hiking their stake, it has been one of consolidating its stake. So far there have been many firms which have seen open offers for this purpose. Sandvik Asia, Kanthal, Knoll Pharma, Wimco and Abbott Laboratories have witnessed open offers.

In the case of Kanthal India the foreign promoter wanted to increase its stake to have controlling stake of 74 per cent and hence the open offer for the 22.46 per cent. Sandvik Asia also witnessed open offer by the foreign promoter to increase its stake in the Indian arm to 75 per cent.

By far open offers in the Indian arm of foreign companies were in industries which involved high investment in the form of technology and proprietary know-how. This necessitated the foreign promoters to have a controlling say in the operations of company.

While in the case of Wimco, the acquirer Sweedish Match (SMA) had an indirect holding in Wimco and wanted to increase its stake in the Indian operations and came out with an open offer to acquire 20 per cent stake. It wanted to restructure the company by selling off Wimco's subsidiaries which were in unrelated business and concentrate on its core business. So far nothing has happened in this front. The share price has reacted to this and it is currently quoting at Rs 13 levels.

To sum up, open offers can be used as a tool to make short term profits as it throws up opportunity. But, whether to take the offer and sell the shares to the acquirer or not should be decided on a case to case to basis evaluating the objective of the acquirer behind his decision to take over or increase the stake. And in most cases, there are opportunities for supernormal profits, but only if you can bear the risk.