The Hindu Business Line : IT mid-cap: When FIIs smell the money...

WHEN a deal is round the corner, bet on institutional investors to smell the money. A study by Business Line of M&A (merger and acquisition) activity in mid-cap software companies shows that select FIIs (foreign institutional investors)/mutual funds invariably increased their equity stake before a company announced a deal (acquisition or delisting) and that public shareholding in the company came down more often than not.

Take, for example, i-flex Solutions where Oracle acquired the 43 per cent holding of Citigroup Venture International recently.

FIIs and mutual funds that had hiked their equity stake between March and June 2005 in i-flex and retained it till early August are set to reap a bonanza now.

Morgan Stanley, which held 0.99 per cent stake in March, had enhanced the exposure to 1.26 per cent and Templeton Mutual Fund had almost doubled it, from 0.56 per cent to 1.09 per cent, during this period.

Assuming they had acquired the stock in end-April when it was trading at about Rs 600 and retained it till the deal with Oracle materialised (when the stock was trading at Rs 900), Morgan Stanley and Templeton Mutual would have been richer by over Rs 2.3 crore and Rs 15.7 crore, respectively, on their incremental holdings alone.

However, two other FIIs, HSBC Global Investment and T Rowe Price International, either pruned exposures or retained it at the same level.

The time between April and July, in the course of intense churn in the mid-cap software space, has thrown up some interesting patterns in institutional behaviour.

Take, for instance, the recent decision of Flextronics Software (formerly Hughes Software) to delist. Since its parent, the Singapore-headquartered Flextronics, announced its decision to buy out the non-promoter equity of 30.3 per cent, the stock has shot up way past the price of Rs 575 that Flextronics is willing to pay for the stock.

Interestingly, between March and June, the two institutional investors that enhanced their equity stake in Flextronics Software are HSBC Global Investment (5.12 to 5.37 per cent) and Templeton Mutual (2.45 to 3.44 per cent). The other key institutions such as Oppenheimer Funds, LIC and Unit Trust of India, however, have either retained or reduced their exposures in this period.

In sharp contrast, the public shareholding dipped to 4.48 per cent in June from 6.06 per cent in end-March. Some analysts feel that this could be due to public shareholders being typically risk-averse vis-a-vis the institutional investors.

However, what is significant is that both HSBC Global and Templeton Mutual have retained their exposures in the 5 per cent and 2 per cent bracket for the previous four quarters, in anticipation of this buyout of equity by the parent.

Flextronics had bought out Newscorp's equity stake in Hughes Software in June 2004, but these institutions did not tender to the open offer made later that year.

Even in the latest deal in which Softbank picked up a 14 per cent strategic stake in VisualSoft Technologies, FII holdings have gone up in the past couple of quarters.

From a mere 0.88 per cent in December, the FII stake has moved up to 3.05 per cent in March and further to 5.17 per cent in end-June.

The public holding has, however, come down to 34.21 per cent in June from 41.86 per cent in March.

To establish if this was a consistent trend, we went back to a few deals in the IT services space in the last couple of years.

And we found that FII action surrounding some of these deals such as SSI-Scandent, both in the run-up and post-deal phase, has been in line with the above pattern.

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