The Hindu Business Line : M&As and stock calls

Is the company in which you hold shares an acquisition target? Here is how you prepare your ground in order to take sensible hold or sell decisions.

Kumar Shankar Roy

You rejoiced when Tata Steel and Hindalco beat other bidders to acquire companies overseas. What if some global major acquires the Indian company you hold shares in?

What happens when your company becomes the target of an acquisition? Stock prices often react quite sharply to news of mergers or acquisitions.

News effect

Even the whiff of an acquisition usually boosts the stock price of a potential target company. The stock of the acquiring company may not be so predictable. If there are fears of a high-priced deal, the stock can take a hit.

If there are several potential acquirers in the fray, it can really turn out to be a windfall for investors in the target company’s stock.

The ‘goodwill’ factor

If the company has shown respectable performance, is in a promising business or has strong brand visibility, the value of ‘goodwill’ plays a big role in deciding the price at which the deal may be sewn up.

‘Goodwill’ is the sum a company pays over and above the book value of another to purchase it.

Imagine if Hutch was a listed company and you held shares in it — Vodafone paid $13 billion to acquire a stake in it, mainly towards brand value and Hutch’s customers. But, if the company you’ve invested in isn’t doing so well, a merger can still be excellent news.

This is because, in this case, a new management can turn around the ailing company or even offer an exit route to someone who is saddled with an under-performing stock for years.

Not all acquisitions are mergers

Since the terms ‘merger’ and ‘acquisition’ are often used together, investors can be confused about what they mean. An acquisition can be a precursor to merger.

The acquirer can choose to merge the acquired company. An acquisition refers to a situation where one company acquires control in another.

A merger occurs when a company finds advantage in combining business operations with a different company in a way that will contribute to bigger operations or greater scale.

Theoretically, a merger is preceded by the announcement of a share swap ratio or the rate at which the two companies will exchange their shares.

In mergers, one company can be merged into another at the swap ratio. Or two companies can be merged to form a new entity. For example, National Aviation Company of India (NACIL), the entity that was formed after the merger of Air India and Indian Airlines.

In some cases, cash or some other form of compensation is used to facilitate the transaction.

Evaluating M&A

If you hold the target company’s stock, find out information concerning the acquirer in terms of business, management and financials.

Look at the structure of the acquisition. How is the acquisition being made — through cash or through a combination of shares and cash?

The press release that announces the deal usually has details as regards to the rationale for the deal and the milestones to be crossed before the deal is finalised.

Keeping track of various dates — the date when the final results of bidding are announced, the date of open offer, if any, the last date for revision of bids, etc, — would be crucial if you hold the stock of a target company.

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