• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Kumar Shankar Roy

Advertisement

Who doesn’t like to read takeover ‘buzz’ about a stock or a company on the “prowl” for acquisitions? It is but natural that a good portion of the news flow in the papers and on electronic media is devoted to big-ticket acquisitions, mega mergers, and million-dollar order wins. The problem with this is, more often that not, these stories are based on unnamed “sources”.

Such sources are usually faceless and their credibility can be gauged only later. But time is money in the stock market and ‘later’ could be too late. As somebody looking to invest in a buzzing stock what are signs that you should look for? Should you invest in a company based on what is being circulated in the media? Or should you only go by what the company says? Read on…

Before exploring the questions, a quick recap. The HDFC Bank-Centurion Bank of Punjab (CBoP) merger is an eye-opener. On February 21 this year, a media report first indicated that the banking behemoth was in advanced merger talks with its smaller peer. Both the companies vehemently denied the possibility saying that ‘presently there was no such proposal’ even as CBoP shares closed 13 per cent higher on the day of the report (a Thursday).

So it was a surprise to see HDFC Bank actually informing the stock exchanges just a day later, on Friday (February 22) — safely after markets had closed — that ‘a meeting of the Board of Directors of the Bank will be held on February 23, to consider, in-principle, a possible merger between Centurion Bank of Punjab Ltd and HDFC Bank Ltd.’ We all know what happened later. But there are lessons to be learnt from these episodes.

Business Line pored over all the news clarifications given by companies to the Bombay Stock Exchange this year. They can broadly be classified into news on M&As, expansion plans, order wins/contracts and other corporate developments. Only a handful, around seven of the 28 news reports regarding takeover, actually materialised later. What this means from an investor’s point of view, is that there is only a slim chance of actually making money on speculative news about a takeover. The stock price of the “target” for a takeover most often zooms on the first hint of a takeover, usually opening high as speculators pile on to the stock.

An investor can only benefit if he/she knows the development earlier than most others in the market. But despite this, it does not pay to completely ignore news of a takeover or a company’s reaction to the same.

After all, if the takeover buzz is not true, wouldn’t the price rise be a good opportunity to cash in on the stock? Here’s where you may need to do some homework. Whenever news of a deal, takeover or acquisition is reported in the media, companies are required to clarify (not always on the same day) if the same is true or not to the stock exchange.

The clarifications, usually faxed, are a standard procedure initiated by the Surveillance and Supervision Department of the BSE or any listing authority as to whether the company confirms or denies any development.

These can be viewed on the BSE at http://bseindia.com/cirbrief/notices.asp (date-wise) and on the NSE look at the ‘Latest Announcements’ section at http://www.nseindia.com .

However, given that clarifications are seldom straightforward, you’ll have to understand the nuances and what it means for the stock. The longer the clarification, the better it is to really understand what the company means. For instance, terms such as “in exploratory talks”, “we are evaluating options” or “in discussion” or even “nothing has been finalised” should not be ignored.

These suggest that the company accepts that something is definitely cooking on the deal front, though nothing concrete is out as yet. On the other hand, some companies hotly deny that anything is afoot: “We are not aware of any such development”, “We wish to clarify that this report is speculative and not factually correct” or “There is no such proposal as speculated in the article before the Board of Directors at this point in time.”

But even taking such announcements at face value may not be the right thing to do. Take for example: Wipro’s acquisition of the US-based company Infocrossing. When the news broke on August 6, 2007, Wipro first denied it to the exchanges at around 2 o’clock.

Take a look at the wording of the clarification. “In line with the Company’s strategy for growth, the Company is always in discussions with various Companies and Investment bankers to explore potential acquisitions, alliances and partnerships. If and when any definitive agreements are reached on transaction, the Company will make the appropriate announcements.” Wipro’s clarification kept the door open for any future announcements. It used this too at around 5 o’clock on the very same day, confirming the development!

Having said this, some companies do give detailed and meaningful clarifications that keep investors updated on different stages of the transaction. These help you to understand what is going on and how you should pace your moves.

There are instances of a few companies accepting news about an acquisition, corporate development or takeover, in the early stages too. Some recent examples may be Larsen and Toubro (loss in commodity hedging), Essar Shipping (debt-raising plans), IDFC (its Stanchart MF buy) and IL&FS (stake sale by E*Trade) etc.

Clarifications come in handy as an extra, credible piece of information about speculative news. Read them with the original news report, if you want to arrive at any conclusion(s).

Weigh the credibility of the news source and the prominence given to the news, before you act (First page stories, even if unconfirmed, mostly turn out to be true);

Remember how the corporate communications department of the company handled previous instances. Did they hotly deny a bit of news which later turned out to be true?

When it gets into print or TV, stock prices generally have already begun their march. Decide on the maximum price that you would be comfortable with, if you decide to invest in such a buzzing stock.

It is up to you or your investment advisor to tell you what should be the fair value of the stock.

A single development sometimes may not make such a big difference to a company, in such instances, it may be best not to jump on to the bandwagon at all. It is only with a matter of time before most undervalued stocks are fairly valued.

More Stories on : Corporate | Insight | Investor Protection | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Cement’s pressure points

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line