The Hindu Business Line : Trying to score off rumour, news

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Trying to score off rumour, news

K. Venkatasubramanian

“Buy low sell high”…that is the common refrain of those trading in the markets. But there is also “buy on rumour, sell on news” especially when there is news relating to mergers and acquisitions of listed entities.

While it might be difficult to anticipate and take decisions based on rumours, there are some careful decisions retail investors need to take during an M&A situation.

The positives of synergies or business benefits from any merger or acquisition as articulated by the dealmakers might paint a rosy picture for the merged entity. But from a shareholder’s perspective, there could be concerns.

What if the merger is to be funded by substantial expansion in equity (dilution in earnings) or by raising debt (which results in higher interest costs)? What are some of the concerns associated with such acquisitions that drive stock prices up or down?

Ups and downs

Take the case of the recent Bharti Airtel-MTN merger talks.

Bharti’s exploratory talks for the acquisition of South Africa-based telecom major MTN group were viewed with concern by the stock markets. The stock went down by 5.2 per cent on the day the news broke out.

Given the $39.2-billion market cap of MTN, the markets feared that funding costs for the buyout may burden Bharti’s balance sheet, by way of higher debt or equity expansion, should there be a majority stake acquisition.

Bharti’s balance sheet at the end of the last fiscal indicated that it held cash and short-term investments, totalling up only to about $1.4 billion.

This clearly indicated that internal sources of funding wouldn’t be enough. A higher interest cost due to the borrowing would have induced margin pressures. When the talks were called off, the stock went up!

If the investor is certain of a dip in earnings in the foreseeable future (if such deals do go through) and has liquidity requirements he may be inclined to sell the stock.

But rumours and unconfirmed news can push stocks too. Spice Communications’ chairman, Mr B.K Modi, market rumours had it, was supposedly in talks with its stakeholder Telekom Malaysia for offloading his stake in the company. Further there were talks that he had asked for selling price of Rs 60 per share. Investors looking at the possibility of an open offer at a good price lapped up this news. The stock shot up nearly 40 per cent to Rs 59 in the three weeks since the rumour started.

Once the news was denied, the stock fell 4 per cent. But then it rose again, this time on news articles suggesting that Idea Cellular intends to buy Spice for Rs 2,200 crore and that Mr Modi is now looking at a per-share offer of Rs 78-80!

A wait and watch approach in such cases may be necessary for clarity to emerge, unless the investor can time as well as discern between rumour and news.

Orchid instance

But the case of Orchid Chemicals takes the cake when it comes to confusion caused to investors! After BSMA sold stake in the company, the stock was trading at Rs 107 levels in mid-March.

That the promoter of Orchid also had to offload stake on the back of margin calls did not help matters. But reports that Ranbaxy Labs promoted entities were holding 14.7 per cent in Orchid and with the possibility of 15 per cent trigger an open offer was in the offing for investors.

The stock more than tripled and by end April had gone up to Rs 330. But unfortunately for investors, the 15 per cent mark was never reached and Ranbaxy denied the possibility of a hostile-takeover. The stock has since declined 30 per cent to Rs 230 levels!

Finally, take the case of Daiichi Sankyo acquiring the entire promoter stake in Ranbaxy Labs.

The Ranbaxy promoters have planned to tender their stake at a 30 per cent premium to the market price. This suggests that when an open offer is made, retail investors also stand to gain to this extent.

While mergers and acquisitions can be potential money spinners for investors, timing investment may be very difficult.

The safest course for investors would be to wait for companies to announce open-offers and accept or reject it based on how lucrative the offer gets. For investors who bought the stocks on rumours or ‘tips’ of brokers or even on news, utter prudence is required.

Those wishing to time rumours or news and sell stocks may do so if they have a high risk appetite and are game for an opportunity loss/gain! In such cases though, if an appropriate target price is kept in mind, exit can be made in the open market.

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