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Shareholders flee mega deals

Shareholders flee mega deals
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First Published: Tue, Feb 13 2007. 12 20 AM IST
Updated: Tue, Feb 13 2007. 12 20 AM IST
Mumbai: The morning after an euphoric Sunday when Indian deal-making reached new heights, worried investors decided to head for the exits, pushing the Sensex, the barometer for the country’s capital markets, to its lowest levels of the year, a decline of 2.39%, or 384.2 points.
While the day’s big loser was Hindalco Ltd, which the night before had announced a $6 billion all-cash deal to buy a larger aluminium company, Novelis Inc., 28 out of the 30 stocks that make up the Bombay Stock Exchange’s Sensex fell. The broad-based Nifty, which is a rival to the Sensex, also ended down 129.10 points or 3.08% at 4,058.3. There were seven declining stocks for every advancing share.
The declines ended a seven-week rally that saw the Sensex rise to a record 14,652.09 on 8 February. It has gained 40% over the past year, making it one of the best performing major stock market indices in the world.
Hindalco, with its 1.44 weightage on the Sensex, tumbled 14%, or Rs23.80, to Rs149.45, the biggest drop in the company’s shares since January 1991. The decline in the company’s share price was a lot more dramatic than in the case of other Indian takeover bids this month.
Tata Steel, which won a hard-fought battle for Corus Plc. by agreeing to pay a record $12 billion, saw its shares fall 10.7% on the day of the announcement. Yet another Indian firm, Suzlon Energy Ltd, which last week joined the race to acquire German wind mill equipment maker Repower Systems AG for $1.33 billion, saw its shares fall 1.04% on the news. Both companies lost ground on Monday as well.
Analysts noted a new trend emerging in terms of stock market reaction to mega deals with ordinary investors seeming to disbelieve the logic of company promoters who are willing to pay large premiums for overseas acquisition candidates.
“Many of these companies are paying heavily for their overseas acquisitions,” said Ketan Karani, head of research at Kotak Securities. “While the promoters are confident that these acquisitions will help them in the long run, investors have concerns at the moment.”
With all three proposed acquistions, promoters of the companies concede that large premiums are being paid, but justify the price based on long-term prospects of the combined companies, access to technologies and new markets, as well as the cutting down of the amount of time it would take to create similar assets from scratch.
“I can see a clear difference in the way promoters and non-promoter shareholders are reacting,” said Kunj Bansal, chief investment officer, Religare Securities. “The non-promoter shareholders feel that this will put pressure on their finances in the short term, so they want to make an exit.”
Also fuelling the volatile reaction from shareholders is the much shorter time horizon of most investors, analysts said.
In Hindalco’s case, “the benefits of the acquisition will take at least three-four years to percolate down, while the investment horizon for most investors is not more than one year,” said Shriram Iyer, executive vice president, Edelweiss.
Another stock that was affected was also related to acquisitions, though this one had to do with losing the battle for control of Hutchison Essar. Outbid by Vodafone Group, Reliance Communications Ltd lost 4.32% to close at Rs 455.
“Reliance Communication stock had run up ahead of the Hutch bid. So there was some correction expected after it failed in its bid,” Harendra Kumar, head of research ICICI Direct, said. Other telecom stocks also slid with Bharti Airtel closing 3.2% lower at Rs728.8.
The declines weren’t confined to stocks on the acquisition trail. Shares of capital goods, banking, real estate and metals segments all fell as investors decided to book profits amid concerns over rising inflation and interest rates.
One senior analyst with a domestic brokerage, who didn’t want to be named, said the volatility might continue until after the government presents its Budget later this month.
Out of 2,668 stocks traded, 2,303 declined, 338 advanced and the rest were unchanged. Among sectoral indices, The BSE metal index lost 5.46% or 497.62 points, to 8,616.43, followed by BSE capital goods index that lost 5.17%, or 513.69 points, at 9,425.92. The BSE mid-cap index dropped 4% to 5821 and the small-cap index slipped nearly 5% to 7127. The two exceptions in the Sensex were Hero Honda and HLL.
“Market participants have been cautious over the last few days and this correction hasn’t taken them by surprise,” said Kalpesh Parikh, head, institutional sales, Ask Raymond James.
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First Published: Tue, Feb 13 2007. 12 20 AM IST
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