Tata Motors’ ordinary shares now trade at a record premium of 120% over its DVRs
Experts point out that a large premium arises when investors foresee a change in management
A rose by any other name would smell just as sweet, goes the Shakespearean saying. Likewise, if the value of a stock is the sum of the present value of its future cash flows, how should it matter to investors whether the equity shares they purchase are called ordinary shares or shares with differential voting rights (DVRs).
But apparently, in the case of Tata Motors Ltd, it matters a lot. The company’s ordinary shares now trade at a record premium of about 120% over its DVRs. The ordinary shares, which trade at ₹109.50 apiece, offer one vote for every share held in the company, and the DVRs, which trade at ₹49.95 apiece, offer one vote for every 10 shares held.
Watch video: Why Tata Motors looks increasingly like a takeover target
Researchers say that the difference between voting and non/lower voting shares is almost entirely explained by the possibility of a change in the company’s management or ownership. “The difference between voting and non-voting shares should go to zero if there is no chance of changing management/control," says corporate finance expert, Aswath Damodaran of New York University, in a paper titled The Value of Control.
In a paper that sought to assess the economic value of voting rights, Haim Levy of the Hebrew University said, “An individual investor would have a motive to hold the stock with superior voting rights, if he or she expected that a future struggle for control will yield significant capital gains." Else, they might as well buy the shares with lower voting rights at less than half the price for the same amount of economic ownership.
With investors willing to pay as much as 2.2 times more for Tata Motors shares with voting rights, it certainly begs the question whether they are pricing in a greater probability of a takeover in the future. After all, any acquirer seeking control of the company would only be interested in shares with greater voting rights.
The government of Singapore, a large shareholder in Tata Motors, has more or less shunned the DVRs while increasing its ownership in the company since end-2017, despite the huge bargain available there. Less than two years ago, it held 41% of its stake in Tata Motors in the form of DVRs; this has come down to 26% as of June 2019, with its holding of ordinary shares more than doubling.
The fact that Tata Motors’ market capitalization has fallen more than 80% in the past three years makes the possibility of a takeover even more likely. A 51% stake in the company now costs about $2.4 billion, compared to more than $13 billion three years ago.
Damodaran of NY University adds that investors ascribe a higher premium to voting shares when a firm is performing badly, especially when it is because of poor management decisions. The bet clearly is that a change in management in such cases will derive great value.
Whether or not Tata Motors’ DVR discount points to the possibility of an impending takeover—it may well be an inexplicable anomaly of the markets that refuses to correct—it’s fair to say that investors have decisively voted for a change in the way the company is managed.