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It is raining open offers - Should you invest?

By Prabhat Anantharaman | 10/31/2011 6:09 PM Monday

In the backdrop of a lacklustre and volatile stock market, there has been buzzing activity in the ‘open offer’ segment.

Thanks to the recently introduced investor-friendly New Takeover Code, there has been a barrage of open offers launched in the market. Currently, there are about 20 open offers filed with the SEBI.

New Takeover Code Old Takeover Code
Minimum size of open offer set around 26 per cent Minimum size of open offer set around 20 per cent
Non-competent fees favoring promoters has been scraped  Non-competent fees favoring promoters not included in open offer  
Threshold trigger limit for acquirer of target company set at 25 per cent Threshold trigger limit for acquirer of target company set at 15 per cent

It is common knowledge that open offers have always presented investors with golden opportunities to make healthy profits, as the stock prices tend to shoot up, temporarily triggering speculative buying activity. For instance, INEOS ABS (INDIA) saw a 17% jump in its stock prices post the announcement of its strategic JV-driven open offer agreement in June 2011.

However, investors have always been confused when it comes to deciding how best to respond to such offers.

One of the most important and tricky facts with respect to an open offer is that if an acquiring company receives more shares than it plans to buy, it rejects the excess applications. As a result, investors who have bought shares hoping to sell them to the company at a higher price end up with losses. This happens because share prices generally tend to recede post the offer closing. 

In view of the problems faced by investors, we have decided to highlight a few points that one must keep in mind before venturing into an open offer-driven investment opportunity.

The most important point to remember is the probability of acceptance of the shares tendered by investors to the company. In simple words, it tells you how likely your shares are to be accepted by the acquirer. This is calculated by dividing the existing floating capital (other than promoter holdings) with the number of shares to be acquired in the open offer. The higher the acceptance ratio, the greater is the probability of the shares being accepted in an open offer.

For instance, in case of Everonn Education, which is launching an open offer to acquire 20% of its existing floating capital, the probability of acceptance stands at 40 shares for every 100 shares held by an investor. In other words, you may continue to hold 60 shares even if you have offered 100 shares to the company in the open offer.

Another important point is the tax implications. We would like to inform our readers that since an open offer transaction is an off-market transaction, one may have to pay long-term or short-term capital gains tax on it, instead of the usual STT. The gains will be either taxed at 10% without indexation or at 20% with indexation, depending on your duration of holding. Hence, in case of companies like Jai Hind Projects and Marg, the profit derived from the price differentials would be eaten away by the tax implications attached with them.

In conclusion, we at DSIJ believe that the current set of open offers launched in the market will not yield any multi-bagger opportunity to investors, as most of them are trading near or above their respective open offer prices, leading to investor apathy.

Also, an important point to be noticed is that a majority of these counters are listed on the BSE under the ‘T’ group, indicating some corporate governance issues. Hence, we, at DSIJ, advise our readers to remain alert and well aware of the various pitfalls while venturing into open offers.

List of Open Offers

Target Company Open Date Offer
(%)
Floating Capital Price (31 Oct) Shares on Offer Offer Price Size of Open Offer Probability of acceptance Profit Per Share
Everonn Education 16-Nov 20 11081654 380.4 4483535 528 236.73 40.46% 59.7
Rhodia Specialty Chemicals 2-Nov 20 881940 364 675120 386.72 26.11 76.55% 17.4
Jai Hind projects 28-Oct 20 4126305 190 1951489 202.32 39.48 47.29% 5.8
Safari Ind 19-Oct 20 1381749 160 598000 170 10.17 43.28% 4.3
Marg 1-Dec 20 17383190 85.5 7651572 91 69.63 44.02% 2.4
Macmillan 7-Dec 20 6482688 34.45 3364534 37 12.45 51.90% 1.3
ACI Infocom 10-Dec 20 9016817 46.75 2209818 52 11.49 24.51% 1.3
Aksh Optifiber 18-Nov 20 88594257 6.25 31325227 7 21.93 35.36% 0.3
Savani Financials 7-Dec 20 2280410 6 800000 6.5 0.52 35.08% 0.2
Pharma Com 13-Oct 20 1557000 1.1 600000 1.4 0.08 38.54% 0.1
Beeyu Overseas 24-Oct 20 9905313 2.95 2828291 3 0.85 28.55% 0.0
Midland Polymers 9-Dec 20 1096700 29.3 786500 29 2.28 71.72% -0.2
Bloom Dekor 24-Nov 20 4221245 16.7 1200000 15.75 1.89 28.43% -0.3
Media Matrix 8-Dec 26 62902147 3.21 21024900 1.9 3.99 33.42% -0.4
VMS Industries 10-Dec 26 7148227 23.75 4283082 23 9.85 59.92% -0.4
Rabha Plastics 2-Nov 20 3766200 7.22 1090760 4 0.44 28.96% -0.9
Gupta Carpets 26-Oct 20 2803800 9 878180 2 0.18 31.32% -2.2
Pitti Laminations 31-Oct 20 5397010 52 2698340 41 11.06 50.00% -5.5
INEOS ABS 16-Dec 17 2931920 630 2931920 606.81 177.91 100.00% -23.2

 

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