Wednesday, November 25, 2009

“Everybody has a plan …..”

“Everybody has a plan till they get punched in the face”. This brilliant quote can be credited to the famous American philosopher “Mike Tyson” :-) . ( His detractors might point out his fetish for ears but didn’t Vincent Van Gogh also cut off his ears).

It’s a extremely impactful statement with implications for any participant in the stock markets. We plan for all kinds of scenarios that the market throws at us. For ex Looking at the market right now we could plan that if the market corrects by 20% we could deploy additional capital into the markets. Simple statement of intent or plan factoring in a possible scenario.

It becomes easy to implement this plan if the market gradually drifts down a percent or two every week and winds up going down 20% over a six month period. It’s a series of small punches that the markets throws at you which tires you out but keeps you in play to deploy the action plan that you had thought thru.

The challenge is when you get punched in your face by the markets when they correct 20% in a week or fortnight. At that moment the mind freezes and all the best laid plans of men and mice go waste. Fear and self doubt seeps in and the reptilian brain takes over.

The R-complex as it is called overrides the more rational functions of the brain and results in primitive behaviour where the survival instinct takes over. We of course see that in the rush to the exit door that happens with market participants.

Can we work our way thru this and retain our rationality? I think the first step is being able to recognise when our mind starts moving into this state.
The awareness of it might helps us deal with a few punches thrown between our eyes.

Saturday, November 21, 2009

Paradox of Choice - Prof Barry Schwartz

Prof Barry Schwartz's Talk on the "Paradox of Choice" at the TED conference. It has very interesting implications beyond the fact of why we still savour the limited choices that Doordarshan used to offer as opposed to the plethora of channels now which seem to have nothing to offer.

As the markets offer us more and more instruments and asset classes like equities, debuntures, options, gold, copper, art, interest rate futures, forex futures etc, we start spreading ourselves thin not willing to limit or restrict our choices to particular asset classes.

Wednesday, November 18, 2009

The curious case of Zenotech Labs

This saga should give Ekta kapoor a complex for the twists and turns and the never ending nature of its existence.

Circa Oct 2007
Ranbaxy enters into a definitive agreement to increase its stake in Zenotech to 45% by purchasing of shares from promoters and preferential offer.

Jan 2008
Ranbaxy completes open offer and acquires 2.2% shares through the open offer at a price of Rs 160 per share. Ranbaxy’ stake goes upto 46.79%.

June 2008
Daiichi buy’s out Ranbaxy from the Singh brothers and hence becomes owner of the 46% owned by ranbaxy in Zenotech which results in triggering of the open offer due to the indirect acquisition.

Jan 2009
Daiichi makes a open offer to acquire 20% from the public shareholders at a price of Rs 113. 62 per share.
The promoter Dr Jayaram Chigurupati claims that Daiichi had in a meeting promised to pay Rs 160 to the shareholders.

The battle begins

Dr Chigurupati and retail shareholders file cases in the court and with SEBI to ensure that the open offer happens at Rs 160.

Feb 2009
SEBI dismisses the case and Daiichi prepares to rollout the open offer at Rs 113. Dr Chigurupati and the retail shareholders take the case to SAT.

Oct 09
SAT rules in favour of the retail shareholder and directs Daiichi to do the open offer at Rs 160.

Nov 09
Case is also filed in SAT to ensure that Daiichi pays interest for the delay
Daiichi takes the case to supreme court and agrees in Supreme court to pay interest in case it loses the case.

The supreme court has decided that Dec 02 2009 will be the final date of hearing and the judgement should follow.

There are of course multiple cases being fought between Daiichi/ Ranbaxy and Dr Chigurupati in the CLB also.

Where do we stand now

Current shareholding
Dr Chigurupati & associates - 25.76%
Ranbaxy - 46.85%
Public shareholders - 27.39

Precedence suggests that Supreme Court tends to go with SAT order though precedence is no guarantee.

1) Supreme Court rules in favour of retail shareholders
Open Offer Price - Rs 160 + Rs 10 ( approx interest) = Rs 170

2) Supreme Court rules in favour of Daiichi
Open offer prices - Rs 113.

CMP - Rs 115

I had bought stock in the Rs 108-112 levels. The way I see it is the downside is restricted to around 8-10 bucks where as the upside could be around Rs 140-150 on the stock, with the information that SAT ruled in favour of the retail shareholders.

The most important thing is that this long drawn saga will come to an end with clear defined timelines.

To take a quote that I like from “ The curious case of Benjamin Button”
“Life can only be understood looking backward. It must be lived forward.”

Sunday, November 15, 2009

Predictably Irrational - Prof Dan Ariely

I am currently reading Prof Dan Ariely's book "Predictably Irrational". Enclosing one of his videos which gives a flavour of the kind of work he has been doing in the area of behavioural finance. The book is a interesting read. This video is from a presentation he made at the TED conference.

Areva T & D - Impending Corporate Action

Areva T& D is the Indian subsidiary of the French nuclear power major Areva. The Indian listed subsidiary is focussed on the Power T & D business.

In the month of June 09 the parent announced its intent to globally sell its T& D business and invited bids for the same. The company which is listed, has its majority stake owned by the French government.

The stock in India reacted on this news positively in the month of June but like all other corporate events the markets tend to forget.

I have been tracking the deal for sometime and finally the company made a press release that 3 bidders have submitted their final bids and the bids are getting assessed.

1) Alstom / Schneider
2) General Electric
3) Toshiba / INCJ

I have enclosed the link to this press announcement.

The French government has always maintained in its announcement that the deal will be closed by the end of this year. Reuters had also given out a release though quoting unnamed sources that the announcement date of the winner will be Nov 15th.

Either ways the deal is in its last stage and I would assign a very low probability of the deal not materialising considering the intent of the French government and 3 shortlisted bidders.

Announcement of the winner will immediate trigger the open offer clause as per SEBI’s takeover code. The risk in the transaction is that Areva T & D ivery expensively priced on all valuation parameters and the stock could correct in the interim period.
CMP – 280.75

Innovative Foods - Money for Nothing

I came across this corporate announcement on Innovative Foods.{4038BCAC-2189-44EE-AD2C-807B2263BE72}&param1=1

Innovative Foods is a Chennai based company which was a BIFR case. Based on the BIFR proceedings the promoters were asked to bring additional capital which resulted in their stake increasing to 93%. According to the BIFR order the promoters has to give a exit option to the remaining shareholders of the company and the company arrived at the exit price of Rs 34.5 to paid to all public shareholder who tender their shares. I have enclosed the link to the offer document.

The offer is open till Nov 19th.
The stock was trading around the 32.15 mark after the announcement date and currently trades around 33.65.

So u can technically buy the stock in the market at this prices and tender at Rs 34.5 and be assured that 100% of you shares will be accepted and money paid to you.

So whats the catch?
Not enough trading volumes and high impact cost so u can deploy very small amounts of capital.

But it is a case of “ Money for Nothing”.

Gwalior Chemicals – Shareholders Gain, Arbitrageur lose

I’ve had a small break from the blog due to work pressure. Along the way a lot of water has flown under the bridge both on the Gwalior Chemicals front and a lot of other special situations opportunities have come on my radar.
The board of Gwalior Chemicals made the following announcement after the board meeting
In the first phase the Company proposes to buy back maximum of 40,50,000 shares at Rs. 120 per share through a tender offer route in this financial year. The aggregate amount Rs. 48.60 crores is the maximum permissible buy-back in this financial year ended March 31, 2010 as per Section 77A of the Companies Act 1956.
The market of course didn’t like it and the stock promptly went down to Rs 90 and has been hovering around there.
Lets examine what it the management is trying to achieve I spoke to the company secretary and asked him on the thought process. According to him the company intends to deploy Rs 100 crores as stated in the original press release to buyback shares in 2 phases
1) Phase 1 - This is the announcement that we read above.
2) Phase 2 - Will be done in the next financial year and I would assume somewhere around the Sept – Nov 10 kind of time frame.
So this brings out the logical chain of questions some of which I have received as comments
1) Why the share buyback in 2 phases?
This is because under Section 77 A of the Companies act a company can in a financial year buyback only 25% of the paid up capita+ free reserves of the company. This acts as a upper limit to the amount that can be deployed towards the buyback process hence a 2 stage buyback.
2) Why no dividend?
The management’s view is that share buyback is value accretive to the shareholders of the company and is clearly more tax friendly to the long term shareholders of the company. Factoring in either indexation or without it long term capital gains is lower than the dividend distribution tax that the company would have been borne out of the amount. I cant argue against it.
3) Will the promoters participate in the buyback?
The promoters will be participating in the buyback. The promoters would have to participate in the buyback bcos under the SEBI Takeover code, they cant increase their stake beyond 5% in a given year. Any increase beyond that will force them to make a open offer.
4) What will be the acceptance ratio?
The acceptance ratio is about 1/6th of the shares tendered as the buyback is of 40 lac shares on a equity base of 2.4 crores shares. Assuming about 10% brain dead shareholders who don’t tender we can at best assume a acceptance ratio of 1/5th or 20% of the shares tendered. This is presuming that the promoters will tender in full. The promoters could tender partially and use this as a route to increase their stake by 5% which will further improve acceptance ratio.
I have just worked out a sheet below listing down how the event can play out and the associated returns. I have assigned multiple scenarios giving different haircut to the terminal value that market will assign to the stock based on holding company discount. There is however a potential upside as according to the company secretary the company is looking at potential acquisitions. This will reduce the terminal value discount if the market factors it as a operating company.

So am I happy or unhappy?
I think the arbitrageur has lost in this transaction at the expense of the long term shareholder. I cant fault the management for its actions though I might lose money in the interim.

So what should I be doing?
I entered the transaction wearing a special situation arbitrageur hat and today have the option to wear the long term shareholder hat. I have always been advised by my fellow special situation arbitrageurs with whom I compare notes to never change my hats.

If u entered with a spl sit hat and that went wrong then exit the trade and not to change boats in mid seas. I think I will go with that though somewhere still not convinced that the trade has really gone wrong.