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Equity holders have experienced (and still do) a bonanza. It's open-offer time. In the past year, five multinationals have made such offers to raise stakes in their Indian arms, at a significant premium to market prices, providing investors an additional exit route and a chance to make a quick profit.
Take ICRA. When global ratings major Moody's announced it was raising its stake by at least 21.5 percent in the domestic ratings company, at Rs 2,000 a share, the latter was quoting at Rs 1,594. Within a day, the price surged 20 per centand the stock now changes hands at Rs 1,881, a clean 25 per cent gain to shareholders. Moody's said it could purchase up to a 26.5 per cent stake but if a minimum of 21.5 per cent was not tendered, the open offer would not go through.
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Value unlocking
Open offers often result in shareholders unlocking value in their holdings. Says Sonam Udasi, head of research, IDBI Capital: "It's good news because promoters hiking a stake reflects their confidence in the company. When a promoter thinks this is what my business is worth, it helps shareholders form a longer-term view." In fact, a tool savvy investors often utilise is examining how promoter-holdings have increased or decreased. "Promoter holdings are closely watched and a rising stake is positive," says Udasi.
Should you exit a stock during an open offer? Yes and no. Market watchers say these should be viewed case by case. Sometimes, it might be a good idea to sell a stake in an open offer; other times, it's better to hold on for the long term.
Take the case when international ratings major S&P first made an open offer for CRISIL, back in May 2005, raising its stake to 58.5 per cent. The open offer was initially made at Rs 680 and later revised to Rs 775. But experts say those who tendered their shares have since lost on substantial compounded annual gains. Says Udasi: "The CRISIL stock has returned phenomenally and those investors who held on are sitting on tidy profits."
On the other hand, cases abound when companies that have conducted open offers haven't done too well in the long run. In June 2008, Daiichi Sankyo announced an open offer for Ranbaxy at Rs 737. The stock has since not made money for investors, as the company is troubled with regulatory issues from the US Food and Drug Administration. The price now hovers at Rs 360, down 51 per cent since the open offer.
What can spoil stock market returns after an open offer? Anything. Stock prices might "correct" if the offer is too high and it could take a while for the real earnings to catch up. The open offer might not go through, as it could be a conditional one, such as Moody's in ICRA. Shareholders might not be willing to take part in an open offer and part with their stake.
Should investors identify potential open offers? Experts say, potentially, all multinational companies where the promoter stake is around 40 per cent or low could make such offers. Though, one might have to wait for a long time before one is made. Says Udasi: "One has to be very patient in identifying open offers. There was always the buzz that GlaxoSmithKline would hike stake in its Indian arm but it took more than five years to materialise."
Not easy to spot
Investors should look at the strategic interest of the Indian entity to a parent company. With India's vast and growing market, many multinationals would seek to raise their stakes. Many earn through dividend and royalty but experts note there is a limit to raising the latter. Though fast-growing companies can always pay out more in dividend, it appears better for multinationals to raise their stakes. Besides, experts note credit is easy in the West, making it easier for foreign companies to increase their stakes.
Nevertheless, experts say one should not only focus on potential open offers but also on the valuations and earnings potential of Indian entities in the home market. Says Gaurav Dua, head of research, Sharekhan: "One should invest in a company looking at its valuations and future earnings. Open offers are usually done when stocks are undervalued. They can be an added advantage to an investor but one cannot anticipate an open offer."
Stocks of most multinationals in the country are quoting at premium valuations; hence, they should be closely watched for earnings growth, with an eye on the distant horizon. A short-term view, say experts, might not work with such a strategy.
Watch the tax
Investors also have to keep in mind the tax implications. Since sales of shares through open offers are on the off-market route, such deals would be taxed as capital gains. If you have held the shares for more than a year, you secure the benefit of indexation and a 20 per cent capital-gains tax or no indexation and a 10 per cent capital gains tax. Short-term gains (holding for less than a year) would be normally according to the tax slab one comes under. Says Dua: "Selling through the market route could be more tax-efficient."
Stock sales through and in the stock market attract Securities Transaction Tax; hence, the rates differ. Long-term gains through normal market transactions are exempt of tax; short-term gains attract a 15 per cent levy.
Experts say depending on one's tax status, one can decide to sell a stock either through the markets or directly in an open offer. The latter are generally made at a premium to market prices. The price at which the open offer is made is key to know whether you need to sell your shares or not. Experts say if the price arbitrage is substantial, one can consider exiting during an open offer. Otherwise, hold on and wait for a better offer price.
