Would you mind buying HCL Tech shares at 12.32% discount rate on CMP of 730

Recently, I came across a thread on a popular investing forum Valuepickr“. The discussion was on the merger announcement of HCL Tech and Geometrix (Here’s the link to the discussion).

Before I clarify: How you can indirectly buy shares of HCL for 12.32% on its current valuation of 730, I need to explain all the terms of this merger.

HCL Tech bought Geometric for Rs 1,283 crore in a share-swap deal.

Like HCL Tech, Geometric is also an IT related company and its current valuation is 1,425 crores at 218.5 per share price. So it seems like the HCL bought it at a discount but here’s a shock:

At the time of the deal company’s valuation stands at Rs 1,274 crore, which means the HCL deal came at a slight premium.

This change in valuation is due to hike in the price of Geometrix after the announcement of the merger. As you can see in the chart below:

Economics times also describe reason behind the sudden price hike here.

The share hiked from 196 to 264 after the announcement of the acquisition by HCL Tech. It’s a straight 19% price hike. It also means the stock is still at 13% discount than its implied deal value.

As per the source of Times of India:

HCL Tech, India’s fourth largest IT services company, will issue 10 equity shares of Rs 2 each to Geometric shareholders for every 43 equity shares of Geometric of Rs 2 each held by them. In all, it will issue 15.64 million equity shares. Geometric’s current market value stands at Rs 1,274 crore, which means the HCL deal came at a slight premium.

Also, here’s the media release from Geometrix:

 Read full 2-page announcement release here.

I assume that you had seen a box at the end of the above image which is the crux of the whole deal. If not, here’s the magnified version:

As I had already quoted the TOI source earlier. In addition to that, the each holder of single shares of Geometric will also receive a one 7% listed redeemable preference share.

So enjoy the dividend of 7% while you hold the preference share till redemption.

I also found an astonishing thing from business standard:

Other than HCL Technologies, Tech Mahindra, France-headquartered Altran Tecnologies and the $12 billion US-based Allegis Group too had made bid to acquire Geometric.

“But what made the deal go to HCL was the fact that they had the best structure and they were fast to drive the deal to conclusion,” said a person involved in the deal on condition of anonymity.

You can read the full story here.

SO finally, here’s the butter of this article – How you can indirectly get shares of HCL Tech at 12.32% discount on Current Market Price?

A query was raised by a member of the forum as follows (quite modified):

If I buy 43 shares of Geometric, in todays CMP of Rs 217. Total cost would be Rs 9331.

Out of this, I got 2 things:

  • 7% redemeeable Preference Shares of Rs 68 @43 = 2924
  • Also, 10 shares of HCL.

So deducting the amount of prefernce shares from the tolal cost I got, 9331-2924 = 6407, which equals to Rs 640 per share of HCL Tech i.e. discount of 12.32% on the CMP (20th July’16) price

That’s the whole nerdy calculation but…..

There is also a flaw

This merger will lead to the issue of additional 1.5 crore shares of HCL Tech in Market which will eventually decrease the per share value. However, I ignored it as I even didn’t consider 7% dividend on Preference shares. Let us compensate it.

Also, it may take around 6 months for full execution of this merger deal. So time value of money is also another flaw.

“Sowmay, everything is confusing to me” a newbie might say. So here’s a solution:

Ignore all the details and just buy 43 shares of Geometric at CMP (around 220). In an estimated time of 6 months, your portfolio will get credited by 10 shares of HCL + 7% redeemable preference shares of Rs 68.

However, I’m not quite clear on how to avail dividends of Preference Shares and how to redeem them. If you know it then your comment will be appreciated below.

SO should you buy Geometrix?

I don’t know about you but according to me, it’s a great deal. Even HCL Tech is available at a low valuation which itself makes it more attractive. It’ll also benefit us if the price of HCL climbs up. Don’t falter to discuss more in comments.

Disc 1: Geometric consist my 9% of portfolio holdings.

Disc 2: Invest at you own risk. There’s always risk associated with the stock market. So, I’ll be not responsible for any risk. Get a glimpse of risk: Mandhana Ind lost 79% of share value closing at the lower circuit for 20 straight trading sessions.


Disclaimer: Pal! I don't own your money so do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to me. Any information on blog is not any financial advice and should not be construed as such.
About Sowmay Jain 53 Articles
Hello! I’m from Hub of IT (ha!) Hyderabad, India. I work full-time from home, making a living from my blog and another dynamic medium from my investments. Like so many other people, I’m on my Plan B career. At the same time, I share ideas and techniques to help my readers in mastering stock market and overcoming losses.
  • xa

    At current market prices EOD 22nd July ignoring HCL dilution the deal value is +ve for Geometric shareholders (10*730+68*43)-(43*220). Do you think this difference goes away close to closing of the deal ? If true, should Geometric trade 10-12% higher?

    • No, the difference will not go away until HCL tech announces the merger record date. After the announcement, Mr. market might fade it away. But it’s better to be early bird.

      • xa

        Yes difference will fade away. Question is which way? Geometric goes up or HCL goes down. I guess will become more clear after HCL results

  • Your money, your move. However, keep your portfolio diversified with 7-8 stock to reduce anticipated risk.

  • First of all, I’m not recommending, that is just the information and second, after the announcement of record date the arbitrage opportunity will quickly fade away so it would be hard to get benefitted at that time.