Unlocking value through “Promoter’s Stake Sale” rumours!!
In the last couple of weeks there were rumours of promoters of a couple of large IT firms planning to sell their holdings in these companies.In both cases the promoters immediately denied it categorically.
Ignoring the denials, let us investigate further and think about this phenomenon as a value investor. In general, if a promoter is considering selling their holdings, it most likely means:
· They can sell the stock at a price higher than its value; typically, seen in IPOs
· They no longer have management capabilities to run the business or even oversee it; possibly due to old age of the founder-manager
· They have lost interest in the business; possibly due to generational change
· The fundamentals of the business have deteriorated irreversibly
Let us consider each of the possibilities:
· Given that the IT stocks are selling at such depressed prices and experiencing negative sentiments, it is highly unlikely that the promoters see it as a way of selling it at a price higher than its value. So we can eliminate the first bullet point as a possibility.
· While the management capabilities have been lost in one case, they continue existing due to the young and most likely capable second generation with strong ownership in the other case. Even in the former case, they continue having capability to oversee it. But are probably struggling to establish a protocol to do that better on an ongoing basis while maintaining their original values and culture.
· It is unlikely that they have lost interest in the business given the level of involvement and response to board and management actions in both cases
· This is the primary reason being given by most that fundamentals of the sector are in secular decline and the companies are doomed. Hence promoters are trying to exit. This is highly unlikely, given that the companies are extremely resource rich. Both the companies are sitting on cash of $5 billion or so and have cash flow generation in the range of $2 billion per annum. These companies enjoy fat margins of 25% or so. Revenues and earnings have been stable. With this kind of a status, it is easy for these companies to hire the best possible talent from across the world as top management. They can spend for organic growth or acquisitions in new areas, such as, digital or automation or artificial intelligence, data analytics etc. Given this situation it seems highly unlikely that the promoters are planning to sell at all.
Then why are such rumours floating? It could be that the promoters are actually trying to find out from savvy private equity or strategic buyers what is the price they are willing to acquire the shares at. This can be a price discovery mechanism and then it automatically could catalyse the value unlocking of these companies and the sector.
Since, so far there is no authentic information, but a rumour, a value investor would try to think about the implications. If it is a rumour then who would benefit? This is akin to reason out a murder mystery based on “Who benefits from the murder?” Since rumours for two companies came out in quick succession, it looks more like engineered information. But a value investor always considers all aspects before reacting.
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