Take A Call On Siemens

Siemens AG, the German parent of Siemens Ltd., intends to increase its stake in the company from the current 55.18 per cent to 75 per cent. It has made an open offer to the shareholders of Siemens Ltd. for acquiring up to 6.68 crore shares, constituting 19.82 per cent of share capital, at a price of Rs930 per share. Siemens AG will shell out about Rs6,215 crore to raise its holding in its Indian subsidiary. Before expanding its business further in India, the company wants to raise its stake in it. The offer is expected to open on March 25, 2011 and close on April 13, 2011.

The offer
The price offered is 28 per cent above the closing price on January 28, 2011 of Rs728 and 20 per cent above the minimum offer price of Rs772 required by Indian regulations. According to Girish Vanvari, executive director, KPMG India, “The premium is pretty good for shareholders.”
In most open offers, where promoters are trying to consolidate their position, it is the norm to offer an attractive price to shareholders in order to get them to tender their holdings.

Two key issues
This open offer raises two questions: One, is Siemens looking to delist? Says Vanvari: “It need not be necessary that after reaching 75 per cent shareholding they will delist. The company may stop further acquisitions thereafter.” However, investors need to wait and watch to find what the company decides to do.
The second aspect is whether the open offer will be successful and whether Life Insurance Corporation of India (LIC) will participate in it. The promoters currently own 55 per cent shares while the total public shareholding is around 45 per cent. Of this 45 per cent, 13.7 per cent is held by LIC alone and the rest 31.3 per cent is held by the remaining shareholders.
The next question that arises is whether LIC (which holds the key to the success of the open offer) will participate in this open offer. Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities, believes that LIC won’t participate in the open offer. “It may tender some of its shares but not all, so that if the company decides to delist it will have greater negotiating power,” he says.
If LIC participates, the acceptance ratio (the number of shares accepted by the acquirer out of the total number tendered by shareholders) will come to 44.22 per cent. However, if it does not participate, it will be as high as 63.74 per cent and minority shareholders will have a good opportunity to avail of the open offer premium.

What should you do?
There is no doubt that the price offered by the management is a generous one. Shareholders may use this opportunity to exit the company at an attractive premium.
Following the announcement, the company’s share price jumped 17.3 per cent and closed at Rs853.50. Currently the stock is trading at around Rs845.50 (February 11, 2011). For somebody who wants to enter at this point of time, Thunuguntla says: “The open offer advantage is already factored into the stock price (in the significant jump). However, one may enter the stock to take advantage of the arbitrage opportunity created by the open offer.”
The company has had a string of disappointing quarters. But in the latest quarter (December FY11) it managed to post decent results with net sales growth of 35.6 per cent and profit after tax growth of 2.2 per cent year-on-year. However, based on these results it is difficult to draw any conclusion about the long-term prospects of the company. If a shareholder decides to stay invested in the company, he will need to take a call based on a more detailed analysis of the company’s prospects in the coming years.