Beware initial euphoria over headline-grabbing deals
OVER the course of what has been a largely unimpressive year for the local stock market, many second-line firms have at one time or the other been in the focus because they announced deals with large, headline-grabbing numbers.
These plays have injected much-needed interest into a largely lethargic market whilst benefiting the shareholders of the firms concerned. Furthermore, day and short-term traders would have welcomed these announcements as they produce tradeable volatility.
The problem, however, is that very few, if any, tend to have a lasting impact. So, it's worth noting that the window of opportunity is not big.
Consider, for example, that on March 25 digital communications firm AddValue Technologies said it had agreed to sell one of its subsidiaries to an unnamed China buyer for a very handsome S$330 million in cash.
Not surprisingly, given that the parent company's market capitalisation at the time was only just under S$100 million, the stock rocketed up the next day, more than doubling from S$0.063 to S$0.157.
Since then, the shares have collapsed to where they traded before the announcement, closing at S$0.064 on Monday. It could be that the market thinks that after almost eight months the deal might be called off but there is no sign that this is the case - since March's announcement, AddValue has released updates in May and June to the effect that certain administrative conditions are still being ironed out which are delaying completion of the deal. So until the company announces otherwise, the sale is still on.
For our purposes though, the point to note is that the euphoria surrounding it was very short-lived, arguably only a few days.
In early April, it was announced that oil and gas firm Ezion Holdings was to buy a 29.81 per cent controlling stake in JK Tech to enable the latter to diversify into the offshore marine sector.
Not surprisingly, given that Ezion is viewed as one of the sector's leading lights, JK Tech's shares shot up on the news. Even though Ezion's entry was at S$0.09 per share and even though JK Tech's shares traded at S$0.15 just before the announcement, they closed at S$0.515 when trading resumed - a massive gain of 243 per cent in one day.
The momentum continued for about two months, with JK Tech's shares hitting S$0.70 in early June, at which point the company undertook a placement of 150 million shares at S$0.40 each. Since then, the upward momentum has stalled and the stock now trades at a post-placement price of S$0.34.
The optimism surrounding Ezion's entry could be said to have lasted two months, though of course, JK Tech's post-placement price is still way above what what the stock was trading at before Ezion came into the picture.
In September, property and IT firm Singapore eDevelopment (SeD) announced a US$700 million deal with a US firm whose shares were at the time pending quotation on an over-the-counter bulletin board. Despite the mammoth headline number, there was no discernible impact on the stock price which, after a 100-to-one consolidation, has actually fallen from S$0.10 to S$0.092 now.
More examples can be found of disappointingly short effects of big deals which initially held plenty of promise - the takeover offer price of S$0.452 for STATS ChipPAC comes readily to mind after the market had chased it up to S$0.75 on takeover speculation - but the point to note is that prominent announcements don't seem to have an extended effect on share prices.
Whether this is due to the prolonged absence of retail investors or it is simply a function of a market still reeling from the penny stock crash a year ago is anybody's guess, but it is something to bear in mind for those still active in stocks. The market loves new stories and if the story is compelling enough, share prices can really perform - but usually only for a short while.
