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What's the big deal with big deals?

Without prompt follow-through, momentum can be quickly lost

The market loves big deals, from the time of the huge infrastructure announcements in the 1990s, to those with profit guarantees involving China in the late 1990s and early 2000s. Remember Ekran and the Bakun dam project that pushed Ekran's stock above $20 when it traded on Clob International in the early 1990s? Or Rowsley's billion-dollar deal to build solar panels for China's sports stadia for the Beijing Olympics? If memory serves me right, at one time China lotteries were once also all the rage, and there were local companies who announced lottery-related deals with large headline number that sent their share prices shooting up. As time passed though, and as many of these deals either did not materialise because a clause in the agreement was not met, scepticism sets in. The market then develops greater resistance to the allure of a mega deal - there may be an initial price surge but if nothing concrete appears after a while, the momentum is lost.

In March 2014 I cowrote a Hock Lock Siew column about digitial satellite firm Addvalue Technologies selling a China subsidiary to an unnamed buyer for S$330m in cash. Back then, my colleague and I expressed wonder that a buyer would pay a premium of 1,883 per cent over NAV, or that it would pay $330m to buy a subsidiary of a parent when the parent's market capitalisation before the announcement was under $100m. Were we right to advise caution? Yes - 16 months later and the deal has still not gone through. To its credit, Addvalue has provided regular updates, the latest being that the buyer now wants to revise the terms of the original agreement. I hope it all works out for the company in the end. The market however, seems to have lost faith - the stock jumped to 16 cents when the deal was announced but is now trading around 6 cents. The lesson? Like many of the mega-deals in the past, there has to be decent follow-through, otherwise scepticism sets in. The market is an impatient creature.

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