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Poll: Digital in question - Views on News from Equitymaster
 
 
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  • Jun 16, 2003

    Poll: Digital in question

    Last week we had asked our viewers a question relating to the HP-ISO and Digital merger proposal. This question was chosen in order to ascertain the view of a retail investor regarding this deal.

    Majority of the audience have indicated that they would want to buy the stock. This indicates that they are bullish about the prospects of the company going forward, given the global technological strengths of HP. However, there exists a possibility of the audience misinterpreting our question also. Since the stock opened 25% lower on Monday, investors’ would have shown an intention to buy Digital at that point.

    The merger between Digital and HP-ISO involves Digital buying HP-ISO from its parent HP, by issuing it close to 34 m shares. This means that the shareholding pattern of Digital would change and would favour HP, as its shareholding in Digital would increase significantly (read more). What is most contentious regarding the merger is that the basis of the deal has not been disclosed. That is they have yet to disclose revenues of HP-ISO, which Digital is merging with. Markets obviously reacted negatively to the merger announcement and this is reflected in the erosion of market capitalization of Digital (32% loss since announcement). After announcing the deal, the management owes an explanation to the shareholders, which is exactly what is missing in this whole picture.

    Our view…
    Due to lack of disclosure, the retail investor is left in the lurch and do not seem to have any avenue to voice their concerns. In the past too, investor have been taken for a ride when it came to merger, demergers and open offers. Examples include the case of shareholders of HCL Infosystems and Indo Gulf Corporation (read more). In both these cases, minority shareholders have been given a raw deal by the acquirer. Until the regulator takes concrete steps, these irregularities will continue to plague investor sentiment.

    When deciding future investment decisions, this is one key factor investors should bear in mind i.e. the management of the company. There are many promising growth stories in India Inc. But how many companies have the willingness to share their wealth with retail investors is debatable. Buyers beware!

     

     

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