The stock, which has remained stagnant for the past several years, rose 35% in just one month before announcement of its takeover by HCL Technologies
On 2 April 2016, the board of Geometric, a software company with a focus on engineering and manufacturing, announced a scheme of arrangement with HCL Technologies and 3DPLM Software Solutions. According to the scheme, HCL will acquire the business of Geometric except for the 58% stake that Geometric owns in—3DPLM Software Solutions, a joint venture with Dassault Systems. 3DPLM Software Solutions will issue preference shares to the shareholders of Geometric and Geometric will cease to exist.
But what’s strange is that the share price of Geometric had shot up as much as 35% in just a month before the announcement from Rs144 as on 29 February 2016 to Rs196 on 1 April 2016. For years, the share has been stagnant thanks to average to poor performance. On 4th April after the announcement when trading resumed, the scrip shot up another 19.39% to Rs234. What led to this massive rally? Was it insider trading?
In terms of fundamentals, Geometric was far from impressive. Over the past five quarters, Geometric’s average growth in sales was just 7%. Operating profit growth averaged a mere 5%. Its average operating profit margin is an unimpressive 11% and net profit margin averaged 8%. The price-to-earnings of Geometric, which was earlier at nine times, shot up to as much as 13 times before the announcement. Certainly, its financials did not demand such sudden optimism from investors.
It is interesting to note that on 2 March 2016, leading newspapers rumoured that ‘Godrej may sell Geometric to HCL Technologies’. Later in the day, Geometric confirmed that there were “no events or occurrences of the nature reported in the article”.
On 16 March 2016, Geometric reported a trading volume of 1.28 million shares, up 11.50 times from its average trading volume of 111,400 shares over the past month. The trading activity took the price up 12% on the day. On the day, ET Now had reported
, “HCL Tech will buy the stake at Rs210-220 per share this week” and that “the transaction will trigger a 26% open offer in Geometric”.
Ace investor Rakesh Jhunjhunwala, together with his wife, holds around 18.9% stake in Geometric.
In December 2014 we had mentioned (Geometric: Target for Takeover?
) that over the long term, due to its poor return on capital, Geometric had disappointed its shareholders (which include marquee names like Rakesh Jhunjhunwala) even though it operates in one of the most profitable business segments of India, that is, software development. We had said, “The real value of the company may be unlocked either with a change in management that can add more profitable business lines or through a takeover by a much larger company.”
HCL Technologies will issue 10 equity shares of Rs2 each to Geometric shareholders for every 43 equity shares of Geometric of Rs2 each. Subject to approval from the Reserve Bank of India, 1 fully paid up redeemable preference shares of Rs68 each of 3DL will be given for every 1 fully paid up equity share each of the Geometric. If the RBI does not approve, “such shareholders shall be issued and allotted 24 fully paid unlisted equity share of Rs10 each of 3DL for every 1,793 fully paid up equity shares” of Geometric.