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Commentary

HOVS: A takeover story gone awry

HOV Services, a stock I’ve traded in the past (and exited with a stop loss) has seen some major action in the last few days.

They made an announcement on June 5 saying:

Material Transaction Proposal
The Company has received an offer of approximately $202 million to
purchase 100% of its wholly owned subsidiary HOV Services, LLC and its
Hong Kong subsidiary from a company controlled by some of our
promoters and shareholders. On a fully diluted basis including ADR’s
if any, our shareholders will have the right to receive approximately
$91 million in cash – our shareholders will have the right to receive
either cash of approximately Rs. 170 or one share in the buyer for
each share held as of the record date; the existing debt will be
assumed under the terms of this offer. All shareholders as of the
record date will continue to own their current shares after receipt of
cash or shares in the buyer. Our independent directors believe this to
be in the best interest of the shareholders and have recommended that
the Company seek independent legal and financial advice. Upon
satisfactory statutory or regulatory approvals, as required by law and
subject to positive recommendation by the Company’s independent
advisors to our board of directors, the transaction will then be
submitted for approval to our shareholders.

This is a good thing, right? The stock is below 100, and a promoter owned company wants to buy a subsidiary and pay the current shareholders Rs. 170 per share, and the shareholders can keep their shares of the parent business. Fantastic?

For a couple days, The markets thought so. For two consecutive days, it was at the upper circuit, with large buying and obviously a lot of people thought 170 is the bare minimum for the stock.

As it should be, if there was really a proposal on the table. There is no mention of anything serious – i.e. which is the promoter company, what is the record date of the deal, when and how they will make the payment. And most importantly, what if they say ok and later say no? Is there a clause that says they have to pay some percentage anyhow? Will they put the money in escrow so that if the renege later, the company still receives a cut, and the shareholders aren’t duped?

Now the story gets interesting.

NSE then put the stock into the T2T segment on June 13– where you can’t speculate intraday, every single trade results in delivery. That means full cash up front. NSE does this to stocks when there is a tremendous move and they put the stock under surveillance for a few days or months. In fact NSE kept HOVS in T2T in a later announcement too.

If there was real buying in the stock it should have sustained the volume even after June 13. I have traded Jai Corp when it was in T2T and the volumes and demand remained even when it was in T2T – signifying that the move was on strong – in fact I exited with nearly 30% profit on that stock.

In HOV the situation is different. With 500,000 shares traded the day after the announcement and a couple 100K days, the volumes are down to less than 10,000 shares a day! For a share that’s around Rs. 100, that’s less than 10 lakhs worth of shares every single day – even with T2T that’s remarkably low.

Now this makes you think, doesn’t it? What if this announcement was made primarily to rig the price of the stock? What if the price went up and later there was no such deal, but someone intended and managed to get rid of their stock at the higher price?

Now the company by itself is good – they have a fantastic BPO setup and have over 12,000 employees, doing various kinds of KPO and BPO services. Still, there is some consternation about such announcements – and here is another problem.

The promoters have had cases filed on them accusing them of price rigging in U.S. Listed stocks.

Surinder Rametra, Chairman and MD, was involved in cases in his other companies ATEK and Interpharm, in the US. The case on ATEK was settled with the plaintiffs for an undisclosed amount.

Read these two links (Corporate Greed at it’s worstand “Extra, Extra”) for details on how insiders supposedly made announcements and sold heavily as the price of Interpharm went up. These are known as “pump and dump” schemes, and Rametra has been accused of doing this.

An exec director, Parminder Chadha was in a lawsuit accused of inflating
stock of his company, Osicom(listed in the US), by issuing false statements.
Read these links (Class Action Complaint and “Buyer Beware”)

Now these links do not indicate any fraudulent behaviour, so that cannot be the conclusion. But in the face of such history it pays to be careful when investing – if they were accused of “pumping and dumping” shares, how can we be sure it is not happening now, with HOV? Investors need more clarity and some of the money down – in fact, should you get more news about this “deal”, please try to find as much details, including calling the company up, before you invest. You need to know the record date of the deal, and what happens if the acquiring company says ditch. If those are clearly available, then this share can be purchased, T2T or otherwise.

And then there is the big question of why this announcement was sneaked into what was really quarterly results (see the rest of the pdf). Very weird, that.

I would be very careful in risking any money on this share. Yes, this is one time when SEBI must intervene and demand full and complete disclosure – otherwise make the company rescind the announcement immediately. This is what regulators are for.

Disclosure: No positions. None of our automated systems will buy this stock – we don’t trade illiquid or non F&O stocks.