@The Alchemist wrote:
@slstock - timely post. hype is the right word. after a long time, brokers have a "merger" story to sell and the retail traders are speculating on a favourable outcome to all this. so far so good as many of the lower rung finance companies have gone up significantly and traders have been rewarded.
The thing to keep in mind is these combinations / mergers are like arranged marriages (almost by force ?) and not love marriages. this is been done mainly to protect deposit holders of the weaker institutions. so stronger institutions will have to absorb weaker institutions, by way of share swap or cash, and based on the nett assets principal. since many of the lower tier finance companies are trading at a premium to net assets, the shareholders of these may get a rude shock when & if these mergers take place.
also note that it is possible to pay a higher price than nett assets by recognising goodwill i.e. paying a higher amount for synergy, branch network, locations, new markets etc. In COCR case, the private placement is done at nearly 3 times NAV but at a relatively low P/E (7 times).
another possibility is that the stronger institutions paying a higher than nett assets amount via share swap / cash and are compensated by tax incentives by the central bank, for doing so.
in some instances like (TFC) for eg, with negative nett assets, goodwill maybe recognised or revaluation of real estate portfolio done and incentives offered to potential buyer.
it is no point paying a premium on net assets on weaker finance institutions unless their earnings growth or p/e multiple warrants it. paying a premium for a weak finance company trading at a high Price to Book ratio and high P/E multiple and hoping to gain in a merger with a stronger bank / finance company (through share swap or cash mandatory offer) may be wishful thinking or pure speculation.
ironically, some of the more fundamentally undervalued companies in this sector, i.e. the perceived stronger institutions, like CFIN, ALLI, CDB, LFIN, VFIN, PLC etc have not seen much movement (CDB maybe exception to the case).
This may also not be the best year for banks / finance companies due to declining interest rates and the fact that many locked onto fairly high borrowing rates via debentures, causing a mismatch in their borrowing / loan portfolios.
i am afraid a mini bubble in this sector is being / will be created, led by the retail speculative, broker herded crowd and will burst when expectations are not met in reality. this could negatively impact the overall market, as we have seen before.