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In Orchid's quest
posted by
Vivek Sharma
15 Apr 2008, 17:37
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labels: companies, corporate restructuring, mergers/acquisitions, chemicals
This is not the first time Orchid Chemicals is in the eye of a takeover speculation storm, and it is not surprising either. It is one of the best managed among tier-II Indian companies. With revenues over Rs1,000 crore in the last financial year, with a healthy EBITDA margin of over 30%, the company should be in the radar of anyone looking for an acquisition in the pharma space.
Orchid was one of the earliest Indian companies to cash in on the rising demand for cephalosporin, used for treating bacterial infections. Its manufacturing facility near Chennai is one of the largest in the country for anti-bacterial drugs. It later diversified into other drugs and set up another manufacturing unit in Gujarat.
What makes Orchid even more attractive is the low promoters’ stake of under 24% as of last December. Domestic institutions held close to17%, with LIC holding a sizeable stake, while FII’s had over 18%. This widely dispersed holding pattern is almost like an invitation for a corporate raider to make a move.
That is not the whole story. The stock went into a free fall last month, losing nearly 50% in just two days. Apparently, Orchid’s promoters had pledged part of their stake to finance an increase in their total holdings in the company. As the markets went into a tailspin last month, following the near failure of Bear Stearns, Orchid’s promoters were not able to meet margin calls and the pledged shares were offloaded in the market.
After the fall, Orchid was valued at just Rs800 crore. If a potential acquirer was waiting for an opportunity, that was it. Solrex, allegedly owned by promoters of Ranbaxy, quietly picked up nearly 10% and triggered all the speculation about a hostile bid – which of course, both Ranbaxy and Orchid has ruled out.
The bigger question is, why do we look at hostile bids as if they are undesirable in some way? Is it because we view the promoter of the target company as a hapless underdog, who is about to lose all that he has built in his lifetime to an insensitive moneybag? A classic David Vs Goliath situation, where it is morally incorrect for us to side with the Goliath? Our concern for the underdog forcing us to call a hostile takeover bid as unfair and uncivilised?
Such concerns undermine the interests of other shareholders in the target company. We still identify listed companies very closely with their promoters, even if they hold less than a fourth of the company. That has to change.
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