On Wednesday evening, the tech sector was jolted by a surprise R800 million takeover bid for the local software group Adapt IT.
South African telecom company Huge Group is offering to exchange each Adapt IT share for 0.9 Huge share, which works out to a value of 552c per share – 33% more than the share’s average price over the past month.
In response, Adapt IT issued a neutral statement on Thursday, saying Huge’s offer was "unsolicited" – indicating that the board won’t necessarily support the takeover.
Adapt IT’s share price jumped by 13% in reaction to the bid, while Huge declined by almost a percent on Thursday – indicating that the market believes the bid may go ahead, says Chantal Marx, head of investment research and content at FNB Wealth and Investments.
But she believes that the bid is opportunistic, given that Adapt’s share price has lost more than 70% of its value over the past four years, leaving the company undervalued, on a price earnings ratio of below 8 times.
Part of the slump was collateral damage from the near-collapse of tech peer EOH Holdings, which was hit by fraud and state capture corruption in recent years, says Marx. While Adapt had no part in any of it, the fact that it had a similar business model caused the market to drag it lower along with the large IT services group.
Huge, on the other hand, is closer to being overvalued after strong gains, says Marx. It is currently trading at a price earnings ratio of above 12 times.
The company is probably gunning for Adapt as it searches for its next growth vector, she added.
Huge mainly focuses on telecommunication, and its Voice over Internet Protocol (VoIP) technologies have been a big part of its business. But demand for its specific VoIP technology is waning, while Adapt has more promising software products, Marx says.
The company provides software solutions to a range of industries.
Huge also hopes that the creation of a much larger, merged company will bring other benefits.
"The markets in which Adapt IT and Huge Group operate are similar and the economies of a larger company that can both withstand greater challenges and exploit expansive opportunities because of size and scale is appealing," Huge Group chairman Duarte da Silva told Techcentral, adding that both companies are focused on growing their annuity revenue from clients.
Shareholders who have been invested in Adapt It for some time, and have seen the value of their investment plummet, may be tempted to pursue the offer, says Marx. "They may have had to wait for years for the market to rerate Adapt-IT (to these levels)."
But she believes the company is worth more than Huge is prepared to pay. Adapt reported strong results in October last year. Its headline profit increased by almost 30%, with revenue almost topping R1.5 billion. "At this price, Huge will be getting Adapt-IT for a bargain."
Earlier this week, Huge announced that it applied for a listing on London Stock Exchange's Alternative Investment Market (Aim), in an effort to attract new investors. Its primary listing will remain on the JSE.
Compiled by Helena Wasserman - Business Insider SA