Majesco Ltd: A special situation investment opportunity
There are ways you can make money by doing simple maths and without really looking into the financials of the company. These are called special situation investing. Warren Buffet use to call them ‘work-outs’.
If you hold special situation investments, during the bull run, the performance will be less than the market and during the bearish trends, the performance of special situation investments will be better than the market.
I am inspired by Warren Buffet and Joel Greenblatt for these investments. I use only cash segment for making decisions and that too extremely conservative style.
You do not invest based on rumours or hearsay. You invest when a company reports to the regulator. Your decision will be based on the odds of making money. Needless to say, those odds have to be extremely high.
I came across Majesco ltd in July 2020. Link to the news article.
Majesco Ltd is listed in NSE/BSE (India) and NASDAQ (US). Based on the news, the US arm agreed to be sold at $13.1 per share to a private equity firm. This price was at a 70% premium to the prevailing price at NASDAQ. After the deal, the US arm becomes a private company (delisted).
Interestingly, the Indian arm holds 74% of the US arm. On July 22nd 2020, the share price in India was Rs 348, a massive discount to the US entity’s agreed price.
Even considering fees, taxes etc. there was a massive upside. Will you go ahead and buy?
The answer is ‘NO’. It is a negotiation between the target and the acquirer, may or may not lead to the final deal.
What do you do? Keep a watch on the news flow.
All companies have to keep the exchanges (NSE/BSE) informed. Here is a link to get reports filed by companies to BSE.
Here is a news flow on Aug 8th, the price was revised to $16 (from $13.1). This is equivalent to Rs 1,200 per share, making it more lucrative for the shareholders. Link to the news article.
You will still not invest because the deal may still fall apart. You keep a watch on the news flow.
The deal was closed and the money came to the company on 21st September. On 22nd September, BSE & NSE were also informed about the deal. The share price had climbed to Rs 777 per share. Click here for the news article.
I scribbled on a piece of paper for 5-min and it indicated an opportunity, I started building the position.
The company has to pay tax @20% on the buyback and the rest is paid as a dividend. Company does not deduct any tax on the dividend and the tax is to be paid by the recipient at his/her respective tax-bracket.
On 8th October 2020 the company shared the distribution plan. The company arrived at Rs 1028 per share (instead of my price as Rs 934 per share). The buyback price was set at Rs 845/share by the company.
I accumulated more on 8th October 2020 at 820/share, in fact there was an arbitrage of Rs 25, given that the buyback price was known at 845/share. The overall average price of the shares was Rs 800, considering the purchases on 8th October.
Since companies do not pay dividend distribution tax now and dividends are taxed at income tax bracket, it will require some after-tax assessment.
Please note that after paying all this cash, the company would still be left with a small parcel of real estate valued at Rs 75 crore (25/share).
As per my assessment, if your tax-bracket is 30% or more, it may be better to either sell at the market price (more than Rs 845/share + Rs 25/share real estate) or tender shares during buyback period at Rs 845/share.
At an institutional level, the tax bracket could be lower (less than 20%). In those cases, Rs 845/share may also make sense from entry stand-point, although it’s not that attractive anymore.
On 9th October 2020, the price increased (maybe due to institutional buying) and I exited at Rs 870/share. This is 8.75% in 3 weeks, 150% annualized. Please note that there was an investment made for only a day at 820/share and that also yielded a 6.10% return.
The logic of selling now and not holding is simple. I do not want investors to pay taxes on the dividend as per their tax bracket since all of them are in more than 30% tax bracket. Additionally, do not wait for the last penny to come, you may lose out more than you earn.
Now, a lot of investors may ask, had I invested in July 2020, the return would have been exponentially high. As I mentioned, it is all about achieving results with high probability. That high probability was created when the company got the money and reported to the regulator.
Special situation investing is all about achieving results with high probability. The risk would remain but it would be time risk and not the capital risk. For example, the deal may take more time than planned for.
If you want to develop a keen understanding of these strategies, I would recommend Buffet letters and also a book, You Can Be a Stock Market Genius by Joel Greenblatt.
I apologize for some bit of maths explanation in this article. The intent was to explain in detail the nuances around special situation investing. The positive thing is that I did not talk about accounting. After all, most of the special situation investing may not involve accounting because these are event-based investing.
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." — Ben Graham
(all buyback situations are not special situation investments because the probability depends upon acceptance ratio and that may or may not make sense).