Saturday, October 21, 2017

Is silverlake axis acquisitions a good deal?

I might be suffering from confirmation biases here, but I think it is a fairly good deal.

Here is why?

For the Base Case Acquisition Cost (Profits of all 3 entities do not experience more than 25% earning growth yearly for the next 3 years till 2020 ), the acquisition will be done purely through the issue of new shares. Hence there is no strain on the cash of silverlake axis, neither will it need to takes on loan for this acquisition.

New shares issued is cents 71cents, a premium of about 17% over the last traded price of 60 cents.

The acquisition cost is 50 mio, and hence will result in a dilution of shares by less than 3%. If we assume zero profits growth, the 3 entities will add about 14% of 2017 NPAT. Hence it is yield acretive.

Even if profits collective is halved, it will still be acretive. However, 2017 is a low base for NPAT. If we assume 30% more profits as reversion to the mean, and the 3 entities' profits to halved, it would still be accretive.

With the exception of SDE, of current ratio of about 1.3, the other 2 entities have current ratio above 2.

Now, the confusing part is when Earn-Out consideration comes into the picture.

Maximum dilution is 25%. For that to happen, the NPAT will amount to about 110 mio (RM), that is about 70% of 2017 NPAT. (Operating, excluding sale of GIT)

The problem is the qualitative part.

The customers of SDE and SDS are also renowned banks around the world, just google them.

I gave just 2 examples here.

There is simply not enough information to calculate possible growth, although the news from the SDE website does show a rather high profile type of corporate actions, e.g. digital bank at sri lanka launched by PM.

I do like the deal in general. How about you? Maybe we would know what Mr Market thinks come Monday. Personally, I think there is more good things to write about it by analysts than bad. Given that the US market is still on a roll, if Mr Market gives the deal a thumbdown, there is no excuse to blame it on market sentiments


  1. I don't like the way it is financed.

    They have RM720 million in cash, why don't they use the cash to pay for the acquisition?
    Why do they have to issue shares to pay for them? I understand that it is stated as 71 cents per share but it is just a distractor, like how one mark up price and then say there is a discount.

    1. Hi SGdividends,

      Personally, if it’s a cash deal, I might want to sell out my holdings.

      Silverlake axis is not a local company and corporate governance ranks high in my mind. Cash means Goh is cashing out, now goh is effextively injectinh assets and giving itself a higher stake in the game. I like it a lot.

      Another way to do it is the osim way, while osim does it through a rights it’s the same, place the shares at a heavy discount to gain more of the company and take it private.

      Apparently both are not happening and I am happy.

      But well, Mr Market is on your side and give the deal a thumbs down.

      If it is thumbs down further, I would bet against Mr Market by reaccunulating my stake

  2. Hi sillyinvestor,

    I see your point. Always good for an owner to have more skin in the game and I agree with the logic on cashing out by a CEO if use cash.

    Just that based on its history, it doesn't spell confidence that CEO still doing the same as per what Razor reported in the past about it accumulating silverlake with injections of its private entities.

    Looking at another way,it might make my imagination go wild, is the cash real as in why don't they use all that cash if it's real? 720 million Vs 156 million is more than enough to fund it.

    Quite recently, they funded the sungard acquisition ( not Goh private entity) with cash. Why when it's Goh private entity, it needs to be funded with shares? Why different treatment?

    It seems there is good and bad to say about it whether by cash or shares funding it.

    Just that it throws out some questions that needs to be answered when it funds by shares.

    Anyway, I have emailed them and posted the questions to them. Hopefully they reply. they have not answered one part of my question since 2015...

  3. Hi sgdividends,

    The market is seeing it the way as u do. So perhaps u are right.

    It’s not easy to take the cash given the amount of money given out as dividends and the fact that there is no rights call.

    Secondly, Silverlake customers are major banks and also use them as “advertisements” of capabilities on their websites, this again hardly possible that they fake their customers.

  4. Hi Sillyinvestor,

    I am also not sure..

    I will be extra sure if after Mr Goh got his shares and meet all the earn out consideration and get further extra shares, then he gives out the large cash hoard as dividends....maximising his returns.

    I will think more positively, if he gives out a big dividend before he gets the shares ,including the earn out consideration.

    1. Hi sgdividends,

      I think to assume Goh did some “fraud” is quite ridiculous. But he might not be shareholder friendly. But his coporate actions so far is good.

      Increased dividends from sale of GiT, premium on price of placement (a rarity)

      Still performing reasonable well in terms of operating business. At current valuation, Market has discounted it as a growth company.

      They is “massive mispricing” if I get it right and market get it wrong


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