Controversy Haunts the $890 Million Acquisition

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AsiaInfo-Linkage’s (NASDAQ: ASIA) performance over the past twelve months presents a mixed picture. Its stock value fluctuated moderately with a slightly upward trend only from around November 2012 when information regarding its proposed acquisition by CITIC Capital Partners became common knowledge.

ASIA generated revenue of $136 million and a net profit of $27 million in the first quarter of 2013. Strong demand for its products and a $7 million tax benefit ensured this larger-than-expected profit and year-on-year revenue growth of 12%.

The Company

AsiaInfo-Linkage is the largest provider of Business Support Systems (BSS) in Asia. It provides the following services:

  •  High-quality, innovative software and IT services to the telecommunications industry for customer relationship management (CRM), activation, and billing through its subsidiary AsiaInfo-Linkage Technologies
  •  Network security software and services for firewalls and virtual private networks through its subsidiary Lenovo-AsiaInfo

Proposed Acquisition

AsiaInfo-Linkage has confirmed its merger with CITIC Capital Partners, the private equity arm of CITIC Capital Holdings Ltd. Under this deal, the company will be acquired by a private investor consortium led by CITIC Capital Partners. AsiaInfo-Linkage will then be a privately held company, a move that several other companies have made recently.

Each shareholder of AsiaInfo-Linkage will receive $12 in cash for every share of common stock they possess. Based on this, the total value of the deal becomes $890 million. This price represents a 52% premium over the price on January 11, 2012 – one day before the proposal for this merger was received from CITIC Capital Partners.

CITIC Capital Holdings Ltd. is an alternative investment management and advisory company. It focuses on China and handles over 4 billion USD of investment from numerous Chinese and international investors. CITIC Capital Partners is its private equity arm that operates in China, the U.S., and Japan and invests in those companies that profit from the resources and the growth of the Chinese economy.2

Battling In the Tech Space

Amdocs (NYSE: DOX) and SAP AG (NYSE: SAP) are amongst the listed competitors of AsiaInfo-Linkage. Unlisted competitors include Digital China Holdings Ltd. and Huawei Investment Holding Co. Ltd. These companies are larger than AsiaInfo-Linkage.

Amdocs provides software services to telecommunication industries for automation of customer relationship management (CRM), billing, and sales. 70% of Amdocs’ sales come from customers in North America.3

SAP AG is the world leader in enterprise resource planning (ERP) software used for integration of different back office tasks. Over half of its sales come from Europe, the Middle East, and Africa while the U.S. accounts for a quarter.

With a market capitalization of $94 billion, SAP AG is in a league of its own. Amdocs has a market cap of $5.8 billion while the corresponding figure for AsiaInfo-Linkage is $844 million. Stock prices of SAP AG and Amdocs have both shown a consistent upward trend over the past one year.

Among other things, price-to-earnings (P/E) ratio represents the number of years a stock investor is ready to wait in order to recover his investor. AsiaInfo-Linkage’s P/E ratio of 21.6 is better than that of Amdocs’ 15. Here again, SAP AG outperforms both these with a P/E ratio of 25.4.

Conclusion

Because shareholders of AsiaInfo-Linkage will receive no more than 12 USD per share after the deal matures, it is better not to invest in this company unless the investor is willing to risk his funds on the outcome of the investigation.

Stockholders of AsiaInfo-Linkage should hold because the investigation may rule in favor of shareholders causing disproportionately large stock appreciation. Otherwise, the current price of $11.60 is less than what they can make.


Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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