MENU

This Week’s Falling Knife: Memstar Technology

memstarlogoThis week we don’t just have one falling knife but a pair of interlocking falling knives. Shares in Memstar Technology (SGX: 5MS) plunged 10% to S$0.09, while United Envirotech (SGX: U19) slid 7% to S$0.95.

Earlier this week, United Envirotech, which specialises in treating water and wastewater, announced that it would buy Memstar’s business and assets for S$294m. Memstar makes polymer membranes used in filters.

On the face of it, this looks a good deal for both companies given that one makes membranes and the other uses them. However, the devil lies in the detail.

United Envirotech plans to pay for the acquisition through a mixture of cash and shares. A quarter of the purchase would be paid for in readies and the balance would be financed through the issue of around 200m new shares. The deal also leaves Memstar Technology holding a bag of cash and very little else. In other words it would effectively be a cash shell.

It is easy to see why shares in both companies have fallen. In the case of United Envirotech, the issue of new shares amounts to nearly a third of its outstanding 600m shares. However, if the company can make the acquisition work, then profits may improve in the future. Meanwhile, a question mark hangs what Memstar will do with the cash.

The Motley Fool’s purpose is to help the world invest, better. Click here now  for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock — Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool’s purpose is to help the world invest, better.  

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.