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.

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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.