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Is There Any Value Left In STATS ChipPac Ltd.?

STATS ChipPACJust yesterday, the semiconductor chip tester STATS ChipPAC Ltd. (SGX: S24) has again announced that certain parties have expressed interest in acquiring it.

The company, which is majority owned by Singapore’s sovereign wealth fund, Temasek Holdings, had made similar announcements back in May and June this year. But this time, the company has revealed that its possible suitors include two Chinese firms, namely, Jiangsu Changjiang Electronics Technology Co., Ltd., and Tianshui Huatian Technology Co., Ltd.

With so much acquisition interest building up in STATS ChipPAC, is there really still value left in the company for investors?

Performance so far

The share price performance of STATS ChipPAC has certainly been impressive; over the last 12 months, the company’s shares have more than doubled from S$0.315 (on 29 August 2013) to S$0.66 as of yesterday’s close.

Interestingly, STATS ChipPAC had been hovering between S$0.30 and S$0.35 per share for much of the past year before shooting up in May following the first time the company revealed that it’s in talks with potential buyers (see chart below).

Source: Yahoo Finance

In light of that, it would be logical to conclude that most of the price increase STATS ChipPAC has seen so far has been due to speculation that the company will be acquired in the near future.

The risks

In the first half of 2014, STATS ChipPAC had suffered a loss of S$20.0 million as compared to the loss of S$48.7 million it logged a year ago. So despite recent improvement in its earnings, the fact remains that the company is still making some serious losses. In addition, the company is also highly leveraged with a net debt (total debt minus total cash) to equity ratio of around 93%.

Thus, for investors thinking of getting into STATS ChipPAC in the hopes of the company being offered an even higher takeover price, they’d still need to at least be aware of the possibility that any potential deal might fail, as obvious as it sounds. If an acquisition offer fails to materialise, we might well see STATS ChipPAC fall back to where it was prior to all the acquisition-talk.

Foolish Summary

For investors looking at STATS ChipPAC as a possible investment, perhaps the right question to ask is not whether the company will be acquired. Instead, the right question should be: How much is STATS ChipPAC worth as a business? And to answer that question, investors could look at the possibility of STATS ChipPAC turning its operations around to regain profitability and perhaps even build a competitive edge around its business.

If anything, trying to determine the real economic value of STATS ChipPAC would be a much more fruitful exercise for an investor as compared to merely speculating on the possibility of an acquisition.

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.