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Why Have STATS ChipPAC Ltd. Fallen By 11.5% Today?

STATS ChipPAC

Shareholders of STATS ChipPAC Ltd. (SGX: S24) might have woken up to a rude shock today. The share price of the company was down by as much as 11.5% earlier in the morning.

Since May this year, STATS ChipPAC has been on a stupendous rise, doubling in price on the back of the possibility of it being acquired.

Sad but True

The company had recently revealed the names of two of its potential acquirers, namely Jiangsu Changjiang Electronics Technology and Tianshui Huatian Technology. But yesterday evening, STATS ChipPAC announced that there is a low possibility that any sale agreement would happen with Jiangsu Changjiang.

It’s my opinion that the big drop in price today happened because there isn’t much for shareholders to look forward to in the short-term as a result of yesterday’s announcement.

Just smoke and mirrors?

As I’ve discussed before, STATS ChipPAC is still a loss making company struggling to turn its business around. Without a possible merger or a chance for the company to get back to profitability, its share might continue to be under pressure going forward.

It is interesting to also note that the share price of STATS ChipPAC only started to climb in May after the company revealed that it might be bought over. In other words, it’s likely that most of the price rally that we’ve been seeing over the past few months had been the result of speculation that a possible sale could be happening.

So, what’s next for STATS ChipPAC following its announcement yesterday? Investors should note that the company’s share price had been hovering between S$0.30 and S$0.35 for a few months before news first broke of any possible deal. Can that be STATS ChipPAC’s next stop if no buyer eventually emerges for the company? There’s always the possibility.

Always focus on the business first

Bear in mind that I’m not trying to make a call on the company’s shares. I’m calling out STATS ChipPAC because this episode can be a great reminder that it’s more important to focus on the real business value of a company rather than speculating on whether it might be taken over at a higher price.

STATS ChipPAC has a reputation within its industry as being one of the best managed companies if you get a chance to speak with industry insiders. Yet, it is struggling to make a decent profit. In addition, it operates in a highly-competitive industry with global competitors and also faces the need for high capital expenditures. In short, STATS ChipPAC is in a business with poor economics.

And for billionaire investor Warren Buffett, he has some choice words for such companies:

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Keep that in mind when you analyse STATS ChipPAC’s business value.

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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.