What You Need To Know About Silverlake Axis Ltd after It Dropped By 7.5% Yesterday

Silverlake Axis Ltd (SGX: 5CP) started today by making an announcement for a trading halt for its shares. This came after a 7.5% drop in its share price yesterday, which prompted an enquiry from stock exchange operator and regulator Singapore Exchange Limited on the same evening.

When Silverlake Axis was first issued the “Please Explain” yesterday, it responded by saying that it had essentially no idea why its shares had traded the way they did. And it turned out that today’s trading halt was made for the company to issue a follow-up statement to its response yesterday. More of all these will follow shortly.

The following is a recap of what has transpired with the company.

An acquisition proposal

Silverlake Axis was last in the news back in December when it make an offer to take over New Zealand-listed software company Finzsoft Solutions Limited. According to S&P Capital IQ, Finzsoft Solutions sepcialises in integrated software for the finance and banking sector in Australia and New Zealand.

Silverlake Axis, together with Finzsoft Solutions’ managing director Andrew Holliday, had jointly offered to takeover Finzsoft Solutions at a price of NZ$3.00 per share. Interestingly, the offer price was a 48.1% discount to Finzsoft Solutions’ last-traded price of NZ$5.77 back then.

The takeover proposal was for Silverlake Axis to hold a 51% stake in the new entity formed to takeover Finzsoft Solution with Holliday having control of the remaining 49%. Silverlake Axis and Holliday thinks that the discount is justified as Finzsoft Solutions had been trading only around NZ$0.30 per share in the early parts of 2014 and had only recently advanced to its high price from very low-volume trading.

Finzsoft Solutions had also just turned profitable at the end of 2013. For the six months ended 30 September 2014, the New Zealand software company had recorded a net profit of NZ$2.02 million. With the offer price of NZ$3.00 per share, Finzsoft is valued at an annualised price to earnings ratio of 6.35 times. Although that low valuation might seem attractive for Silverlake Axis, it’s hardly a price for Finzsoft Solutions’ shareholders to be excited about.

Advantages for Silverlake Axis

From the looks of it, Finzsoft Solutions and Silverlake Axis do have a lot in common (the latter’s business is also built around the provision of software services to financial institutions) and there might be synergies that can arise from the acquisition.

The low valuation that Silverlake Axis is proposing to pay for Finzsoft Solutions also makes it seem like the former’s getting a good deal. However, it is important to note that Finzsoft Solutions had only recently turned profitable and there is no guarantee that such profitability might continue.

A collapsed merger

Besides Silverlake Axis’s proposed acquisition, there’s another development which might have caught the attention of the market: The proposed merger of CIMB Group Holdings Bhd with two other Malaysian financial institutions to form the largest bank in Malaysia by asset size.

As CIMB is a client of Silverlake Axis, the latter is is expected to be involved with the integration of the software systems between the three banks in the merger. But, news reports had surfaced yesterday that the deal might be scrapped due to weak market conditions and falling stock prices. The potential loss of any merger-related business for Silverlake Axis had likely spooked the market.

To that point, Silverlake Axis’s statement that was released today during the trading halt was related to the matter. In it, the company pointed out a recent research report that UOB Kay Hian had released which talked about Silverlake Axis’ prospects following the merger of the three Malaysian banks. The company “as a matter of policy… does not confirm nor comment on the veracity of [the UOB Kay Hian] report and analyst’s view.”

In the statement, Silverlake Axis also revealed that analysts were also “generally aware” that the company had been in talks with RHB Bank (one of the three Malaysian banks involved with the CIMB merger) regarding potential business deals.

Foolish Summary

Silverlake Axis has been growing its revenue and earnings partly through acquisitions for the past few years. In fact, this growth-by-acquisitions strategy has helped make it one of the fastest growing companies in Singapore for the past decade. Finzsoft Solutions is currently the most recent target the company is looking at to further its expansion. Will this be a smart move? Only time will tell.

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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 does not own any companies listed above.