Netsol’s acquisition plans leave analysts perplexed

Netsol Technologies’ plans to acquire subsidiaries of its parent company have drawn confusion amongst analysts.

KARACHI: Netsol Technologies’ plans to acquire the European and North American subsidiaries of its parent company have drawn confusion amongst analysts and dismay amongst its investors.

Since announcing its plans on July 19, the company has seen its share price on the Karachi Stock Exchange tumble by 33 per cent to Rs18.66 at the close on Monday.

The transaction is expected to be valued at Rs1.76 billion ($20.5 million) and will be financed through a transfer of equity to the parent company, Netsol Technologies Inc (Nasdaq: NTWK), the only Pakistani company listed on a US stock exchange.

However, investors have expressed their unhappiness with the arrangement that will leave their shares in the company diluted. The stock has traded close to its lower limit for price declines on many of the previous weeks’ trading sessions. The Karachi Stock Exchange suspends trading for the day in any stock that declines by 5 per cent.

“The incremental revenues (from the acquisition) are unlikely to counter the dilution effects,” said Omar Rafiq, an analyst at BMA Capital, an investment bank, in a research note issued to clients on Monday.

Netsol Technologies Inc, a Nasdaq-listed company, currently owns 58 per cent of Netsol Technologies Ltd, the KSE-listed company. According to BMA Capital’s analysis, after the acquisition, Netsol’s American-listed parent company will own 76 per cent. The public shareholders’ stakes will be diluted by almost half, from 27 per cent of the company to 15 per cent.

Analysts have also expressed deep scepticism about the company’s ability to manage businesses in the highly competitive developed markets that its acquisition targets operate in.

“Both Netsol North America and Netsol Europe operate in highly competitive business environments which will pose a challenge to company to harness,” said Rafiq.

Yet the management has tried to sound optimistic about the proposed transactions, presenting them as an opportunity for shareholders to gain exposure to foreign markets with a KSE-listed stock.

“Customers are often reluctant to sign deals with Pakistani companies,” said Boo Ali Siddiqui, the company secretary in a letter issued to shareholders. “Through this acquisition, we will be able to overcome this issue as well by signing new deals through these subsidiaries. At the end of the day, all results will be consolidated with NetSol Pakistan.”

Both subsidiaries have combined revenues of close to $10 million, which would raise the top-line of Netsol Pakistan by close to 47 per cent. It currently has revenues of Rs1,845 million ($21.5 million). However, analysts caution that while revenues may rise, so will costs as the operating expenses in those markets are likely to be far higher.

Published in The Express Tribune, September 7^th, 2010.