How Acquisition News Affected Apollo Tyres?

Acquisition is always a situation where traders or investors are in a state of dilemna. We have seen such dilemna arising when Tatasteel acquired Corus group and now same problem is being experienced by Apollo tyres which has announced a mega acquisition of American company Cooper Tire which is Ohio-based for USD 2.5 billion. It has manufacturing facilities in US, Mexico, Serbia and China. 

The deal - the largest in India's automotive history - caused a run on the Apollo stock when it was announced due to the large debt component. 

Apollo Tyres Limited has closed to its lowest level since Dec 2011. The stock has lost 36 percent in last month and thus stock is not suitable for entry in short term. The stock is trend wise negative in the medium term and a further decline is indicated.

Management Decision for Going for Acquisition

The deal - the largest in India's automotive history - caused a run on the Apollo stock when it was announced due to the large debt component. Kanwar however has since then gone at great length to explain that there's no stretch on the Apollo balance sheet and as a profitable company Cooper will also earn for itself."There's heathy cash flow to pay down the interest. Add to that the synergy bucket which we have identified worth $80-120 million - and this is a conservative estimate - coming in the next 3 years and it looks quite alright," he said. "Also after two years, we will have the opportunity to pay down part of the $400 million through dividend from international operations as well." 

Verdict

Apollo tyres will bear burden in short term due to high cost of acquisition but will yield results in long term. As a stratgey long term investors can enter in stock when the news is absorbed by the market and as a strategy can enter in stock as a systematic investment plan as similar phenomenon in stock price was seen post Tata Steel and Corus deal.