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Becoming a Privately Held Company – The AsiaInfo-Linkage Case

December 26, 2013 | About:

In a macro view, we expect corporate spending on software to grow by a mid-single digit rate in 2014 (similar to that obtained in 2012 and 2013). With this outlook, let's take a look at Brandes´ last trade and try to explain to investors the reasons for this appealing investment opportunity.

On Dec. 13, Charles Brandes bought AsiaInfo-Linkage Inc. (ASIA), a company which is a provider of telecommunications software solutions and information technology products and services in China.

Stockholders' Approval of Merger Agreement

The company’s products and services include business operation support systems, containing billing, customer relationship management and other software and services that enable its customers to build, maintain, operate, manage and improve their communications infrastructure. The company also provides software and maintenance services for the systems it develops, as well as system integration and other information technology consulting and planning services. For 2014 we expect renewals related to software updates and support to remain relatively healthy, which sounds great for the firm.

Moreover, at a special meeting held on Dec. 19, the company's stockholders voted in favor of a previously announced Agreement and Plan of Merger in which Skipper Acquisition Corporation will be merged with AsiaInfo-Linkage. We see that this deal will benefit with access to more customers and can offer a greater range of products and services while reducing many of its duplicating expenses.

Valuation

In terms of valuation, its price-to-book ratio of 1.1 indicates a discount versus the industry average of 2.38 while the price-to-sales ratio of 1.47 is below the industry average of 1.86.

Earnings Per Share (EPS) increased by 83% in the most recent quarter compared to the same quarter a year ago. Also, it has demonstrated a positive trend in EPS growth over the past seven years as shown in the next graph. We include the stock price because EPS often lead the stock price movement.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. ROE has decreased when compared to its ROE from the same quarter one year prior. We must say that this is a signal of major weakness. AsiaInfo ROE of 3.2% is above the industry mean of 6.9% and lower than almost all peer group companies, with the exception of Jive Software Inc. (JIVE).

Ticker

Company Name

ROE (%)

ASIA

AsiaInfo-Linkage

3,2

AMAP

AutoNavi Holdings Ltd.

12,7

ELLI

Ellie Mae Inc

11,7

BSFT

BroadSoft, Inc.

7,5

DSGX

Descartes Systems Group, Inc.

6,7

JIVE

Jive Software Inc

-36,5

The firm´s revenue growth has outpaced the industry average. I expect this trend to continue as well as the future contribution of the significant improvements with the merger deal. Despite having found a major weakness in the result of ROE, the firm has other highlights as its revenue growth seen before and the positive trend in EPS. For investors looking for good EPS growth we recommend also watching Amdocs Limited (DOX).

Final Comment

Hedge fund managers have also been active in the company. Hedge fund gurus like Jim Simons and Jeremy Grantham have invested in it.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


Rating: 4.4/5 (7 votes)

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