Digital stock crashes 25.5%; investors lose Rs 420cr

On Saturday, the company announced that it had signed a definitive agreement with parent company Hewlett-Packard (HP) to combine with HP Services’ India Software Organization (HPS ISO), establishing a significant services company with HP as a key investor, customer and supporter.

Analysts attribute the lack of transparency over the merger as the major reason for the current offloading in Digital. Though the merger is deemed to be good for Digital business-wise, as much of the company’s revenues stem from business with HP, the valuation of the merger is not satisfying. There’s also disappointment that no financial details about HPS ISO’s software business have been disclosed.

Analysts are concerned about the price being paid by Digital for HP’s software business. “Digital will be issuing 35.47 million shares to HP as part of the merger deal. In short, as the market value of Digital was over Rs 500, it would be dishing out Rs 1,773 crore. This is a big money. Digital seems to be overpaying HP,” said an analyst.

On last Friday also, Digital had fallen from Rs 525 to around Rs 500 amidst a huge volume, which was double the daily average. “The fall in Digital shares (on Monday) had a rub-off effect on other technology stocks. Wipro (down by 2.5% at Rs 850), Satyam Computer (down by 1.4% at Rs 177.85), HCL Tech (down by 0.7% at Rs 143.80) and Hughes (down by 0.7% at Rs 222.35) all closed with losses,” said an analyst with Motilal Oswal Securities.

After the merger is culminated, Digital’s equity capital will increase to Rs 60.8 crore from Rs 33 crore and HP’s shareholding in Digital will increase from the present 50.6% to 76.2% (following the issue of additional equity and convertible preference shares to HP). “Why is the company hiding details about the merger? They should be more transparent,” said a shareholder.

The merger between Digital GlobalSoft and HP Services’ India Software Organisation is likely to become effective in the next 6-12 months. Earlier, at the global level, there was a merger between Hewlett-Packard, Heloise Merger Corporation and Compaq Computer Corporation. A new entity called Hewlett-Packard Company took shape on 7 May 2002 in the US. Compaq Computer Corporation is the holding company of Compaq Computer Holdings UK, that owns equity stake in Digital GlobalSoft.