Tuesday, May 17, 2011

Regarding Latexx's Aborted Takeover Deal

ronnie said...
Were you surprised the Latexx deal fell through?

Me: No I am not surprised. The business economics of the industry were stacked heavily against the players.

My biggest concern was always the 'Would You Be Concerned With All The Capex In The Rubber Glove Industry' issue posted way back on June 2010.

The whole industry was expanding forever, Yes, I understand they struck a gold mine in this industry and had became the top players in the WORLD but when everyone expands without considering the risks issue, I found it unreal.

And then as we all know the commodities boom and boomed. This ultimately caused the cost to increase dramatically.

And as we all know, the selling price was in US Dollars and the US Dollar was depreciating big time.

How could the players win in such a business economics?

Their net revenue in ringgit was hit by sinking US Dollar. Their costs were increasing caused by rising material costs. The cost of latex increased due to surging rubber prices. As they say, do the math.

And yeah, to complicate matters much more, everyone was in the midst of an extremely aggressive expansion.

Which all means that profits were gonna be hit.

Ouch! Ouch! and more ouch!

One more issue.

All these stocks were priced in the market for their explosive growth. The markets had given all these players a very rosy outlook and with it the optimistic earnings growth. However, will all these changes in business economics of the industry, as they said about the wheel of fortune, what goes up, must comes down. And so all these stocks reversed dramatically.

And in the midst of all this, suddenly Latexx gets this rather generous offer.

I was puzzled. Why such a generous takeover price? It was rather clear to me then that the industry was going to hit a hard time. There will be no more growth story.

And yeah I am not surprised at all.

3 comments:

solomon said...

I am not surprised either. Whether this deal is made for some to exit.

With the burgeoning raw material price, unless there is a return to fundamental, consolidation of players are inevitable. With the listing WRP soon, top player will make their move on to buy this company.

Moolah said...

Quote: "With the listing WRP soon, top player will make their move on to buy this company."

Err... why? :P

solomon said...

No more growth story, top players have to create another theory to tell it's shareholders? Market share or bottom-line. My flawed opinion Latexx is a good bride for them.