Key points:
- RWS Holdings shares have dropped 26% this morning
- This is as they announce the takeover of Liones Holding
- The fall though is a result of predictions of lower growth and worse results
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RWS Holdings (LON: RWS) shares have fallen 26% this morning as a result of two pieces of news. The first, and possibly headline, is that they are to take over Liones Holding NV in an all-cash deal. All-cash deals – unlike share based compensation – tend not to crater a share price unless the evaluation is that there’s a gross overpayment going on. This isn’t what the market seems to think about that takeover either.
Rather, there’s a second announcement today. One which will fully explain this slump in the RWS share price. The news there is that current and next year results are going to be at the low end of current market beliefs. There are certain technical reasons for this of course – much of the group business concerns translations of patents, people seem to be delaying patent applications – but that’s not really what the market wants to hear.
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There’s also a slightly cynical way of interpreting this part of the announcement “the Group plans to drive accelerated organic growth, operational efficiency and margin progression over the medium term as a result of increased investment in the near term.” Which is that things are going to be bad in the near term but they’ll get better. Promise.
Now that is unkind but there will be those in the market who read it that way. It is true that it’s necessary to invest in order to succeed. But they’re predicting, in this near future, organic growth in line with the market, rather than growth ahead of that market. That second being the one we all want to see of course – that a company is taking a growing share of the market, rather than just maintaining it.
There’s also a final problem which is that RWS has development centres in both Ukraine and Russia. Something that produces obvious problems given current events.
Perhaps the biggest lesson to take from this is that one about efficient markets. The contention is that markets are good at processing information. This means that all the things that are currently known are already in the price. So, the RWS Holdings share price yesterday included assumptions about growth over the next few years. Today we find out that those assumptions were not true. The price changes – near instantaneously – to incorporate the new information. That’s the 26% drop. It’s not that the news is terrible, just that it’s disappointing. It contradicts what we thought we previously knew so it has a significant effect upon that RWS share price.
The corollary of this is that it’s always new information that moves share prices. Our game as traders is therefore to predict what any new news will be – difficult as that is, that is the game being played.
