3 red flags from Appen's takeover offer

Appen (ASX: APX) shares miraculously rallied more than 300% in the past month, only to disclose that it had been in possession of a month-old proposal from US-based digital data solutions company Innodata.

In a perfect world, the timely disclosure of such material information would likely have been appropriate to ensure transparency and fairness.

The company said it chose to withhold the announcement as there was "no certainty that the Indicative Proposal will result in a binding proposal for Appen, what the terms of such a proposal would be, or whether there will be a recommendation by the Board."

Below, we're going to take a deep dive into the takeover bid and bring forth three key issues with the takeover bid.

#1 The Bid

Appen said the offer was priced at 70 cents worth of Innodata shares, which "equated to a premium in excess of 100% to the Appen share price at the time the Indicative Proposal was provided." The last time Appen traded sub 35 cents was on 19 February 2024.

Between 19 February and 12 March, the stock rallied 208.6% to a 5-month high of $1.07.

Appen price chart (Source: TradingView)

Tech stocks might be all the rage right now but leading names like Nvidia, Wisetech and NextDC have rallied around 15-20% (also off the back of impressive earnings too). Could well-informed insiders be fuelling the Appen rally?

#2 The Bidder

Innodata specialises in helping businesses with their data challenges via a combination of advanced technologies and human expertise. Here's a breakdown of their key offerings:

• Data annotation: Innodata helps companies collect and label complex data sets for training AI and machine learning models. This ensures the models have high-quality information to learn from, leading to better accuracy.

• AI-powered Solutions: Innodata offers a suite of AI-enabled software platforms and managed services. These tools can automate tasks, improve data workflows, and help businesses leverage AI for digital transformation.

Much like Appen, Innodata suffered the loss of a large client in 2022, which contributed about US$8.5 million in revenue for the full calendar year (representing approximately 10.8% of Group revenues). Innodata's revenue has only recently returned to levels prior to the loss of the major client.

Source: Innodata 4Q23 results

Innodata has a market cap of approximately US$172 million (A$260 million), not much bigger than Appen's current market cap of A$205 million. This isn't exactly a scenario where a well-established and well-capitalised US tech giant swoops in to take out Appen. It's more like two Appens merging together ...

#3 Innodata is no better

Appen's recent price action might be a little suspicious but Innodata is no better.

The stock is down 51.2% since 14 February, with notable drops recorded on:

• 16 February (-30.5%): Wolfpack Research published a report on Innodata that alleges “despite management’s pumping that it is ‘delivering the promise of AI to many of the world’s most prestigious companies,’ it is a deteriorating, manual data-entry business driven by offshore labor, not innovation.” On the same day, US law firm Block & Leviton advised any shareholders who purchased Innodata shares and seen their investment fall, to reach out.

• 23 February (-16.6%): December quarter 2023 results

• 12 March (-16.3%): In response to the Appen takeover news

Innodata price chart (Source: TradingView)

Food for thought

What is the deal worth: Appen said the offer was valued at 70 cents worth of Innodata shares per Appen share (at the time the Indicative Proposal was provided). We can conclude the offer was made around mid-January to mid-February. Innodata shares have tumbled around 30% since mid-January, which implies the scrip deal is worth more around 50 cents per share or 50% below current levels.

What now: If the deal were to move forward, then i) Appen's shares are trading at a substantial premium at the moment (currently 98 cents) and ii) this would peg Appen's share price to that of Innodata. If Innodata suffers, so will Appen.

The deal is currently non-binding and indicative. Appen has appointed Barrenjoey and Allens to assist it with its assessment of the takeover.