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It pays to have takeover targets in your portfolio
There’s no more rapid source of share price gains than when a company becomes a takeover target.
Just two months ago Pioneer Foods became a takeover target of PepsiCo and the company’s share price shot up around 40% in two days. Or Clover, which shot up 62% between October 2018 (when the first announcement of a possible takeover was made) till February 2019 when the takeover offer was finalised.
Right now, there are a number of companies that I suspect could be takeover targets – or at the very least have business units that could be bought out by larger companies. I’m talking about companies like Santova, Astoria, Argent, Metrofile, Rolfes and York Timber.
All of these are companies that sell on low earnings multiples, are asset rich and have growth potential even in today’s slow economy. And all of them could very easily become a takeover target – sending the share price soaring.
What happens when a buyout offer is made?
When one company decides it wants to purchase another, a formal offer will be made to buy the target business. If the company to be acquired trades on the stock market, the offer will include a value for the shares. Buyouts can be in the form of stock or cash or a combination of the two.
When an offer is made public, the share price of the company to be bought usually increases, but often not all the way up to the buyout value. At this point nothing is final, and your buyout targeted shares will remain in your brokerage account.
After the formal offer has been made, shareholders need to approve the deal.
That means the company would have a meeting with shareholders. Formal voting needs to be done for the deal to be approved. Shareholders could reject a deal because the price offered is too low, or perhaps because shareholders prefer a cash offer as opposed to a share based offer.
After this approvall regulatory approvals need to be completed. In South Africa this takes some time… Especially where the competition commission gets involved.
And only after this has happened, can the takeover be finalised, and the company’s share price moves closer to the takeover offer price.
What happens to your stocks now?
If the takeover offer is a cash offer – you will receive cash in your brokerage account, and the shares will disappear from your account.
You don’t have to wait till the offer is concluded though.
Sometimes it pays to sell your shares even before the buyout offer is concluded.
Reasons for this include, lowering risk by pocketing your gains as soon as possible, or where there exists limited upside till the takeover is completed.
But remember – this attracts brokerage costs. If you wait for the takeover to be completed, your shares will be bought from you without you needing to pay any costs.
If a takeover is made with shares – always ask yourself this question
Do I want to own shares in the new company?
Let’s say that ABC Company is purchasing XYZ Company. If you wouldn’t normally buy shares of ABC Company because the stock’s fundamentals do not meet your investment criteria, then sell your XYZ stock and reinvest the capital in a more appropriate place.
You don’t want to end up holding a share you don’t like or approve of.
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How can you spot takeover targets?
What you can do as a shareholder is look at industries where mergers are occurring and evaluate if there are any good investment opportunities in them. The key is to find stocks that would be good investments even if no acquisition offer were ever made; simply investing on the hopes of a merger is pure speculation. Secondly, you want to evaluate the competition to assess if there is a potential buyer for the company.
A potential buyer has to have the size, financial means and desire to acquire the subject company. Often you find a company is already a minority shareholder in a takeover target. So that’s definitely also a good sign to look for – large companies or investors continually acquiring small amounts of shares in a target company.
Keep in mind that if even there are potential buyers for a company you are invested in, there is never a guarantee that an offer will ever be made. If an offer is made, you will need to evaluate the acquiring company to determine if it makes sense to follow the merger to completion. Each deal is different: You will have to weigh the benefits of maintaining your investment against both the potential risks of the merger not being completed and the opportunity costs of not investing in another company.
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares
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