One popular investing tactic is buying companies that you think might be taken over. You'll often see news snippets saying that Lame Duck plc is not doing that great but it is worth holding just in case a takeover offer should emerge.
Standard Chartered (LSE: STAN) is the latest candidate. Its share price has risen from 600p to 850p in recent weeks as bid speculation mounted. This caused the company to issue a statement on Monday that it wasn't (and never has been) in talks to sell the company. However, this morning it was announced that its Chief Executive was resigning with immediate effect, saying he felt it was "an appropriate time to move on". No doubt this will re-ignite the rumours.
To be fair to Standard Chartered, it is no lame duck. But the nature of its operations, banking in 'emerging' economies, does mean that its results are unlikely to show the smooth upwards progression much sought after by share analysts. I've always found that ironic. Investment banking is arguably one of the most volatile businesses around, yet they expect every other company to show steady earnings per share increases no matter what.
It's not unusual for takeover offers to be made at a 50% premium to the pre-speculation price. In fact, I think that is about the average, although I can't find the actual figures at the moment. But it's very tempting to go for the prospect of a quick 'takeover gain'. Too many investors get drawn in by the (remote) prospect of making a quick killing and ignore the far more likely event that they will probably lose money. Most takeover rumours are pure hot air, circulated by those no doubt looking to offload some shares but hoping to get a higher price. The rumours also make good press and many participants in the financial community benefit when more shares are being traded.
It would be interesting to see how many reported rumours actually end up in an official bid. I would suspect the percentage is quite low. And it is that percentage that is important when looking at the validity of such a strategy. Occasionally, you will get lucky and it's easy to remember the odd time the strategy did work, but conveniently forget the many more times nothing ever happened. Never confuse luck with skill. It's a fatal mistake to make -- particularly with investing. It's something most people are prone to do, however. Shares that are subject to bid rumours can fall rapidly once the rumours fade away or be officially denied. In truth, if you want to take this approach to investing, you might as well just go down the dog track instead and cut out the middle man.
Format for printing | 
E-mail page to a friend | 
Archive | 
Have your say
