Activist investors are targetting these small cap firms.
Few things help the price of a share like an approach from a predator, looking to snap up the stock they you just knew was undervalued all along.
Last week's announcement by Healthcare Locums (LSE: HLO) that it had received an approach which "may or may not lead to an offer being made for the company" undid much of the damage inflicted by the recent change in accounting policy, and was welcomed with open arms by shareholders. Whether an offer for the company would be made at a price that shareholders would accept is another matter, of course.
It's just over a year since I last wrote about predators building stakes in companies with a view to possibly buying them out, or at least shaking them up, and the couple of shares I identified at the time have had very different experiences.
What became of ...
Centrica (LSE: CNA) had just bought 23.6% of Venture Production, a business that revitalises neglected oil and gas fields, and had said it was "considering its options". Having bought in at 725p, the price had jumped to to the low-800s, and the company was finally bought out by Centrica at 845p six months later.
Rio Tinto (LSE: RIO) had taken a 15.8% stake in Kalahari Minerals (LSE: KAH), an AIM-listed exploration group with a portfolio of copper, base metal and uranium interests in Namibia, causing the share price to double to around 84p at that time. In the meantime, its holding has been diluted down to 12.5%, and Nippon Uranium Resources / ITOCHU has taken a 16.65% stake, but "currently does not intend to make an offer". The shares now trade at 172p, having been as high as 217p.
Recent stake-building
Recent activity by stakeholders has been a bit thin, or possibly just hard to identify.
Activist Swedish investor and entrepreneur Peter Gyllenhammar has increased his holding in 1st Dental Laboratories (LSE: FDT) to over 10%, but the company is tiny, with a market capitalisation of less than £2m. Currently trading at 3.75p, the shares were as high as 45p a few years ago, so the company seems to meet his criterion of being 'bombed out'.
Gyllenhammar doesn't always try to buy out businesses, and often keeps his holding below the 30% that would require him to make a bid. His 29.95% share of Hartest Holdings (LSE: HTH) is an example of this, and he used it to fend off a recent approach that undervalued the business. You can read more about Gyllenhammar and his investing style in this piece by Chris Menon.
Crystal Amber has increased its stake in Sutton Harbour (LSE: SUH), the marina operator, to 9.12% -- this is "an activist fund taking stakes in undervalued companies and taking action to enhance value". It also has a significant holding in JJB Sports (LSE: JJB).
Finally, one that I'm watching with interest is the increasing holding by the Toronto-based Constellation Software Inc. in Bond International Software (LSE: BDI).
To quote from Constellation's website: "We acquire, manage and build industry specific software businesses which provide specialized … [yada yada yada]". I'm particularly interested in the second word there -- 'acquire' -- and that's what they seem to do; just this week Constellation won its battle to take over Gladstone (LSE: GLD). These things can take time, however: Constellation reached the 29% mark at Gladstone two years ago, having first bought in in 2006.
At Bond, the company first announced a shareholding of 3.5% in December, and has gradually increased it in the meantime, most recently to 12.95% today (Friday).
Whether any of these positions will result in a takeover bid is highly speculative, so I'd suggest that any purchases should be made on the basis of fundamentals rather than the hope of a buy-out.
More from Padraig O'Hannelly:
Padraig owns shares in Healthcare Locums and Bond International Software.
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