There's been more M&A activity of late -- can you profit from takeover situations?
The best way to profit from takeovers is to find a seriously undervalued company (there are lots of these around by the way), and to sit and wait for someone to take it over before the market spots the value; not exactly rocket science is it?
Alas, it's a lot easier said than done and takes the patience of Job to come good. Sometimes it doesn't happen for years, or never happens at all -- but here's the thing; it's amazing how often it does happen.
But if you aren't invested in a company and a bid or potential bid is announced, it may not be too late to profit. Each individual situation is different. Why not run a virtual experiment?
Watch and wait
Keep an eye on each day's announcements to the London Stock Exchange and look out for "Statement re share price movement" / "Statement re possible offer" etc. and watch what happens next.
Obviously, such news will cause the price to jump. What's interesting, though, is how often the price then drifts down on no further news for a while, unless a deal is put to bed very quickly, or further details are leaked to the press, or a second bidder throws his hat into the ring.
Such drift can present an opportunity, but of course, it isn't easy and very often the deal doesn't come off. Details of the offeror may or may not be given at this stage.
So how can you tell which deals will be sealed and which won't? The short answer is that you can't, but you can stack the odds in your favour.
The takeover panel's disclosure table shows details of all ongoing takeover situations. It's interesting to monitor what happens even if you have no material interest in the shares.
The important thing to remember is that a company is worth what someone is prepared to pay for it. Short term traders, impatient for a quick buck, often sell their shares after the immediate gains have been made. This often happens after some initial speculation and before the actual announcement.
Other short termers, impatient for an immediate result, also sell and the company goes off the radar a little as hopes for a counterbid subside.
Of course, what investors holding or hoping to trade the shares are hoping for is a counterbid. As a holder of shares in Intelek (LSE: ITK), for example, which was the subject of a recent write-up, shortly after which a bid at a 100% premium to the then share price was announced, I was hoping that a counterbid will arise.
OK, it's a forlorn hope now, and I'll happily take the 32p on offer, but it could have got interesting as it has with Scott Wilson (LSE: SWG).
Here, the bidding war between two rival suitors drove the share price way above the 210p initial offer, before a deal at 290p seems to have been struck. This is where these situations get really interesting -- though it presents a better opportunity for speculators if there's more of a time lag before the counter bid appears of course.
Under the takeover code (PDF) a bidder is not allowed to buy stock in the market at a price higher than it is offering shareholders -- unless it immediately ups its bid. This means the bidder can't buy stock if another bidder enters -- or is expected to enter the process, so counter offerors have the advantage in many ways here.
A good knowledge of the takeover code (which is long, fairly complicated and includes many waivers and exceptions etc) is essential if you're even thinking about dabbling in these situations. Here are a few points to bear in mind:
- An offeror must announce a bid only after ensuring that he/she can fulfil in full any cash consideration, if such is offered.
- Where the statement includes reference to the fact that the terms of the possible offer "will not be increased" or are "final" or uses a similar expression, the potential offeror will not be allowed subsequently to make an offer on better terms.
- Where a potential offeror has reserved the right to vary the offer, the value of any offer that is made subsequently must be the same as or better than the value of the offer.
Personally, I think trading shares in companies in takeover play is something best left to those who fully understand the nuances of the takeover code.
I prefer the odd pleasant surprise when a value share is taken over as it's usually at a decent premium to the prevailing share price -- something which is magnified further if the company is family-controlled (as of course these are tougher targets for predators in the first place).
But it is a fascinating area and there are people out there who are specialists at this kind of thing -- though even for them, it's not without risk.
More from David Holding:
David holds shares in Intelek.