Why did the Ultra Electronics share price explode last Friday?

The Ultra Electronics share price exploded following a potential acquisition offer. Zaven Boyrazian takes a closer look at the potential deal.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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After years of idle performance, the Ultra Electronics (LSE:ULE) share price erupted last week. The stock surged by more than 32% on Friday, pushing its 12-month performance to over 50%. Seeing this level of upward momentum in a single day is exceptional in my experience. So what caused it? And should I be considering this business for my portfolio?

Exploding share price

Ultra Electronics is, as the name suggests, an electronics company and provides various technological and engineering solutions for the military, aerospace, and nuclear energy industries. However, its primary source of revenue stems from defence contracts with the US Department of Defence and the UK Ministry of Defence.

It seems the market is in a bit of an acquisition frenzy at the moment because Ultra Electronics is yet another business to receive a potential buyout offer. Last week, on Friday morning, management announced it had received a non-binding offer from Cobham Limited.

Cobham has been pursuing Ultra as an acquisition target for a while, with an initial offer of £28 per share in June. However, the bid has now increased to £35 per share and includes the interim dividend of 16p. Given the Ultra Electronics share price closed at £24.68 the day before, I’m not surprised to see it explode following this announcement.

What’s next?

The acquisition offer is undoubtedly exciting for shareholders. Cobham has until 20 August, subject to extension, to make a binding offer. Until that time, another interested party may enter the bidding arena and push the Ultra Electronics share price even higher.

Having said that, there’s no guarantee a higher bid will emerge or that Cobham will actually commit to this acquisition. Another potential roadblock is a regulatory one. All acquisitions have to be approved by both shareholders and regulators alike. And in the case of Ultra Electronics, the latter may prove challenging given its operations closely align with national security. Rolls-Royce knows this all too well. Its attempt to sell Bergen Engines was blocked by the Norwegian government out of national security concerns.

This is likely one of the reasons why the Ultra Electronics share price is currently trading below the offer price. And suppose the acquisition fails to materialise? In that case, I think it’s more than likely we’ll see the share price plummet back to its original valuation.

The Ultra Electronics share price has its risks

The bottom line

Comparing the price today with the offer price shows a gap of around 7.5%. If the deal were to be approved by both regulators and shareholders alike, this would be the maximum upside. By comparison, if it were to fail, the potential loss could be 35%, assuming it returns to the pre-initial offer price.

To me, that doesn’t sound like a wise investment. The ship has sailed, in my opinion. Therefore I won’t be adding any shares to my portfolio today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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