The easyJet (LSE:EZJ) share price started the week at £4.62, before climbing to £5.10 and then falling back to £4.82. The stock market can be volatile but these are big moves.
The big story has been the possibility of the company being taken over by Mediterranean Shipping Company (MSC). And this is something that I think investors should pay attention to.
Landing slots
Low-cost airline easyJet has been the subject of takeover speculation for some time. Ryanair CEO Michael O’Leary highlighted this as a possibility recently given the easyJet’s recent lack of growth.
One of the big attractions to buying the FTSE 100 company is it has some important assets. Airports have finite capacities, which makes landing slots in certain locations extremely valuable.
easyJet has attractive positions in Gatwick and Paris. So with its shares trading at around 30% of pre-pandemic levels, another operator might see this as a bargain opportunity.
The stock jumped this week on the news of a potential takeover bid from MSC, before falling back as everyone involved denied any interest. And there’s something important for investors to note here.
Speculation risk
An acquisition offer might mean there’s quick money to be made for anyone who buys the stock at today’s prices. But it’s an extremely risky move and one that could backfire spectacularly.
Various parties might think it’s likely, but there’s no guarantee a concrete offer ever comes in for the company. And that’s not the worst-case scenario.
If the stock falls, easyJet could find itself being acquired below the current share price. That would result in a loss for investors and it’s worth noting analysts are not optimistic about the near future.
Earlier this week, Morgan Stanley initiated coverage on the stock with a Sell rating based on rising costs and lower prices. That makes buying the shares and hoping for a takeover look very risky.
Takeover talk
That’s not to say that I completely ignore the possibility of a takeover when I invest. I look for stocks that I think are undervalued and I know there’s a chance a major operator might agree.
It’s not, however, a reason that I buy any stock. As an illustration, consider my investment in DCC, which used to consist of an energy division, a healthcare operation, and a technology business.
When I started buying the stock, I knew the firm had plans to sell off its healthcare and technology units. But I thought the share price looked attractive whether or not this happened.
The growing energy business looked attractive to me – and still does. A recession is always a risk for this type of company, but I’m still looking at the possibility of adding to my investment.
Final Foolish thought
Investors don’t have to – and in my view, shouldn’t – ignore what’s going on in terms of potential takeovers. It’s an important part of understanding the future potential of the business.
A lot of the time, though, this can be a risk. Anticipated offers might never materialise, or they might come at a price that doesn’t generate a good return for existing shareholders.
This is why I think investors shouldn’t buy stocks just on the basis of future takeover potential. But it can be nice when it aligns with a wider investment thesis based on the company’s long-term prospects.
