AstraZeneca plc Shows The Danger Of Buying On Takeover Talk

If you dived into AstraZeneca (LSE: AZN) (NYSE: AZN.US) on recent takeover talk, hard cheese. The share price is down 10% since the height of the Pfizer furore. You don’t have my sympathy, however. Leaping into a stock in the hope of making a quick killing on takeover talk is a gamble, and gamblers should understand the consequences. If you didn’t, you’ve learned a hard lesson. Buying on speculation is dangerous.

I shouldn’t complain, because I’m benefiting from M&A speculation right now. The share price of medical devices manufacturer Smith & Nephew, which I hold, has been driven skywards by speculation that US-based Stryker Corp is lining up a bid. I’m not topping up my holding to take advantage, and I’m not selling either. For me, Smith & Nephew is a long-term play on the ageing global population. This was never meant to be a flutter. 

Loose talk costs lolly

I don’t buy on takeover talk because there is just too many a slip between cup and lip. The £69 billion Pfizer bid may have made short-term sense for profit-hungry AstraZeneca shareholders, but was partly scuppered by an unexpectedly forceful political campaign against what was portrayed as an aggressive, asset-stripping bid. 

Who knows, if Kraft had been kinder to Cadburys, or the public mood hadn’t shifted against open markets and City short-termism, it might have squeaked through. Every bid is subject to a host of such variables, any one of which could scupper the deal, and sink traders.

Given that most speculation does not lead to a deal, you are likely to lose more times then you win. That’s gambling. And you can quickly stack up big losses. As news of the Stryker bid first broke, shares in Smith & Nephew soared 17.5%, before ending the day just 2.8% up. You wouldn’t want to be at the sharp end of that. This is important to remember, with headlines proclaiming the FTSE 100 has just hit a 14-year high on M&A speculation.

Talk Is Expensive

In January, United Utilities, Severn Trent and BSkyB all climbed on takeover speculation. None has been sold. Last year, Vodafone leapt, after talk that AT&T Inc was preparing a bid. Engineer IMI is up on talk that Scottish engineering company Weir Group is ready to open its purse. InterContinental Hotels Group has also attracted rumours. And so the chatter continues. 

I’ve tuned out. I guess I might welcome a bid for one of the companies in my portfolio if it was struggling, and this was an opportunity to cut my losses. But mostly, it’s a distraction.

Traders who bet on the Pfizer takeover do have one consolation (unless they dumped AstraZeneca in a rage). They have made a wise investment, if unintentionally. 

Invest, Don’t Trade

Chief executive Pascal Soriot has transformed the negative impression of this company in recent months. Its drugs pipeline looks healthier, and, since Pfizer pulled out, it has released encouraging trial results for drugs to fight lung and ovarian cancer. 

Some of the takeover froth is still in the price. AstraZeneca is still 16% higher than the 3723p it traded at before Pfizer flopped up. The yield is lower than it was, at 3.9%. At 14.2 times earnings, it has been cheaper. These are the type of numbers you need to look at, when buying a company like this. And ignore the rumours.

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Harvey Jones owns shares in Smith & Nephew. He doesn't own any other company mentioned in this article. The Motley Fool owns shares in Smith & Nephew and BSkyB.