Shares in Imagination Technologies (LSE: IMG) jumped this morning after the company received a takeover offer from China-backed buyout fund Canyon Bridge Capital Partners.
Canyon Bridge is offering 182p per share. However, after initially rising towards the offer price in early deals, shares in Imagination have settled at a price of 168p at time of writing, 14p below Canyon’s offer price. Does this present an opportunity for investors?
Looking for a partner
Imagination has been looking for a strategic partner or buyer since the company found out that its primary customer, Apple was planning to drop it. When this news became public, the chipmaker lost around two-thirds of its value in a single day as investors rushed for the exits.
Since the Apple loss, management has been trying to find a buyer for the company and its intellectual property. It looks as if they’ve found one in Canyon Bridge, which is offering around half a billion pounds to take the business private.
As well as the China-based buyout, Imagination has also agreed to sell its worldwide MIPS CPU business and patents, to Tallwood MIPS Inc, a company indirectly owned by Tallwood VC of Palo Alto for a total consideration of $65m in cash. Some $40m of the proceeds are payable in cash at completion and $25m in cash six months after completion.
According to today’s news release on the transaction, management has decided to hive off the MIPS business to “ensure MIPS remains an independent licensing business” and the unit’s continued growth will “provide increased customer choice and new job opportunities.“
So, it looks as if Imagination is going to split up and go private. However, there is a chance that the group could become the subject of a takeover battle. The firm said in its acquisition note today that “one party has not confirmed whether its interest in the Imagination Group has terminated and accordingly it remains a potential offeror for Imagination for the purposes of the Takeover Code.” With this being the case, another higher offer could still emerge.
Time to buy?
Should investors buy into Imagination in the hopes of making a quick profit? Well, as the shares are trading below the offer price, it looks as if the market does not believe that the deal is going to go ahead.
There are multiple reasons why the deal could fall apart including competition and regulatory concerns. And if the merger is called off, investors who tried to make a quick buck will be left high and dry. City analysts are projecting a 52% decline in earnings per share for the company for fiscal 2018, the year the Apple contract finally runs out, and going forward it’s difficult to predict if the business is a worthwhile investment.
Overall, shares in Imagination do look cheap compared to the offer for the company, and they could be an interesting trade — if you know what you’re doing. For long-term investors, it might be better to take the money and run as the firm’s outlook is uncertain.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK owns shares of Imagination Technologies. 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.