The Takeover Roulette

Friday, 17th September 2010 10:44 - by Riddler

Welcome to this traditionally busy time in the investment calendar, whereby companies will start to report on their financial health and prospects during the next 4 weeks. The subject of this blog, as made clear by the heading, is how to react to the news that a company you are watching, or even hold, gets the RNS that the company has “received an approach from a Third Party which may or may not result in a full offer being made”. This seems like great news and many posters will speculate as to how much the offer will be, almost “presuming” that an offer will be forthcoming in the coming weeks. However, I must be the voice of doom and gloom because in my opinion and experience, an RNS like this can create many dilemmas for investors. Firstly we must gauge the “seriousness” of the approach. Some RNS will say discussions are at an “early stage”, some will say they are “advanced”. Some will state that the offer is “unsolicited” others will be as a result of “discussions with major shareholders”. In my experience the whole saga can be a headache, as the share is effectively in limbo, as these complex and time consuming discussions can leave the share price “paralysed” for 3-6mths or more. Augean (AUG) had a takeover approach in late 2008, the share price surged from 60p to 110p but the talks were terminated in Mid 2009 and the share price had slumped to below 50p. Investors who bought into the euphoria were left nursing losses and with money tied up without an end result. This situation has occurred on countless occasions in the last 3 years. Secondly, the offer can grossly undervalue both the Enterprise Value and the Future Value of the company and can stop a good share dead in its tracks with this inopportune RNS. The Market Makers (MMs) will have a good idea of the “current value” of the company, and will often mark the price up to this level in the next 48 hours, but thereafter will cease to credit the share with further upside. This is often due to the points made earlier in this blog. Therefore it is not wise to “chase” a share price up, unless there is clear indication that there are “several offers of interest”. In recent weeks, Silence Therapeutics (SLN) was marked up immediately to 12p, but is now languishing well below these levels, as the MMs offload chunks of their own stock at inflated prices to the unsuspecting trader. Takeovers and Merger & Acquisitions (M&A) will, in my opinion, be a feature of the coming years. Mining giants will see an easy way to bolster their mineral reserves having let the Junior Miners “sweat and toil” their way through the Credit Crunch, only to become an opportunistic target. The Waste and recycling sector is ripe for M&A due to the fragmented nature of the industry. Pharmaceutical Blue Chips are seeing many blockbuster drug patents come to an end and will need to acquire the new discoveries from AIM tiddlers. The important lesson is not to go “chasing” the dreaded Takeover RNS, as you can end up with an investing headache. London South East is not regulated to provide Financial Advice. The views of the author (above) are theirs and theirs alone, and should not be construed as Financial Advice to visitors to lse.co.uk. If you require Financial Advice, you should speak with an Independent Financial Adviser or Broker.