Read the M&A signs

Unsuccessful takeovers can be good times to buy, subject to certain conditions
Thursday 24 Nov 2016 Author: Daniel Coatsworth

Takeover activity in the small and mid-cap space is gathering pace. Investors should consider buying stocks where deals haven’t immediately been accepted, have failed, or where other bidders may enter the scene.

You might think that sounds a bit counter-intuitive as surely the best scenario is to already own shares in a company before a bid approach pushes up its price?

Well, yes that is strictly true. However, you could potentially still make money buying after the first approach if the situation ticks either of two boxes.

Checklist

• Has the company indicated it would be happy to accept a takeover if the price was right?

• Is the suitor a high-profile business whose actions could prompt competitors to also make a bid?

There are no guarantees you will make money and buying stocks purely as a bet on a takeover is rarely a good investment strategy. But hear me out.

I believe there is merit in examining each takeover scenario on a case by case basis and making a judgement call on whether there are enough signs to warrant buying.

Construction equipment provider Lavendon (LVD) received a takeover approach last month from Belgian rival TVH at an indicated price of 205p per share.

The deal didn’t go through as Lavendon doubted whether TVH had enough support from its shareholders.

The most interesting part was Lavendon asking TVH to approach additional shareholders to see if it could get the necessary support. That is Lavendon blatantly saying it wants to be taken over.

At the time of writing Lavendon was trading at 190.5p, implying an opportunity to buy if you believe it can eventually be taken over for 205p or more.

Lavendon’s eagerness to get support from TVH’s shareholders also sends a sign to the market that it is willing to accept an offer if the price is right. That might encourage other interested parties to make a move. Watch this space.

Good example

Entertainment One (ETO) rejected a takeover approach from ITV (ITV) in August and its shares slumped. Weakness didn’t last long; the share price subsequently recovered to the same level when ITV’s bid interest was confirmed.

Having takeover interest from someone ITV’s size is a wake-up call to the media industry that Entertainment One could be worth buying. I’d use current price weakness to buy more shares.

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