Takeovers aren’t always welcome
Takeovers and mergers are dominating the headlines as companies make acquisitions to accelerate growth, foreign companies take advantage of a weak pound to buy UK businesses, and private equity firms put some of their spare cash to use.
While this M&A frenzy has recently triggered some hefty share price movements, such as Just Eat (JE.) rising by 25% on a merger deal with Takeaway.com and Cobham (COB) jumping nearly 40% on a bid from Advent, there are often downsides to such corporate activity.
Let’s say one of the stocks in your portfolio is taken over and delists from the market. You may get a 20% to 30% premium to the market price before the news was announced, but you could suffer from losing an investment which could generate significant returns for years to come.
Long-term investors could argue that the typical 20% to 30% bid premium woefully undersells the target company’s true value generation potential.
For example, three years ago FTSE 100 technology giant ARM Holdings was bought by Softbank. The takeover was arguably bad news for investors who had enjoyed average annualised shareholder returns of more than 30% over the previous decade from the stock.
Imagine one of your greatest investments disappearing from your portfolio. You might get a chunk of cash as compensation yet finding a suitable replacement is likely to be a hard job, particularly as most quality companies are currently trading on high valuations.
So the next time one of your portfolio holdings receives a bid, take some time to think about the longer-term impact on your wealth and also whether you will receive cash or shares from the bidder.
Some bids are made by foreign companies and the deals are structured as cash, a mixture of cash and shares, or just shares. Therefore you could potentially end up owning stock in an overseas-listed company, which is something some UK investors don’t want.
However, a takeover can occasionally provide some relief, particularly if a share price has been struggling. For example, Merlin Entertainments (MERL) floated at 315p in November 2013 and exceeded 500p in summer 2017.
Subsequent share price weakness wiped out all these gains until a takeover bid emerged just over a month ago at 455p. Assuming the deal completes, the price means investors may narrow their losses or some might walk away with a profit.
Private equity firms have struck £13.6bn worth of UK deals so far this year, according to Dealogic, the highest level since 2007. The industry is awash with cash after making substantial disposals in recent years so private equity firms are looking to recycle the proceeds by doing new deals.
Should one of your investments be taken over by private equity there is a chance it could reappear on the stock market in the next few years, as holding periods by such acquirers can be short. However, the key question is whether your prized company is still in the same state as when it left your portfolio as private equity firms have a habit of draining cash out of a business and loading it with debt.
Takeovers can be exciting on the initial news but they aren’t always good for your long-term wealth creation.