E-Book Idea: What makes a good acquisition stock

14th Dec '16 by Benson212

5 comments 10481 reads

In the last few months, I noticed a number of stocks, mostly small caps, have received approaches/bids by larger companies. Examples include:

Punch Taverns
Avesco
e2v Technologies
Creston
Lavendon
Sky
Journey Group

On each occasion, I have been kicking myself because I have cast my eye over each stock but decided not to invest. So this got me thinking... how can I improve my chances of finding a stock which will rocket in share price following a take over bid.

In similar style to "The Profit Warning Survival Guide" e-book, could Stockopedia produce a "lessons learned" from small cap acquisitions?

Is there any science behind acquisitions or is it blind luck?

Which factors correlate with takeover bids? Intuitively, I would think a mix of Quality and Value would be the main driver, but are companies more likely to be bought when the majority shareholder is the founding CEO, for example?

Therefore, I would like to put it to the Stockopedia community for their thoughts and whether this is something we could request the team at Stockopedia to look into for us?

Note: I hold no long/short positions in any of the stocks mentioned above.

Ben

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gus 1065

15th Dec '16

Hi Ben.

While this would certainly be a useful addition to the library, I'm not sure how well a screening methodology using Stockopedia would work as a means of identifying potential takeover targets. I personally think it is more of an art than a science and that this is one area where the oft criticised "monkey brain" does come into its own. I've had a pretty good hit rate this year (I held 4 of the stocks listed above at the time of the bid) as well as a further 6 stocks that have been taken over at healthy premia in 2016.

I agree Q and V scores are probably important, but in most cases I've tended to find my takeover candidates by following something of a story stock approach. Ideally, I look for companies with a strong market position and/or substantive defensive moat in a sector which has high barriers to entry or requires a particular entrepreneurial skill set. A decent asset base (especially cash, undervalued property and significant IP) and generally low leverage adds additional benefit - not least it brings PE buyers into the equation as well as trade buyers. On the other side of the coin, it also helps if they are cheap and maybe have had soluble problems that an outsider thinks they have a better chance of solving (such as an inefficient capital structure). There are exceptions to every rule (Punch Taverns (LON:PUB) is hardly lowly geared!) and there is a fair amount of patience and luck required in picking prospects.

Ultimately, I would never buy what I think is a poor stock on the grounds that it might be a target. Rather, I prefer to buy a stock in the hope that if I think it is attractive to buy a bit of it, someone with more firepower will try and buy all of it.

If Stockopedia do look into the subject, I would also be interested to look into any historic correlation between the various factors and an approach being made as well as an analysis of how the bids have played out from first approach to completion. For example, when first approach is made should you stick (sell) or twist (hope for a higher offer) and risk the bust (bid falls through)? Not sure I'm too good at maximising value from this second part.

Best,

Gus.

cig

I find inverting the problem makes it easier: for each stock I consider for my portfolio, one of my check list items is to estimate if it has some chance of being a takeover target and exclude the stock if not. This is often pretty obvious that a stock is a lost cause. It won't do miracles but it nudges the probability you get some hits, and helps eliminate duds indirectly.

Rusty2

There have been a lot of takeovers this year, I have had about 6, BG (LON:BG.), Home Retail (LON:HOME), £DEE, Avesco (LON:AVS), Fyffes (LON:FFY) and Skyepharma. There was also ARM. I did consider buying £E2V last week. I think some has been cause by Brexit with fall in £ it's makes our companies cheaper. So I would say value does come into it. I think there is quite a bit of luck. Also it not always a good thing to be taken over, yes you get a quick profit and if its like AVS then its ok but you don't always want to sell, Skyepharma would be one example.

back2value

22nd Dec '16

Of the companies I own, in my view the most obvious potential candidate for takeover would be Waterman Group (LON:WTM). It's in a sector, civil engineering consultancy, which has seen quite a lot of consolidation in the past and is small enough to be readily picked up as a value-adding bolt-on to one of the larger civil engineers. It's also trading steadily, and it should also look a lot better value to dollar-financed buyers than before. Finally, I agree that you should never invest in a company on the basis of takeover potential alone. In the case of WTM I am happy to hold as I think it has favourable prospects even if no one tries to acquire it.

B2V

Nick de Peyster

Isn't acquisition activity cyclical (dries up during bear markets)?

Nick de Peyster
http://undervaluedstocks.info/

E-Book Idea: What makes a good acquisition stock

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Benson212

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