Andor Technology (AND): Missing The Boat

A quick update on Andor Technology (LON:AND), a stock I liked but didn't buy when I looked at it last month. They're a very niche producer of extremely high-specification cameras used mostly in science and research, and have an interesting history going back a few years - a bit more on that in a minute. My regret at not buying Andor is fairly obvious given the events of the last few days; Oxford Instruments, the listed Oxford Uni spin-out (plenty of parallels with Andor here) announced a 500p offer for the company. The share price jumped on the news - from about 400p to closing today at 495p.

There's two interesting sides to this story, so I'll briefly cover both.

Oxford Instruments' Insistence

Share price movement when a bid is announced is always interesting, because it becomes an arbitrage game. How long will the deal take to close? Will the deal close at all? Will the price be improved or worsened by the bidder? All of these factors have to be priced into the stock almost immediately. It becomes a game of weighing all the competing factors and coming up with a price which fairly discounts them all. Here's what's interesting about Andor, then - the price has shot up to 495p against a takeover bid of 500p, and there's still resistance by the board - so the deal doesn't seem likely to close soon. Why would anyone hold a stock for a potential 1% gain (sans all trading costs - which will push it negative) at some point in the future, when the deal is resolved?

You have to infer that the markets are pricing something else into the equation. The blunt answer is the expectation that Oxford Instruments will, once again, raise their offer. Their previous form in this is a big indicator; here's the pertinent paragraph from the offer statement: 

Oxford Instruments and Andor have been in discussions since 9 July 2013, when Oxford Instruments sent a letter to the Chairman of Andor setting out the strategic rationale for the transaction and an indicative proposal of 420 pence per share in cash, subject to due diligence...  On 7 September 2013, Oxford Instruments informed Andor that it was prepared to increase its indicative proposal to 470 pence per Andor share, subject to due diligence...  Andor subsequently granted access to commercial and financial due diligence to Oxford Instruments in early October.  Following access to due diligence and Andor's recently announced acquisitions, Oxford Instruments has increased its indicative proposal to 500 pence per Andor share.

It's already risen about 20% from their first offer; and we should note that the first offer for the company was an indicative one that shareholders didn't see. So was this one, notably, for a few days - before OI decided to make it public. Andor's board weren't particularly happy about this; they said it was unhelpful. The tone of the statement certainly paints a picture of rather firm resistance - Andor, it appears, want a significantly better offer. The market, I would suggest, seems to think OI will be forthcoming. I suspect they will too.

The historical

One of the things that did get a chuckle was Andor talking about OI's offer not doing the best for their shareholders. It's easy to say in hindsight, but one thing that definitely would not have been in the interests of shareholder's was the management team's offer to take the business private in 2008 for 73p a share. The share price is up 7-fold in the 5 years since then. Call me cynical, but the warped interests of a board making and responding to bid offers are so obvious I'm surprised they're still allowed to exist - a group of managers trying to take a company private will obviously want to lowball shareholders to get the best deal for themselves. A group of managers receiving a takeover bid will want to reduce the likelihood of the bid or increase the price, either to improve their own payoff or to ensure they keep their job as heads of an organisation. I am, of course, not saying anything about any individual cases. I simply think there's an obvious conflict of interest which makes directors' opinions on takeovers rather lack value.

I should say, for fairness, that the non-executive director team back in 2008 eventually removed their recommendation for shareholders to accept the offer after a positive trading update, so no harm done there.

Final notes

Either way, bid offers are a green light for the valuation of the business. Not a huge one - companies often do overpay for acquisitions - but a takeover offer making it through due diligence says that the acquiring company doesn't think it's hugely overvalued. I'm not interested enough to check Oxford Instruments' acquisitive history - I would say a bid offer is more of a green light from a company that has made frugal acquisitions in the past which turned out successfully, over one which splashes its cash on companies which go on to underperform. Their valuation, it's also important to note, includes synergies a company can (and should, if it's a good acquisition) enjoy when buying another company. Fewer centralised costs, layers of management and so on. These are benefits shareholders do not enjoy if the company stays as-is.

That last paragraph gives away the thrust of my opinion on this sort of situation, really - nothing really changes for me. Still all I care about is the intrinsic value of the business versus the market price. I might have a little more confidence in the first given the news, but the increase in the second nearly always outweighs that.

I should have bought then, but I don't think I'm going to buy now - it's now on a very, very healthy valuation - and I'm not hugely comfortable with that should the board put up a big fight and OI walk away. It's being propped up by the bid situation, and that's not a game I want to play.