Learning To Invest | Takeovers - What Do You Do?

7th Apr '21 by Indie

19 comments 711 reads

I know it's good news when you own shares in a company that's being bought by another. But why? Is it just because the share price tends to do up, so you sell? Or is there more to it? When would you hold on to them? Would you become a shareholder in the new company, or do they sometimes want to buy you out? Or is it different every time? I'd be glad to hear the community's wisdom on the subject.

This question is prompted by Ed's post today about The Club selling Wey Education on the news of a recommended takeover bid. It made me realise I wouldn't know whether the obvious thing to do - sell at a profit - was always the right thing to do.

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Indie

Premium Member

I owned shares through a stockbroker for thirty years but from 2023 it's all in my ISA under my control.

19 comments

Metatron

7th Apr '21

i would always sell on a takeover as sometimes the takeover fails.Check out Arrow Global.Believe it is sensible not to be too greedy.

Mike888

7th Apr '21

100% of the time I immediately sell, to date, that has never been a poor strategy.

Gromley

7th Apr '21

It depends how 'clever' you want to try to be. (IME trying to be too clever rarely adds value, but perhaps I am just not clever enough!)

Most often I will sell out in advance of the bid completing. The downsides are that you will pay dealing costs for selling and you may not quite as high a price as is being offered (because the market may be pricing in the chance that the bid will fail). The upsides are that you do not have your money tied up for potentially months in order to get a few percent more and in the case the bid does fail, you are locking in gains that might otherwise evaporate.

Sometimes, however, the market price will rise to above the proposed takeover price, because the market is pricing in the possibility of a higher competing bid. Here it might pay to hold on and wait to see what happens. There was a case of this very recently, but I cannot for the life of me remember what it was and have not kept track of how it played out. Going back a little further in time, back in 2017 there was a bid (from Stonegate) for Revolution Bars (LON:RBG) and an announced competing bid from Deltic (but with no real indication of price). IIRC the market price went a good few percent above the announced takeover price, in the end the Board rejected the competing bid and the shareholders rejected the announced offer as being to cheap. Even after the recent rally the share-price is still less than 20% of the rejected offer.

If a competing bid and therefore a bidding war does emerge then holding on can certainly produce some nice extra gains, but that seems (to me) to be quite a rare occurrence, so unless I felt I had some massive insight I would take the 'bird in the hand'.

Edward Croft

7th Apr '21

@Indie - it does rather depend on the situation. It really would be worth us writing a complete guide on the topic for private investors. There are a few guides out there on the web that give a lot more detail on the UK Takeover regime - although more focused on explaining it from the corporate advisory side. You can always read the City Code on Takeovers and Mergers.

Regarding Wey Education's takeover, the clincher for me was the fact that this was a 'Recommended Cash Offer'. This means that the Wey directors are recommending that shareholders accept the offer. The directors have committed 'irrevocably' their 8% shareholding to the acquirer. So this is a friendly takeover bid, rather than a hostile one.

Could another company come and bid higher in a hostile way? Yes possibly, but they'd be up against the fact that the Directors have irrevocably bound their shareholdings to the Inspired Education bidder. "These irrevocable undertakings remain binding even in the event of a higher competing offer." As a result, any new bidder would be 8% short from the starter's gun and they'd presumably need a majority of shareholder votes for it to go ahead.

There are a couple of other considerations.

Firstly the Directors offloaded a great deal of shares at far lower prices, and the CEO has been offloading shares all the way up. I felt they were wrong in their share sales (school administrators may not be the best investors), but it did make me feel they are weak hands and lacking some conviction.
Secondly, I don't feel that WEY has a competitive advantage in technology, the proposition was always about being a 'remote only' school and a marketing advantage riding secular trends - so I can't see a bidding war for the technology. It seems like 8x sales is a good multiple.
Thirdly, it is indeed a fact that takeover bids can fail. All kinds of things can come up in the due-dil process.

So in this scenario, I felt it unlikely that there would be further upside. Hence the sale.

Berksbee

7th Apr '21

Sometimes it pays to consider your capital gains - you may be able to choose which tax year you want to recognise the gain in, this is the case for me with LON:SIG

sharw

7th Apr '21

I think the company Gromley can't remember is Codemasters Group (LON:CDM) . It had an agreed bid in early November part cash part shares valued at 464p a share: https://www.stockopedia.com/share-prices/codemasters-group-LON:CDM/news/take-two-interactive-codemasters-grp-hldg-offer-by-take-two-interactive-software-inc-urn:newsml:reuters.com:20201110:nRSJ8064Ea/ There was a very slim premium but the share price gradually rose because the bidders share price rose and the market tracked that until Dec. 14th when there was a counterbid at 604p (all cash). The market immediately put the price up to around 650p as a higher bid was expected from the first bidder. However, on 13/1 the first bidder withdrew and the price then went back to around 600p until the bid completed.

If you read the RNS link and that to the stock report page to look at the graph, which is still there, you may learn about this one, but there are many variations!

Gromley

7th Apr '21

Good call sharw - that wasn't the one of was thinking of though.

It is however an excellent indication of what can be achieved if you do hold out. I've just found that I personally can't call these things, hence why I usually sell these days.

gus 1065

7th Apr '21

Hi Gromley.

The experience with Revolution Bars (LON:RBG) was quite a bit worse (with hindsight) for shareholders than you describe. The Stonegate bid was at about 203p/share compared to the current 29p. Quite a lot of discussion here and elsewhere that the bid was too low and would be trumped by a better offer/the company would trade up to a higher value. Shareholders rejected the bid by a small majority and Stonegate refused to up their bid which lapsed.

https://www.stockopedia.com/sh...

Various skeletons came out of the RBG closet after the fact and the share price crashed, further compounded by COVID etc.. Definitely a situation where the bird in the hand was worth a lot more than the turkey in the bush.

Gus.

Kevin Holloway

8th Apr '21

I read this post and comments yesterday and lo and behold one share I was ready to dump Minds Machines (LON:MMX) has announced it is to sell most of its assets to godaddy. Sp up 55% so on the consensus view here I should sell and move on I think....

Gromley

8th Apr '21

Actually the stock I could not remember was Scapa (LON:SCPA)

On the 27th Jan a recommended (ie by the Board) offer came in at 210p per share. This was an 18% premium on the previous day's close - if you believed in the recovery play and/or that they would win their outstanding legal action it was a bit stingy.

The share price rose to about 220p on the day - "predicting" a counter bid or increased offer. I sold for 219 plus change.

The market price stayed above the offer price for over a month.

On 8th a revised and final offer of 215p was announced (same bidder, no indication of any competitive bids) and it looks like this is now going ahead.

So in this case I am a little ahead in both cash and time for selling out. Of course if there had been any competitive bidding I could have been ruing the decision on the other hand if the bidder had stuck to their guns and walked away when 210p was rejected who knows where the SP would be.

UK_Investor_8888

8th Apr '21

Last takeover for me was Greene King where someone mandatorily confiscated our shares at a 30% premium. It was all done and dusted the same day of the announcement with just a couple of months to wait for an account credit.

(In those days, £12K profit was a big win for one to two years investing for me. Currently, that's the wobble-noise factor over a period of 15 minutes. )

Rusty2

8th Apr '21

"I know it's good news when you own shares in a company that's being bought by another."

Actually I don't agree with that, why do you want sell decent growing companies?

I generally do sell fairly soon, after the takeover has been agreed, unless like Codemasters Group (LON:CDM) the price was too low, there I held on until another bid came in and when the share price was higher than the new takeover price I sold out.

Rusty2

8th Apr '21

You did not hold Codemasters Group (LON:CDM) then?

sharw

8th Apr '21

With all due respects it was not "all done and dusted the same day of the announcement". There was a process to be gone though and talking about that may help Indie's learning curve.

There are two routes to a takeover. In the case of Greene K it was a Scheme of Arrangement under the Companies Act. There are various votes to be held to be presented to the High Court who will sanction it. If they do then it is all or nothing - it applies to every shareholder. This is the one occasion where the small shareholders come into their own. The Act requires not only a majority of 75% of shares voted in favour but also 50% of shareholders regardless of the size of their holding.

The bid was announced on 19 August 2019 but it was not until the meetings on 9th October that it was certain. 98.82% shares were voted in favour and 81.73% of shareholders. That implies those with small holdings were less in favour but not enough to prevent the bid proceeding.

The alternative process (sometimes switched to if a Scheme of Arrangement looks as if it will be blocked by small shareholders) is a straightforward bid where holders have to indicate their acceptance. The magic figure is 50% at which point the bidder can control the company by appointing the Board. At this most people cave in and accept. Some hold out for 75% at which point the bidder can have entire control including special resolutions. At this point the bidder will usually move to delist causing most remaining holders to accept. At 90% the bidder can purchase the remaining shares compulsorily.

Indie

8th Apr '21

Hi herbie47, I see what you mean. I suppose what was in my head was that the universal reaction seems to be to cheer and rub hands together, but what you say makes sense. Thanks.

Gromley

8th Apr '21

The Act requires not only a majority of 75% of shares voted in favour but also 50% of shareholders regardless of the size of their holding.

But as anyone holding via a nominee account (that's most private investors) are not actually on the share register, the nominee is, then I presume that the nominee counts as a single shareholder? Still not much power there for smaller shareholders unless I have got that wrong.

Rusty2

8th Apr '21

Well of course it depends on the company etc.

I was annoyed with the management of Codemasters Group (LON:CDM) agreeing to such a low offer, no surprise when another rival offer came in, in the end it worked out alright and I was happy with the price I sold at.
I had not held for long, so the gain in a few months was good for me.

But I feel many of our technology companies are bought out too cheaply and hence why we have few large tech. companies left in the UK, I'm surprised Sage (LON:SGE) has not been swallowed up by one of the US tech giants.

UK_Investor_8888

8th Apr '21

Correctomondo Gromley.

The big institutional shareholders thrashed it out before the private nominee investors with day jobs even knew what had happened.

And anyway, what would the big institutionals think of the objection of some balding pot bellied middle aged PI from Esher or Worthing with £20K skin in the game when they are making 10s or 100s of £M for their client/holders.

Gromley

8th Apr '21

We are not a million miles apart 8888, but I think you are slightly twisting my words.

I do agree with sharw (post 14) that there was a process that was gone through that played out of quite a period of time, so it is not the case that it was all done before private investors knew,

However, I do agree that (because of the nominee system) Private Investors probably had little ability to influence the process.

You say :

And anyway, what would the big institutionals think of the objection of some balding pot bellied middle aged PI from Esher or Worthing with £20K skin in the game when they are making 10s or 100s of £M for their client/holders.

Whilst I could understand they might find it frustrating to be thwarted, by the minnows, I do not actually care. The fact is that the law states that you need a majority of shareholders not shares, but this legal principle is thwarted by the whole nominee system.

If the nominee system were corrected such that a company actually recognises each and every shareholder we might get different results.

To be frank, I think I might then be tempted to side with the institutions owning 90% of a stock if they could be outvoted by an army of PIs who only owned 10% between them. However if the shareholders were recognised by the company we could perhaps have a more rational debate on how to ensure everyone is (appropriately) represented.

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Takeovers - what do you do?

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Indie

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