The capital market has been busy for months, for which tenders are coming Morrison And others raised for such companies Easy jet And Stage coach. A short-term takeover bid can be profitable for UK shareholders. But long-term holders can be harmed by being forced to sell their shares below their purchase price without waiting for the potential share price to recover.
For example, if I were to buy Morrison Shares in May, before the bid was raised, I would sit on a 63% share price rise to date. But if I have been holding shares since December 2011, even after the takeover news, my holding share price will show a 7% decline.
It can be helpful to evaluate which UK stocks could become the takeover target. Here’s how I do it.
Consider the financial and strategic evaluation of a company
There are two types of arguments for most takeovers.
The first is that the market value of a company falls below its potential financial valuation. It may be based on business as it is being managed today. It may also reflect the potential for a new owner to change his or her cost structure. So, for example, private equity bidders for Morrison probably think they can save costs on the company.
The second type of argument is demonstrated in strategic acquisitions. A strategic acquisition is a combination of an industry or market that adds size to an existing player. It can improve its bargaining position or price capability, or achieve scale economy. The Wiz EasyJet and National Express Bid for Stagecoach is an example in UK shares. In such bids, the target company does not need to be explicitly evaluated, as the bidder realizes the opportunity to unlock the price from the strategic adjustment.
Spotted UK shares that could be a takeover target
Based on this, I think it may be fairly easy to identify UK stocks that are potential acquisition targets. It is very difficult to know about the timing of such potential bids. I think Morrison has been interestingly valued for many years – but no bids have appeared so far this year. Hoping for a takeover approach has cost me the opportunity to keep my money tied to my performing shares for many years.
Nevertheless, I still think it is appropriate to look for potential takeover targets. An undervalued company can offer a good investment opportunity for me, regardless of any acquisition. Sometimes due to market conditions or weak trading statements, a company’s shares will fall dramatically. This means that, sometimes, quality shares are available at attractive prices. Over time the stock market is expected to balance the company’s share price with its underlying price.
Why I focus on business quality
But there are risks to such an approach. Consideration Sentrica As an example of such risk. Assessing its continued cheap appearance may suggest a fundamental assessment. This could attract a takeover approach. But lower share prices could signal investors’ concern about declining customer demand in the future. Centrica’s share price may reflect concerns that domestic gas supplies will decline as environmental regulations bite.
A stock that looks undervalued sometimes just falls. So, when I search for value, as an investor I look for long term business opportunities. I will not buy UK shares for my portfolio because I think they could be a takeover target.
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Christopher Ruan owns shares in Centrica and Stagecoach. Motley Full UK has recommended Morrison and Wise Air Holdings. The opinions expressed in the companies mentioned in this article may differ from those of the authors and therefore the official recommendations we make on our subscription services such as Share Advisors, Hidden Winners and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.