Written By: Janine Cox
When news surfaces that a share you hold in your portfolio is to be taken over, what is the first thing you do? You grab your phone of course, and check the current price to see for yourself that the news is true.
Even the most seasoned trader would get excited about the kind of windfall that usually comes when a takeover is announced. Some shares can rise twenty, thirty, and even fifty per cent on news of a takeover. To make that kind of profit from ordinary shares, without leverage, you could be sitting on your nest egg for a year or even more.
Let me also say, collecting a windfall from a takeover doesn’t happen every day, however, there are times when merger and acquisition activity increases and you may see more of these types of corporate actions occur. When they do occur, and the media runs stories about them, it tends to draw the public interest to the share market, which usually helps keep the market buoyant. Markets often rise on this type of news, provided of course that America or Europe don’t launch a bombshell of negative news the same day. In the current climate, you’ve got to expect that this could happen at any time. So, hope for the best and plan for the worst, in other words, always be thinking of managing your risk first, maximising profit second.
If you are a professional trader, you will already have a plan in place regarding the management of your shares in the event that the company is to be taken over. However, if you haven’t had proper training, or are yet to gain the necessary experience in the market to allow you to trade with confidence, it is likely that you may not have given this a prior thought, let alone had a plan to help you make the right decision if a takeover were to occur. So firstly, you need to know that a takeover of a listed company is referred to as ‘corporate action’, and is the purchase of one company by another. If the company you own is to be taken over you may either be offered cash for your shares, and/or shares in the other company doing the takeover.
At the time the takeover is announced, the company will publish information for shareholders. You can find any public announcements under ‘announcements’ on your broker’s website, or you can visit the ASX website at www.asx.com.au, select ‘Prices and Research’ from the navigation, enter the company name/stock code in the box provided and look for the announcements about the takeover. You should also receive a notice from the company with details about the takeover. If there is something you don’t understand about the takeover after reading the information, you could contact the company’s investor centre, details of which will be displayed on the company’s website, or call the registry that provides the shareholder administration services for that company. You will find contact details on the top of a shareholder statement you have received.
Above all, do your research, as not all takeovers will be the same, and so read the information sent to you by the board. If the board are for the takeover, and have given the bidder their agreement, there will be an important schedule of dates issued, which you need to consider when making a decision about your shares.
It can be many months before a takeover is complete, so you have to ask yourself whether you want to leave your money exposed to potential fluctuations while waiting for the deal to go ahead, or whether you are happy to sell on market straight away. There is no guarantee that a takeover will proceed when it is announced.
Some companies will offer shareholders a sweetener to encourage them to continue to hold onto their shares until the takeover is finalised. There may be a dividend payable, and therefore you may need to make a decision as to whether to wait till you are eligible to receive the dividend before you sell. That said, as a trader, I do not believe in holding a stock just to get a dividend, and the additional return may not be enough to justify tying up your capital for longer. In the case of an aggressive takeover, you may receive something in the mail from the company attempting to get you on side, or to sell your shares. They may not be offering enough for the shares to get the board’s agreement, so make sure you read all of the information you receive from both companies, as well as what is being said in the media. But of course, make your own decision.
If the overwhelming view is that the share price could go higher because the board haven’t accepted the bid, or there may be a second bidder, you might decide to hold off making a decision to sell on market. Otherwise, if the board are for the takeover, you can simply wait for the takeover process to swallow up your shares.
Not all takeovers run smoothly for the bidder, particularly if another company comes out of the wings and makes a higher offer. And, there have been times when a company has backed out of a takeover, which saw the share price slide. So, the time between the takeover announcements to when your shares are to be acquired can be a long wait.
As a trained technical analyst and trader, I often comment on whether or not a takeover price is fair. You can do this too, if you learn how to apply price, pattern, and time to a monthly chart. Remember that not every takeover is the same; so don’t just assume you will handle each corporate action the same way. It is however a good idea to have a set of guiding rules to consider when a takeover occurs for one of your shares.
Put simply, as a trader you have three options:
- If the board supports the bid and there isn’t a competitor in sight, sell on market to lock in profit and pay a small amount of brokerage with your online broker;
- Wait for a competitor bid, which would mean you may get more if this occurs, and then sell. If the share price is trading above the offer price for a number of days, post the original announcement as this can indicate a rival bidder in the wings. However, it may turn out to be false, so set an exit price.
- Wait for board and shareholder approval of the deal, and for the takeover to pass regulatory requirements. If this occurs, your shares will be taken up automatically by the bidder, which means you don’t pay brokerage. That said, this cost is negligible nowadays when selling with an online broker.
As a recent example, if you were holding Toll Holdings (TOL) earlier this year, your shares would have risen by more than 45 per cent on the day the takeover was announced. Now, that’s cause to celebrate, because let’s face it, over recent years TOL has been more like the nag you ride for leisure than the horse you want to race. However, that little horse had it in him to leap past the post, or rather TOL grew wings and flew over it.
As the owner, getting an unexpected windfall, when you thought it was unlikely to run that sort of race, is enough to get even the most conservative of investors jumping for joy. This is what Toll Holdings shareholders were doing at the time of the announcement, when Japan Post had made an offer to the TOL board and an agreement was struck. The offer was $9.04 per share plus a $0.13 fully franked dividend.
Further, in the case of TOL, the takeover is conditional on a shareholder vote which is likely to pass, however, in this case the takeover must also meet Australia’s foreign investment rules. If the takeover is approved, what consequently happens to the share price between now and then is not a concern, as you will receive the full offer amount. However, if it doesn’t proceed, the shares may fall back to the price traded prior to the offer. So your job, as the trader, when faced with a decision about a takeover, is to weigh up the benefit in continuing to hold past the day of the announcement versus selling straight away. As a trader looking for growth, I would be happy with the bird in hand!
Janine Cox is Senior Investment Analyst at Wealth Within www.wealthwithin.com.au
