Investing Comment |
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Your Money > Investing Comment Articles > Bid situations - Target practice
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By Richard J Hunter, Hargreaves Lansdown
The Barclays/RBS consortium approaches for ABN, Hanson, Reuters, EMI and Xstrata are but a few of the largest UK companies currently embroiled in takeover situations, either as hunter or hunted. With this in mind, are there any things to watch out for when looking for the predator or prey of tomorrow? The following themes have been borne out with hindsight and can interestingly be applied to many companies in the current environment. Companies can only grow either organically or through acquisition. If it has become clear that a company has reached its saturation point in terms of the products or services it offers and remains profitable and cash rich - for example if it has excess capital which it has recently used to fund a share buy back - it may need to diversify in order to maintain its growth. Similarly, if a company seems to have gone as far as it can without further significant investment, it may itself be a target. Within this generalisation, smaller (perhaps even largely family held) companies with good balance sheets and profits (which will help to fund the cost of the acquisition) may be suitable. If it is generally felt that the management can take the company no further or perhaps has completed the short to medium role it was employed to fulfil, a complete change of direction for the company may be best achieved by the company being acquired. Or perhaps there are economies of scale to be had with another company, very possibly in the same sector, either through merger or acquisition - if so, the company is ripe for a takeover. Other examples of this would be smaller companies who have perhaps saturated their local markets and now need to expand on to a wider stage. Similarly, the acquiring company may be able to bring market reach to the new entity which they would otherwise find difficulty in penetrating (Manchester United in the States was a good example, whereby the Glazer family had specialised local knowledge of the US marketing world in sport - and they are still trying to capitalise on this). In addition, niche businesses may look attractive or those with a high barrier to entry - that is, where the cost of setting up is prohibitive and an acquisition may prove a cheaper option - such as a bank or supermarket. Reading the management releases and a company's Report and Accounts may provide some clues. If these state that the business is acquisitive, or looking to "buy industry position" the potential target may become apparent from the clues. Strangely, any weakness in the share price may render a company vulnerable on the simple basis that the company is "cheaper" than before - particularly relevant if the acquiring company has already done some groundwork on the target and the share price weakness signals a good time to trigger the bid. Similarly, a break up of the company into smaller constituents (such as GUS splitting into Experian and Home Retail Group last year) could make them more attractive either to specialist bidders, or simply to those whose pockets were not deep enough to fund a purchase of the previously larger entity. If any or all of these signs are apparent, it could well be that it is nearing feeding time. And since takeovers can be good news for both target and acquirer, investors might wish to consider how best to book their place at the table. Useful links: |
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