Picture supply: Getty Photos
Subsequent 12 months may see a tidal wave of takeover bids in London’s Different Funding Market (AIM). That’s the verdict of funding financial institution Peel Hunt. It lately issued a report saying that as many as a 3rd of the small- and medium-sized companies on the junior market could possibly be takeover targets subsequent 12 months.
So may proudly owning penny shares let me profit from this bonanza if it materialises?
Investing for the proper causes
Some individuals purchase shares hoping for a takeover. That strikes me as nearer to hypothesis than funding. I’m completely satisfied to spend money on an organization I believe could possibly be taken over, however not just for that purpose. I all the time wish to attempt to purchase shares in nice corporations at a lovely value.
What occurs when an organization’s taken over
When an organization will get taken over, house owners of its shares are successfully pressured to promote to the customer at a sure value. That may appear (and will the truth is be be) good as typically it represents a pointy improve on the worth the share was buying and selling at previous to the supply.
For long-term traders although – and I consider in long-term investing – it will possibly imply being pressured to promote a share for lower than one paid for it.
For instance, think about luxurious leather-based items model Mulberry (LSE: MUL). The corporate has repeatedly dipped into penny share territory thus far this 12 months. That clearly excited main shareholder Frasers Group. It bid 130p a share after which upped its supply to 150p per share.
If I had purchased Mulberry shares in late July at round 98p apiece, it may have meant a profitable bid would see me netting a return of over 50% in a matter of months.
The selection is promote – or promote
However what if I had purchased shares within the struggling agency lengthy earlier than, believing its robust model, distinctively British positioning and luxurious value level may make for an important enterprise?
In 2012, Mulberry was promoting for near £24 per share. So a takeover even at £1.50 per share, not to mention £1.30, would imply that £1,000 invested then would have changed into lower than £63.
Frasers owned over a 3rd of the corporate already (a 37% stake). However Mulberry’s largest shareholder owned greater than half of all shares and determined to reject the supply. If it had accepted it and the takeover proceeded, different shareholders would have had no selection however to promote their shares on the agreed value.
One threat I see with penny shares
In that instance, one shareholder had a large enough stake to make it extremely concerned in rejecting the bid. However penny shares typically have a fragmented base of small shareholders. That may imply few if any have ample incentives to struggle what they see as a lowball takeover supply.
Distinction that to giant corporations the place institutional shareholders usually have a large enough monetary curiosity to inspire them to become involved in keeping off bids they suppose materially undervalue an organization.
So I believe a spree of takeovers in 2025 may the truth is be a menace to some long-term house owners of penny shares they consider are undervalued, relatively than a chance.