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Next year could see a wave of takeover bids on the London Alternative Investment Market (CHECK). This is the investment bank’s decision Peel Hunt. It recently released a report that says nearly a third of small and medium-sized firms in the small market could be takeover targets next year.
Will owning penny stocks benefit me from this bonanza if it happens?
Investing for the right reasons
Some people buy stocks in the hope that they will be taken. That strikes me as closer to speculation than investment. I’m happy to invest in a company that I think can be taken over, but not for that reason alone. I always want to try and buy shares in big companies at an attractive price.
What happens when a company is taken over
When a company is taken over, its shareholders are forced to sell to a buyer at a certain price. That can seem (and actually is) good as it usually indicates a sharp increase in the price the share was trading at before the offer.
For long-term investors though – and I believe in long-term investing – it can mean being forced to sell a share for less than one paid for it.
As an example, consider a luxury leather goods brand Mulberry (LSE: MUL). The company has made several forays into the stock market so far this year. That clearly pleased the largest shareholder Group of Frasers. It calls for 130p a share and raises its offer to 150p per share.
If I had bought mulberry shares in late July at around 98p each, it would have meant that a successful bid would have seen me make a return of over 50% over a period of months.
The option is sold – or sold
But what if I had bought shares in a struggling company long ago, believing that its strong brand, distinctive British stance and luxury price tag would make it a good business?
In 2012, Mulberry was trading at around £24 per share. So taking money at even £1.50 per share, let alone £1.30, would mean that £1,000 invested at the time would turn out to be less than £63.
The Frasers own more than a third of the company already (37% shares). But Mulberry’s largest shareholder owned more than half of the shares and decided to reject the offer. If it had accepted it and the takeover went ahead, the other shareholders would have had no choice but to sell their shares at the agreed price.
One risk I see is with currency stocks
In that example, one shareholder had a large enough stake to be heavily involved in rejecting the bid. But penny stocks tend to have a diverse base of small shareholders. That would mean few if any have enough motivation to fight what they see as a lowball takeover offer.
Contrast that with large companies where institutional shareholders often have a strong financial interest in encouraging them to participate in blocking bids they think do not affect the company.
So I think the mass takeovers in 2025 will actually be a threat to some long-term holders of penny stocks who believe they are undervalued, rather than an opportunity.
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