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Subsequent yr may see a tidal wave of takeover bids in London’s Various Funding Market (AIM). That’s the verdict of funding financial institution Peel Hunt. It just lately issued a report saying that as many as a 3rd of the small- and medium-sized companies on the junior market might be takeover targets subsequent yr.
So may proudly owning penny shares let me profit from this bonanza if it materialises?
Investing for the precise causes
Some individuals purchase shares hoping for a takeover. That strikes me as nearer to hypothesis than funding. I’m glad to spend money on an organization I feel might be taken over, however not just for that motive. I all the time wish to attempt to purchase shares in nice firms at a horny worth.
What occurs when an organization’s taken over
When an organization will get taken over, homeowners of its shares are successfully compelled to promote to the client at a sure worth. That may appear (and will actually be be) good as usually it represents a pointy enhance on the value the share was buying and selling at previous to the supply.
For long-term traders although – and I imagine in long-term investing – it could imply being compelled 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 yr. 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 sturdy model, distinctively British positioning and luxurious worth level may make for an amazing 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 become 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 alternative however to promote their shares on the agreed worth.
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 usually have a fragmented base of small shareholders. That may imply few if any have ample incentives to battle what they see as a lowball takeover supply.
Distinction that to massive firms the place institutional shareholders sometimes have a large enough monetary curiosity to inspire them to become involved in warding off bids they suppose materially undervalue an organization.
So I feel a spree of takeovers in 2025 may actually be a risk to some long-term homeowners of penny shares they imagine are undervalued, slightly than a possibility.
