Well, this Blog has got a bit hijacked by Events. I wrote a reasonable draft at the weekend and expected to issue the Final Blog before I bought more Iomart (IOM) - however, the Stock started to move and I bought some more earlier today (Wednesday 15th April 2015).
This Blog is about a strange quirk that arises sometimes where if you are alert you can make some gains out of Takeover Situations. Classical Market theory would say that such anomalies should not exist - but the reality is that they do. This is of course pretty much always the case with ‘Market Theory’ from the ‘Experts’ - very rarely any use to Actual Investing.
There are several strange things about Takeovers which can give you an Edge but there is one particular one that I want to write about tonight - essentially it is a situation where the Market tells you exactly what the Takeover Price is likely to be - and you can buy hugely cheaper in many instances.
The essence of these Opportunities arises because a Takeover Bid has been launched for a particular Company but that Bid later falls through. They are rare, but they do occur - and when they happen, it is often worth betting Large on them.
Probably the best way to illustrate is by using an example where I made a lovely easy Profit in a short time period. It arose with Goals Soccer Centres (GOAL) back in mid 2012. This was a Stock I had followed for years mainly because a very close Mate held some. It had struggled in the Credit Crunch around 2008 ish and was carrying a big chunk of debt as they had invested in lots of 5-a-Side Football Grounds. I can’t remember what made me Buy in but from my ShareScope Screen I can see that I bought some first at about 123p in April 2012 and did a Top up at 135p a few Weeks later and then I sold at 145p in August 2012.
My notes on ShareScope show that there was a bid from a Canadian Pension Fund at 144p - so obviously I had assumed it was a ‘Done Deal’ and sold out. So, I made a nice little Profit quite quickly.
Anyway, this is not the point of my Story. What happened next is where things got interesting and the Real Profit Opportunity arose. The Bid collapsed and the Price then slumped down to as low as 110p. It then started to pick up again, and I bought in again at 120p in September 2012. Now the important thing here is that I knew it was a Good Company, because I had followed them for many years and they were clearly getting things turned around after struggling with the Debt and low growth. But the really Key bit is that I now knew that People far more Qualified than Me, i.e. The Canadian Pensions Company, had already told all who would listen that the Price should be AT LEAST 144p.
Remember, whenever a Predator Company tries to buy a Target in a Takeover Bid, they ALWAYS pay less than the Company is really worth - this is especially the case with a First Bid Offer - no Company ever gives their Best Offer straightaway - this is why Competitive Takeover Situations result in Offers which can go up and up. Therefore, I knew that the Canada Pensions Bid of 144p was the least I could get for my new GOAL Shares - this meant a MINIMUM 20% upside on my 120p Buy Price.
I then Bought some more at about 128p in early January 2013 - as I was very pleased with the progress so far with the Company and the Share Price was steadily moving up. Then things got really sweet - the Canadian Pensions Fund returned and made a bid of 175p I think (some of this might be factually incorrect, I am trying to remember the exact story !!), and I then Sold out at 190p in January 2014. I can’t remember what happened exactly with the Takeover Bid but I think it fell through and I was very happy with a gain of around 55% in just over a Year and the Icing on the Cake was that I used Leverage on Spreadbets so my true gain was very big.
What to Watch Out for
So, the key thing to understand here is that a Takeover Bid had been made but had fallen through and this had temporarily depressed the Share Price as Weak Momentum Holders had sold out in disappointment and moved onto the next ‘exciting’ story. So I had taken advantage of 2 factors here:
- Temporarily Low Price
- The Predator had already told me what the Minimum Target Price should be.
The beauty is that I see these kind of Situations surprisingly often. Further down I will talk about a couple of such Situations that can be taken advantage of right now.
Regular Readers will know that I am not keen on Stoplosses and rarely use them - however, they can be of use in these types of Situations. In the case of GOAL, I knew the Company very well and was very happy to Buy the Stock even if there had been no Takeover Situation. This is an important point to note - as a General Rule for myself, I tend to only Buy into such Takeover Stories if it is a Stock that I am happy to hold anyway. If the Stock is pretty much rubbish, I am not too keen to get involved. You must look at the Downside - if the Bid does not happen, you don’t want to get stuck with a piece of Poo.
For People who are happy to play any such Takeover Situation, irrespective of the Quality of the Target Company, then using a Stoploss might be a very good idea.
I am sure these kind of things have come up quite a lot in the past, but needless to say, I am struggling to think of good examples !!
Anyway, one that always sticks in my mind was the great example of Marks & Spencer (MKS). About a million years ago, Philip Green of BHS and Dotty Ps fame, launched a Takeover Bid for MKS at 400p. The bid fell through, but in this case Mr Green was telling anyone prepared to listen that MKS was worth 400p - who else would be better placed to know?
OK, in reality it was not this simple, however, there were lots of opportunities to make money from this 400p Signal. I can’t remember the exact details but I am pretty sure anyone could have bought MKS Shares in 2003 - 2004 for around 250p after Mr Green had already helped with his assessment of the Price. The Shares then got as high as 750p in 2007 and it is important to appreciate here that Buyers would also have picked up big Dividends - probably around 4% or more each year.
There might be an Opportunity in 888 at the moment - although for me personally it is not particularly interesting as I have exposure to Gamblers and I don’t really want any more. However, I can understand how Traders could use a Stoploss to make money out of this situation.
888 Closed at 158p Mid Price today (Wednesday 15th April 2015). Back on 10th February 2015 there had been a William Hill Takeover Approach with a Price of 200p plus a 3p Dividend and this Bid had fallen through because a Key 888 Shareholder would not agree to the bid as they felt if Undervalued the Company. So, in this situation, William Hill has already told us that 888 is worth 203p and one of the Key 888 Shareholders has told us it is worth more (which makes sense as William Hill would not have given their Best Offer at such a preliminary stage).
So, for people buying 888 Shares at 158p there could be an Exit Price of at least 203p which is roughly 30% Upside. I know nothing about the details here but it could be worth a good look at. A Stoploss could be a good idea as well.
I don’t know any details here and there is obvious Risk caused by the company having a lack of control over its End Prices (the Company does Bananas and Citrus Fruits) - but FFY received a Takeover Bid back in Early 2014 which fell through. The Price got to around 110p and is currently around 87p - there may be an Opportunity here.
A far more interesting situation for me is that surrounding IOM which I have a few of. IOM runs a load of Datacentres and provides Hosting Services and Cloud Stuff.
I have been in and out of IOM for years and it is a pretty decent play on Datacentres and the Explosion of Data as the World goes increasingly Digital - even without a Takeover Story, I would be a Buyer of this stock.
Anyway, it interests me particularly now because back in June 2014 the Private Equity Group Cinven and Host Europe had bid 285p for IOM. This bid fell through and there were even rumours that the Takeover Price would need to be over 300p.
Today I bought more at 215p after the Breakout from a Tight Trading Range that I will outline below - so at a Price of 285p this would be 32% Upside. However, I expect a Bid could be well North of 300p even.
An Important Factor for me in such Situations is to Buy Stock that I would be happy to hold anyway, just in case no Bid arises. If you look at the Earnings Forecasts for 2016 of 14.75p, this gives a P/E Rating of 14.6 on my Buy Price today of 215p. I think this is a Fair Price for a Stock in such a Hot Sector, with the rapid expansion of Data Use as the World goes more and more Digital. To illustrate this, Telecity TCY is on a P/E of 20 for the same year.
As ever, the Charts below show the prevailing state of the Price Action up to Last Night which was when I made my Decision to Buy more Stock. If you have followed my spiel for a while, you will know that I like to make my Trading Decisions outside of Market Hours so that I am more Objective and not emotionally involved in the Ducking and Diving of the Market’s Intraday gyrations.
The Technical Picture is slightly more involved than the Charts below demonstrate, but for reasons of brevity I have just picked out these 2 Charts that give the Key Signals that made me decide to buy.
On the Chart directly below, please look at the Red Horizontal Line and the Black Horizontal Line that runs parallel to it below. This marks the Tight Trading Range that the Stock had been stuck in for several weeks - I had been stalking it closely waiting for a Breakout of the Top Red Line to signal that the Stock might be on the Move Up again. A great example of why Patience is so important to us Investors !!
You should be able to see where I have put the Blue Arrow that the Price popped up yesterday with a nice big Up Candle (there was some decent Volume behind it as well, but that is on another Chart which I have not included - sorry). Note also that the 50 day Moving Average line which I have marked with the Black Arrow is moving up and will probably soon do a ‘Golden Cross’ against the 200 day Moving Average which I have marked with the Red Arrow.
In a similar vein, although a bit different because as far as I can remember, ITQ did not actually receive a Bid with a Price attached to it, there might be an Opportunity here. Interquest is an AIM listed Recruiter that put itself up for Sale in mid 2014 and the Share Price rose to around 130p. In the event, no Bid was forthcoming (although of course things might have occurred behind the scenes which we are unaware of) and the Price is now around 100p. That is a p/e of around 8.5 for 2016 so there might be Value here.
I hope this Blog has given you Food for Thought and given a quick summary of my reasons for buying more Iomart IOM.
Good Luck to all,