Takeover Bids

Bid takeover rumours could undoubtedly provide for very rewarding trading opportunities but spread betting on bid rumours can be very dangerous as well, since stock price tend to be highly volatile on both the upside as the initial rumours emerge, and the downside should the rumoured bidder announce a denial. Spread traders will not normally be able to predict the precise time of a takeover bid, but there are strategies they can use to give them the best chance possible of being in the right place at the right time.

Takeover targets comes in many different forms. The classic example would be a small company with a tightly held shareholder list that has gone as far as it can without significant new investment. Other possibilities include companies that offer significant economies of scale or a strategic acquisition that would help the potential bidder break into a new market. This particularly applies to sectors like utilities where the direct competition comes from overseas and the barriers to entry in a new country would be too great.

In any case if one thing is for certain with takeover comes market volatility. For instance, if a stock price is presently at 140p, a bidder might have to offer 200p or more to improve his chances of a successful takeover, giving existing shareholders a 60p premium on their present holdings. The rumour by itself may increase demand for the stock by speculators and this may push up the stock price further so getting in early on bid speculation can pay handsomely. However wider stops (say 10% to 20%) are needed as the timing of bids is not an exact science.

A drawback with takeovers is the significant amount of time which they can take to play out – it is worth listening to rumours although traders should bear in mind examples like Boots, which was cited as a target for a number of years before finally succumbing in 2007.

The ideal scenario is to buy into a potential target before the rumours start to circulate so as to enjoy as much of the bid premium as possible. Having identified the company it is a case of applying technical or fundamental analysis to target the best entry and exit positions including the placement of the stop.

Where there is a rumour or news about a potential bid and the stock jumps higher it may still be possible to exploit the situation. This could be the case if there are other large companies in the sector that might make a counter bid or if the price does not fully reflect the premium because of doubts over whether the deal would go ahead. In both situations it may be profitable to buy with a tight stop loss.

In addition to a rising price, look for large volumes, as this is a good indicator of how serious the rumour is. Most of the time the price starts to move a few days before confirmation of the news, so anyone who first hears about it in a national newspaper is too late and will be getting in as the smart money is getting out.

Alternatively, if a stock that is consistently touted as a possible bid target rallies on the back of a further rumour then it may pay to go short with a tight stop loss above. This would make particular sense if the stock looked overvalued at the current price or it it had reached that level in the past only to fall back. Prices tend to move quickly once information is known, although a rival bid could be due if the shares move above the offer price. If this happens then it might be worth opening a long position.

Make no mistake – the present share price is an indicator of what is in the wind. Did you ever come across, leakage, insider trading…etc, phrases like ‘the market knew in advance’?? I know these things don’t exist (in the same way some people don’t actually believe in Santa or werewolves(!), but thought I’d ask none the less. There is a teeny weeny difference between “prediction” and “indication” – no-one can predict a nuclear war, but if you see a load of Russian generals rushing to their bunkers with bags of Tesco’s tinned food and cans of UHT milk, that’s a pretty good indication to run for the hills!

For instance it is no coincidence that shares in SportingBet rose to just under 53p at a time when no-one officially was aware of the 1st William Hill bid & could never breach it. Low and behold William Hil’s 1st offer was….53p. The indicator is stronger when share specific – During the last bid speculation regarding Lads, DESPITE a lot of press coverage saying done deal…etc, the share price FELL from a 54p high to 45p, going as low as 43p despite talk of a 60p+ bid and all days BEFORE Ladbrokes officially withdrew from the process. Do you really think that was a coincidence???? I repeat (for the deaf) the share price is an indicator, of course a bid could come in today, tomorrow, totally out of the blue…etc, guess that’s why (amongst others) the likes of day traders keep holding.

Even when the markets look to be at their bleakest – it is clear that there is money to be made. Volatility is its own reward and for those paying attention, mergers and acquisitions can give even the most fallen of angels a glimmer of hope.

Sorting the wheat from the chaff in terms of what is and isn’t reliable information on possible bid targets is no easy task. Combine the rumour mills of the City and the newspapers and you have a system that often feeds off nothing much more than hot air.

To conclude taking advantage of bid rumours to formulate your trade entries can be dangerous but very rewarding which is why you need to use stops to protect your downside risk. Guaranteed stop orders may also help here while limit orders can be utilised to lock in gains before the stock price reverses.