Equity: Accepting a takeover offer, why yes and no.

Since mid 2014, I have been much more active in the stock market. Today, one piece of news caught my attention. Berjaya Corp Bhd (BCorp) was offering to REDtone shareholders a way out; 80 sen offer for every share they own. Most of the time, the offer would be at as price with a premium to the stock price. Thus, the shareholders would normally be obliged to accept if the majority has accepted. In REDtone’s case, two out of four independent directors have rejected the takeover offer. Both felt that the offer price of 80 sen a share is too low.
I do not own stocks of REDtone or Berjaya Corp. I do have 1,000 units of Berjaya Food because I like it that they send me Starbucks vouchers every now and then. Okay, I bought it just for fun. No comments on whether the shareholders should accept or reject the offer but I offer the following thoughts if I am the one being offered.
Price I bought. If the price I bought was much lower than the offered price, I would accept the offer. I term much lower as anything more than 20 percent. Be real, FD gives you just 4 percent. However, if one had just bought the shares at very high price in anticipation of the corporate exercise, best of luck to you.
Business itself based on Price Earning Ratio (PER). Look back at the business. Is the growth very solid and huge? I term huge when growth is over 30 percent per year in terms of profitability. Or is the business is just chugging along smoothly. For technology based companies of today, I would think it must grow at double digits per year at least. Thus, minimum PER I would expect would be 16x or higher based on latest available data.
The business outlook. Most of the time, I think everyone should realize that in any business at all, competition is intensifying and therefore if a company would like to be strong it has to be a bigger entity to face the world. Thus, I always think a bigger company is more advantageous than a smaller one. Of course, many would argue that sometimes the bigger company is not as well run as the smaller company. Most of the time this is true. Not just for these takeovers in Malaysia but also in the world. I think many of the companies that Yahoo or Google bought were better companies in terms of potential growth than their new owner. However, honestly, why were they bought in the first place? Reason: They offered new growth potential. Why did their original owners sell? Reason: They (new owners) offered growth potential too. See the same reason?
Always note that most of the time, once the takeover fails, the stock price would drop. If the stock price did not drop, then it is true, the price offered was too low. However, if the stock price dropped to a level which was much lower than the price offered, then you know that by not accepting the offer, you have just made a blunder. How to know for sure? Reject the offer and the share price would go back to the usual demand versus supply.
Happy identifying some of these smaller companies which offers great potential. If they are not bought over, their share price would reflect the business value after some time. If they are taken over, then you get your investment gains faster, that’s all. Just stop buying companies because some friend told you to buy since a corporate takeover may happen soon. That’s called gambling or in the corporate world; speculating. Cheers.
written on 28 Apr 2015
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