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Subsequent yr might 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 corporations on the junior market could possibly be takeover targets subsequent yr.
So might proudly owning penny shares let me profit from this bonanza if it materialises?
Investing for the suitable causes
Some individuals purchase shares hoping for a takeover. That strikes me as nearer to hypothesis than funding. I’m completely happy to put money into an organization I believe could possibly be taken over, however not just for that motive. I at all times wish to try to purchase shares in nice corporations at a pretty worth.
What occurs when an organization’s taken over
When an organization will get taken over, house owners of its shares are successfully compelled to promote to the customer at a sure worth. That may appear (and should in truth be be) good as typically it represents a pointy improve on the value the share was buying and selling at previous to the provide.
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 example, think about luxurious leather-based items model Mulberry (LSE: MUL). The corporate has repeatedly dipped into penny share territory to this point this yr. That clearly excited main shareholder Frasers Group. It bid 130p a share after which upped its provide to 150p per share.
If I had purchased Mulberry shares in late July at round 98p apiece, it might 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 robust model, distinctively British positioning and luxurious worth level might make for an incredible 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 turned into less 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 provide. If it had accepted it and the takeover proceeded, different shareholders would have had no selection however to promote their shares on the agreed worth.
One danger I see with penny shares
In that instance, one shareholder had a sufficiently big stake to make it extremely concerned in rejecting the bid. However penny shares typically have a fragmented base of small shareholders. That may imply few if any have enough incentives to combat what they see as a lowball takeover provide.
Distinction that to massive corporations the place institutional shareholders sometimes have a sufficiently big monetary curiosity to inspire them to get entangled in keeping off bids they suppose materially undervalue an organization.
So I believe a spree of takeovers in 2025 might in truth be a risk to some long-term house owners of penny shares they imagine are undervalued, relatively than a possibility.
