Hello Gary,
I am wondering about the best way to deal with stocks which have received a takeover offer. I know the short answer is to respond automatically to whatever trigger arises – buy or sell – and do nothing in between times (I follow that approach objectively and continually). However, takeover proposals do present a somewhat unusual situation, even though they don’t present very often. My thinking is along these lines, for cases where there is an ‘open’ trade for such a stock:
When the offer is tabled, the share price responds accordingly and reflects the value of the offer (either fully responding, or retaining some scepticism and so only partly reflecting the offer). From there, one of three things happens. Firstly, and usually after some time, the offer is accepted and so a ‘sell’ trigger appears. Secondly, the offer is rejected and the share price returns to its previous (pre-offer) value fairly quickly. And thirdly (but far less frequently), a higher offer is put on the table (with the above two possibilities following such a move).
So, for someone holding the stock at the time of the offer, there are two options (disregarding the ‘follow the triggers’ rule for the first option, for the purposes of this discussion).
Firstly, take the profit now (presuming it is a profit, but in any event, the offer is – usually – a significant improvement on any recent share price). Or secondly, wait until a ‘sell’ trigger appears, which may be when the offer (or revised offer) is either accepted or rejected.
The consequences of each option are: (1) an immediate profit, (2) the same profit but some time (even months?) later, or (3) a ‘loss of paper profit’ if the offer is rejected and the price returns to pre-offer value.
For the second consequence (receive the profit later when the offer is accepted and a ‘sell’ trigger appears), although a profit is realized, there is some opportunity cost resulting from waiting some time to get ‘funds-into-bank’, rather than immediately having the funds to re-invest if the stock is sold when the offer is first tabled.
It would seem that the opportunity cost is only justified if a revised (higher) offer is tabled. A higher offer means an ‘investor win’, a rejected offer means an ‘investor loss’. So it comes down to the comparative likelihood of each scenario. Unfortunately, such situations are probably not common enough to do the usual SWS analysis over years.
One recent case is STO last June. Pre-offer, its price was around $6.50; the offer changed the price range to $7.50 to $8.00; the offer rejection saw the price return to a $6.00 to $6.75 range. Although I didn’t hold STO at the time, my thinking at the time was that, triggers aside, I would be tempted to sell with the offer on the table.
Of course, one example doesn’t validate a proposed rule, but has SWS analysis ever looked at such infrequent situations and, if so, are they incorporated into the general analysis? Or are they ‘invisible’ to the mathematical analysis?
An alternative investor approach is to write a personal rule into one’s investing strategy and follow that (but too many 'personal rules’ will end up using a plan which is far-removed from the SWS approach!).
The issue has become more directly personal recently when I have been holding BSL prior to the New Year offer, having bought it on the late October trigger. Taking all of the above into account, I sold my holding a week or so after the offer and realized a profit of over 30%. I realize that the price has increased somewhat since then (including the dividend sweetener by the BSL board), but I am comfortable with my decision and am not experiencing any ongoing worries about a rejected offer and share price drop, having accepted a ‘sell’ price at somewhere near a recent ‘top’. That’s no different from ‘normal’ sell trades – they are never at the very top but usually are a bit after a recent ‘top’ and some distance below it.
Most of the above is just reporting on part of a personal journey, which may be of interest to SWS, but my main reason for writing is the more general query, which is underlined above. In other words, I am comfortable with making minor tweaks to the ‘follow the triggers’ rule, but I wonder is there anything more general that such situations suggest along the lines of ‘sell after offer’ or similar, as a more centrally located strategy within SPA3Investor or elsewhere, rather than just being a personal ‘strategy tweak’?
Thanks for your ongoing work and assistance to all members,
Regards,
Paul McColl