Educational Piece: Participating in ASX Stock Takeovers

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Takeover bids occur when one company seeks to acquire another publicly listed company by purchasing enough of its shares to gain a controlling stake. 

This educational piece will provide a simple guide on how regular Australian retail investors can participate in ASX takeovers, along with the benefits and risks of this approach. 

Participating in ASX Stock Takeovers

To participate in ASX stock takeovers, it’s crucial to stay informed about potential target companies and their acquiring counterparts. 

You can do this by following

• Financial news websites (like Market Index, and Livewire Markets). 

• Regulatory filings.

• Company announcements.

Keywords to look for include:

• Takeover offer/bid

• Scheme of arrangement

• Conditional proposal

• Acquisition/merger

• Due diligence

• Change in major shareholding / substantial shareholder notice

Source: Market Index

Understand the Offer:

When a takeover bid is announced, it is important to understand the terms and conditions of the offer. This includes:

• The offer price: The price per share the acquiring company is willing to pay for the target company's shares.

• The consideration: The type of payment being offered, which can be in cash, shares, or a combination.

• Any additional conditions: Such as regulatory approvals or minimum acceptance levels. Regulatory conditions may prevent companies from acquiring perceived monopolies within a market, for example. 

Evaluate the Bid:

Before deciding to participate in a takeover as a retail investor, consider the following factors:

• The valuation: Compare the offer price to the target company's current share price and historical trading levels. Typically, the offer price will be at a premium to the current share price. 

• The acquiring company: Assess the acquiring company's financial stability, track record, and strategic rationale for the takeover.

• Regulatory approvals: Determine if the takeover is subject to regulatory clearance, as delays in approvals can affect the timeline.

Two Examples:

To illustrate the process, let's look at two historical examples of ASX stock takeovers:

(2007) Wesfarmers' Acquisition of Coles Group:

In 2007, Wesfarmers made a successful bid to acquire Coles Group, a major Australian supermarket chain. The offer included both cash and shares, providing Coles shareholders with the option to become Wesfarmers shareholders. This takeover allowed retail investors who held Coles shares to become part of Wesfarmers and potentially benefit from the long-term growth prospects of the larger conglomerate.

(2017) Tabcorp's Rejected Merger with Tatts Group:

In 2017, Tabcorp Holdings made a bid to merge with Tatts Group, a wagering and gaming company. Despite Tabcorp's efforts, the bid faced regulatory hurdles and was ultimately rejected due to concerns over competition. 

This example highlights the potential risks associated with takeovers, as regulatory approval can significantly impact the outcome, leaving investors uncertain about the final result.

Pros and Cons of Participating in ASX Stock Takeovers:

• Potential for higher returns: Successful takeovers can result in an increase in share prices, generating profits for investors.

• Benefit from offer uncertainty: The first takeover offer might not be the last. For example, if a company is willing to offer a 10% premium in its takeover bid, this will likely be priced into the market - but if that offer is rejected and the company ups the premium to 20%, there’s strong potential upside for investors who backed the takeover earlier on. 

Cons:

• Uncertainty: Takeover outcomes are uncertain and can be influenced by regulatory approvals, market conditions, and competing bids.

• Loss of control: If the acquiring company gains majority control, retail investors may have less influence on the future direction of the company. 

• Potential share price decline: If the takeover fails or the market reacts negatively, the target company's share price may decline, resulting in losses for investors.

For more information on takeovers, Livewire recently published a great article explaining how one Australian fund manager uses a takeover arbitrage strategy, which involves a checklist for evaluating the likelihood of a successful takeover. 

Read it here.