Takeovers

Takeovers - How you can make money from a company under takeover

Takeovers can provide excellent trading opportunities, as The Rivkin Report has demonstrated time and time again. Understanding takeovers is necessary if one is to benefit from the wonderful investment potential that they offer.

A takeover is when one company attempts to buy another company in order to expand. This may be a hostile bid, which is unwelcome by the target company, or a welcome bid, which has been already agreed to by the respective boards of directors and often results in a merger.

Companies launch takeover bids for a variety of reasons. For most, the primary reason is to not only grow sales, earnings and dividends, but to increase the value of shares and hence, the return to shareholders. However, sometimes one company may buy another in order to gain access to intellectual property, or eliminate a potential competitor before they become too powerful. This may be referred to as a defensive takeover bid. Other reasons for launching a takeover bid include:

• If two companies manufacture products or provide services that compliment each other, such as two companies that are in a similar business or involved in the same industry although operating at different points in the supply chain.

• Sometimes companies make radical changes to their core business by buying businesses in a completely different industry. This often happens during booms, with many companies scrambling to become involved in the latest fashionable industry

• A complete rebirth of the core business.

• Diversification. A good example of this is when Kerry Packer’s Publishing & Broadcasting Ltd launched a takeover for Crown Casino. This was an example of a media company taking over a gaming company, which has totally unrelated products and services, apart from some marketing synergies.

There are, of course, infinite specific reasons for takeover bids. Through understanding some of the basic reasons why companies launch takeover bids, you will be more informed about the merits and pitfalls of takeover plays in today’s market.

Time has shown that the long-term result of takeovers on the share price of the bidding company depends largely on the quality of the deal and the ability of management to blend the two organisations efficiently. Some bids are ultimately positive for shareholders, although many are not.