I have written on takeovers for this Report for many years. Some stocks screaming takeover never got a bid, yet rewarded long-term investors because they were quality companies. Some taken over leapt after the bid, after years of losses.
Caveats aside, identifying takeover targets is useful because it forces you to think about company quality, management, sustainable competitive advantage and why the business would be worth more to another company. And, mostly, valuation.
Larger companies, direct rivals and private-equity firms do broadly similar analysis in identifying targets. They, too, want to find undervalued companies worth more if bolted onto a larger business, split up, recapitalised, improved or with new management.
All investors have their own style and performance metrics they look at with takeover targets. But as I have said before, never buy a stock based on takeover alone. Speculating on who might buy what and when, and for what price, is risky. Own high-quality companies run by high-quality people and buy them when they trade below fair value.
Here are three more stocks to add to the takeover-target ideas list:
1. Webjet (WEB)
The online-travel group has been touted as a takeover target since 2015. Its share price leapt 10% in early December 2019 amid speculation that a private-equity group was hovering.
It was another example of “buy the rumour, sell the fact”. Webjet quickly announced no offer had been made. Webjet traded around $9 during that bout of takeover speculation; now it trades at $3.24.
Like other travel stocks, Webjet has been smashed by Coronavirus (COVID-19) and its staggering impact on domestic and international travel.
Webjet raised $346 million in April 2020 to strengthen its balance sheet, such has been the impact of COVID-19. Like several other emergency capital raisings during this crisis, Webjet’s offer was heavily discounted at $1.70 a share for institutions.
Private-equity bidders were rumoured to be willing to stump up $2 billion to buy Webjet last year; the company’s current market capitalisation is $1.1 billion after a 68% fall in its total return (including dividends) over one year, Morningstar data shows.
Webjet, and all travel companies for that matter, are a different proposition after COVID-19. The virus has fundamentally changed the travel industry and some people, particularly those older or with health conditions, might never travel in the same way again.
For all the short-term challenges, Webjet has an excellent market position and brand recognition, and the future of travel bookings is clearly online.
Forget about this year’s full-year earnings; COVID-19 has stopped Webjet in its tracks. Focus on the next two years: the company is well funded after its capital raising, will benefit as younger consumers starved of travel book holidays next year, and must appeal to a private-equity firm or multinational online travel group at the current price.
