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Speculation/Buyout Offers

Oftentimes successful companies are a prime takeover target for larger companies or conglomerates. We’ve personally seen many of our stock holdings being acquired and taken private over the years.

When a buyout offer is made, it will almost always be at a premium to the target company’s current share price. For example, ARA Asset Management, a real estate fund manager, was a target of a buyout offer in 2016 when the management and a third-party consortium offered to acquire the company at S$1.78 per share – a 26% premium.

When news of the offer hit, ARA’s share price immediately jumped to S$1.76. The reason why the share price traded two cents below the offer price was because the offer still had to be voted through by shareholders at an extraordinary general meeting, and there was a possibility that the buyout offer could fail. We then decided to sell our stake in ARA at S$1.76 per share, instead of waiting for the buyout to be confirmed at $1.78 per share. Here’s why:

  • If the offer failed, we had already locked in our profit. And the share price of ARA would have probably fallen back to where it was before the buyout offer. At which we could decide to repurchase the stock.
  • If the offer did go through, our opportunity cost was two cents per share – a minimal amount to risk to secure our profits first.

This reasoning can be applied in other buyout situations.

For example, the share price of DKSH Malaysia, a distributor for consumer and healthcare products, jumped to RM6.43 after news of a speculative buyout surfaced. For us, we owned shares of DKSH Malaysia at an average purchase price of RM4.20. We decided to a check on the company’s fundamentals and find out more about the mooted buyout. The fundamentals didn’t seem to justify an inflated share price of RM6.43 and we thought the move was rather speculative in nature. So we decided to lock in some profit and sell a portion of our stake to recover our initial investment cost. True enough, the market realized that an offer wasn’t coming through and the share price promptly fell to RM4.45. At which, we used our profit to repurchase even more shares of DKSH Malaysia.

So the next time a buyout offer pushes share prices upward, you can consider selling your stake to secure your profit first and repurchase the shares if the offer fails and prices fall back down.

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