Take guesswork out of takeovers


This week I take a look at the interesting topic of takeovers which grabbed headlines since the unusual events surrounding Russian company, Magnitogorsk Iron and Steel Work's (MMK) takeover bid for West Australian iron ore company Flinders Mines (FMS).

In case you haven't been following these events, MMK's 30 cent per share cash takeover offer for FMS has been derailed by a minority shareholder who has successfully applied for an injunction (blocking the takeover) in a Russian court, arguing that the bid discriminates against her interests as a shareholder in MMK.

Both MMK and FMS have appealed against the decision and a judgment is expected by July 2012.

Many investors have rubbed their hands together on the news a company in their portfolio has become a takeover target. The initial excitement can see a potential target's share price rise significantly on speculation alone.

But investing in potential takeover targets is much more than a guessing game and there are specific terms and a process that would-be investors need to become familiar with.

Let's start with the three different types of takeover:

·Off Market Bid - the bidder makes an offer to the company at a set price for a certain period of time. The offer is accepted through a submission form and there are generally conditions attached which can make it unclear whether it has been successful until right at the end of the period. It also allows for a counter offer at a higher level at any other time. Common level of acceptance is 90 per cent.

·Scheme of Arrangement - shareholders from the company under offer meet and vote on a bid and if passed it is referred to the state court after which it is complete. Only requires 75 per cent approval opposed to 90 per cent for off market.

·On Market Bid - this is where the bidder purchases the shares on market, placing a bid at a set price. Legally the bid must be up for a month. It is easy to benefit from the bid by simply selling into the bid, however this is the least common method for a company takeover.

Another consideration needs to be is the bid friendly or hostile?

Friendly is agreed to by the target company's board and more likely to be successful where the hostile bid is one that the two companies may not agree on the terms of the takeover and as a result are more likely to attract counter bids.

Once the investor knows the type of takeover they have to consider the structure as almost all bids consist of cash or script, or a combination of the two.

On occasions there may even be an offer of shares from an international company which can add to decision process on whether to hold or sell.

If the bid is mostly cash, it is relatively easy to understand its value, however if script is dominant the bid can change in value with the movement on the market until the deal is complete.

Further complicating the matter can be regulatory bodies that may also have a say in the process.

The Australian Competition and Consumer Commission can block proposals that lead to a market imbalance in a sector.

The Foreign Investment Review Board advises the Treasurer on international companies' acquisitions on Australian companies and whether it is in the best interest for our country.

Finally, takeover panels work with both the bidder and target company to attempt to get the best deal possible for the target company's shareholders.

This knowledge and doing your homework on the companies involved will enable you to be more successful investing in takeover targets, as many are successful and very good for the shareholder.

However sometimes no matter how scrupulous you are in your study there is always the risk of a left field event out of your and the companies involved control as FMS are dealing with now.

·If you would like to subscribe to Adam Farrall's weekly market update, contact him at Sentinel Stockbroking on 9225 0020 or email afarrall@sentinelgroup.com.au

_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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