Wednesday, 25 July 2012

When to sell your shares into a takeover bid

Whenever there is a takeover for a company the shares in that company normally jump substantially (but often not quite up to the offer price).  The shareholders in the company are then left wondering whether they should sell the shares on market or wait for the higher price or possibly a higher bid. 

This post will consider those situations where you should and those situations where you should not sell your shares on market after a takeover offer has been made.  I should preface this post by saying that it is a very personal decision - if you are a risk averse person the certainty of a gain may be better than an uncertain higher potential gain (versus the share price dropping back down to where it was)

Pros of selling your shares on market after a takeover offer has been made
  • You have locked in your profits.  You do not care what happens to the share price after this point as you have made your return
  • If the offer involves a scrip component (shares in the acquirer) you may not want these shares therefore may not want to wait until a completed deal occurs as the cash is preferable
  • If the deal falls the share price will probably drop down to the pre-offer price.  You eliminate the possibility of this happening by taking your higher profit.
  • You need to consider the time value of money.  Many deals take months and sometimes years to complete - selling gets you your cash straight away
Cons of selling your shares on market after a takeover offer has been made
  • You lose any potential increase in the price due to higher offers being made.  When there are contested offers the price often goes much higher than the original offer price and you lose out on the extra potential profit
  • Unless you have a special insight into the company you must always assume that others in the market have more information than you.  Therefore the question becomes who is buying the shares off you and what do they know about any potential increases in price than you do not.  If you do follow the company quite closely however then this is probably a rationale that you shouldn't use.
  • The offer price may not represent what you perceive to be fair value:  Many offers are opportunistic and are at a much lower than fair value price.  If you believe the share price will go above the offer price in its normal course of trading over time then you may want to hold onto the shares
  • Often there are rollover tax benefits when you get scrip consideration for your stock.  This means that you get the benefit of the higher share price but do not have to pay tax on it until you sell the new shares.  If you sell your stock immediately though your gain becomes taxable immediately.
What should you do?
  • Each person is different and some of the above considerations may be more important to some people than to others
  • Each situation is unique.  You may have good information in one case and bad in another or you may personally value one share more than the offer price and not want to accept and another share you may feel you are getting a great deal.
  • If you think a deal is unlikely to complete for any reason you should sell
  • If you think there are likely to be competing offers then you should not sell after the first offer
Are there any other considerations that you think are important?  If so please comment below.

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