As an investor, you may never know when a takeover offer for one of your stocks will come. It may come out of the blue or… not at all.
However, you can learn what to look for in takeover targets that can help you prepare a special watchlist of potential candidates.
In my previous article about takeovers, I gave you three potential targets, but today I want to go over some indicators that can help you spot your own and tell you about some stocks that match those indicators. Again, you don't have to buy the stocks immediately, but it is good to keep a shopping list so that if something starts to happen, you'll be ready.
3 indicators for potential takeovers
– Changes in regulations or law for an industry.
If industry regulations or restrictions change, that could open up opportunities of not just growth but the ability of a suitor to do something it previously couldn't. In my previous article, I highlighted Ten Network Holdings Limited (ASX: TEN) as a potential takeover target because media ownership laws may be revised and allow media companies to own more media outlets in a particular region.
Southern Cross Media Group Ltd (ASX: SXL) could be another possible target. It owns television broadcasting and radio assets and carries Channel Ten network programming in Darwin, Tasmania and Central regions. It has been ranging in share price around $1-$2 since mid-2009, although net profit has been improving over the past three years. Larger media companies will want to widen their broadcasting footprint if those regulation changes actually take place.
– Substantial shareholders turn into bidders.
Some of the recent takeover offers have been from companies that are already substantial shareholders of the target company. One example is the joint takeover bid by Aurizon Holdings Ltd (ASX: AZJ) and China's Baosteel for Aquila Resources Limited (ASX: AQA).
Oil refiner and convenience retailer Caltex Australia Limited (ASX: CTX) is recently transforming from a straight refinery business to retail distribution, which could change its revenue and earnings dynamics. Chevron (NYSE: CVX) subsidiary Chevron Global Energy owns a 50% shareholding in the company and would definitely be watching how this transformation unfolds.
– Beaten-down price opens potential value.
Rival companies are just like private investors. They are looking for value, so when a target is struggling in business and the share price is sagging for a long time, that can open opportunities when the business is starting to recover.
Stock in AMP Limited (ASX: AMP) has been in a trading range since mid-2010, not really recovering after the GFC. The financial services and wealth management business is starting to see the fruits of earlier business changes and could be ready to shine. That could be enticing for potential suitors.
Its price-earnings to growth ratio is now below one. That means its expected earnings growth rate is more than its price/earnings (PE) ratio and could mean good value for its earnings over the next few years.
