First off, I would like to discuss why. Why, is very simple. It can be a quick way to make a good return in a short time frame when successful. I would like to stress the word successful. From my own personal experience most takeover picks need time factored in to be realized. Why, if someone was to ask me? Why, is because of many reasons. Why is the company a target in the first place? If you can answer that question, IMO your on the right path.
Next is your reasoning in your pick. 1. Are their rumors on the street, or has a bid been made. Chances are if the street knows about it , it's to late for you, without high risk. This area is usually handled by risk arbitrage players. They have capital to invest in this risky area. Many times after a bid is made, they jump in. Speculating to make a profit on a higher bid, or price difference till the close of the deal. A quick return for high risk, the payoff.
This is good for them, but what about you? Don't worry about them. You can try and achieve the same on a much safer degree of risk. There is a price to pay for safer. I will try and go over some strategy, and some of the things I look for. Earlier, I mentioned a time factor is needed for results to realized. This is not a bad thing,since you are picking before there are rumors on the street. This makes time on your side. With time involved, chances are the stock price will improve just on fundamentals alone, (Sales growth, earnings growth. Many times this will be at a higher stock price than a quick take out price.
The first words you hear mentioned by (especially newer investors is)(I've been guilty to). The low price of this stock makes this a takeover. How many times has this happened when we thought we made a good pick, but something didn't go as we planned. This shouldn't IMO-be the reasoning.
Your Reasoning-Your reasoning in making your choices should be determined by the amount of capital you have available for risk,and the time you can leave it available for risk. Having said what I've said, lets go over targeting areas if you have made a decision this is a viable investing option for you.
The choices-(homework time)-Say to yourself, if you were a big company with money available what would you buy? The last statement already has a clue (money available). This leads to more questions. Many big companies have capital available to acquire other companies. Many have sold divisions that didn't fit in its current business plans. They want to add to existing businesses-(another clue). If your the acquiring company, are you trying to gain market share, or are you trying to improve margins by eliminating a competitor? Another question-How much is it going to cost me? Is the company I want to buy selling below book value relative to it's current market valuation? Am I going to be taking on goodwill, or are my earnings going to be added to? There are still many many more questions you as an acquirer can ask yourself. The better you are at putting yourself in their place the better off you will be in your picks.
I have only touched on some areas of homework. The more time you put in, the better off you will be. Sometimes you nail one you didn't even expect, and sometimes that one you expected, never gets realized (that's part of investing).
I will leave this thread open for discussion for areas I haven't touched on, questions that have arisen, or new SITT picks for review by others. My picks, are subject to change without notice. I want to include my favorite caveat. "LISTEN TO WHAT EVERYBODY HAS TO SAY, BUT DO WHAT YOU THINK IS RIGHT YOURSELF". I always like discussing picks of others and your strategy.
Good Investing to All!
TOP TEN TAKEOUT SITT LIST FOR 2017
New rankings and Several Repeats.