An article appeared in the Globe and Mail earlier today which tried to find the answer to a simple question, why do investors rarely see M&A opportunities coming? In order to get his point across, the author of the piece David Berman, looks at Shoppers Drug Mart Corporation (TSE:SC) and Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB).
Shoppers is no Research In Motion Ltd (BBRY)
Earlier today, in a move that very few saw coming, it was revealed that Loblaw Cos Ltd had agreed to buy Shoppers Drug Mart Corporation (TSE:SC) for $11.9 billion, a premium of more than 25 percent on the company’s trading price. Berman looks at the reasons investors neglected this company, while concentrating rumors on BlackBerry.
Why buy into failure?
The most prominent takeover targets in the media tend to be those that have fallen from a great height. Last year, Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) was the perfect example. The media barraged investors with articles about how Hewlett-Packard Company (NYSE:HPQ), or Lenovo Group Limited (OTCMKTS:LNVGY) (HKG:0992), or International Business Machines Corp. (NYSE:IBM), or any other among a large number of companies was going to buy the firm.
At the same time when a smaller business like Shoppers Drug Mart Corporation (TSE:SC) is on the rise, there is rarely any talk about acquisition. In the tech world it is rare for a company to be bought after they go public. Most are acquired while they are still smaller and up and coming. The media, and investors by extension, appear to ignore those businesses as possible M&A targets and concentrate on failing businesses like Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB).
Two simple rules
Berman ends his piece with two simple rules for investors. The first; Buzz is Bad, the second; falling price does not always mean rising value. Under the first rule, Berman says that buzz usually means any acquisition price is usually already built into the stock. This means that though some investors thought that Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) could be sold, it wouldn’t sell for much higher than the price when the news was all encompassing.
The second rule means that just because a formerly great company is falling in price doesn’t mean that it’s good value at any price. This appears to be the logic of M&A buzz around a dying company.
Berman ends by suggesting that takeover premiums are far too difficult to track, and investors shouldn’t spend a whole lot of time trying to pin down where the next move is coming from. Investing in quality smaller companies in a growing industry is a good bet however.