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Next year could see a flurry of takeover bids on the London Alternative Investment Market (AIM). That is the verdict of the investment bank peel hunting. It recently published a report claiming that up to a third of small and medium-sized companies in the junior market could be targeted for acquisitions next year.
So could owning penny stocks allow me to benefit from this bonanza if it materializes?
Invest for the right reasons
Some people buy stocks hoping for an acquisition. This seems closer to speculation than investment to me. I'm happy to invest in a company that I think could be taken over, but not just for that reason. I always want to try to buy shares of great companies at an attractive price.
What happens when a company takes over?
When a company is taken over, the owners of its shares are effectively forced to sell them to the buyer at a certain price. This may seem (and indeed can be) good, as it often represents a sharp increase in the price at which the stock was trading before the offering.
However, for long-term investors (and I believe in long-term investing) it can mean being forced to sell a stock for less than what was paid for it.
As an example, consider the luxury leather goods brand. Blackberry (LSE: MUL). The company has repeatedly dipped into penny stock territory so far this year. That clearly excited the main shareholder. Frasers Group. It bid 130 pence per share and then increased its bid to 150 pence per share.
If I had bought Mulberry shares at the end of July at around 98p each, it could have meant that a successful bid would see me return more than 50% in a matter of months.
The choice is to sell – or sell
But what if you had bought shares in the struggling company much earlier, believing that its strong brand, distinctively British positioning and luxury price tag could generate a big deal?
In 2012, Mulberry was selling for around £24 per share. Therefore, a takeover even at £1.50 per share, let alone £1.30, would mean that the £1,000 invested then would have become less than £63.
Frasers already owned more than a third of the company (a 37% stake). But Mulberry's largest shareholder owned more than half of all shares and decided to reject the offer. If he had accepted it and the takeover proceeded, the other shareholders would have had no choice but to sell their shares at the agreed price.
A risk I see with penny stocks
In that example, a shareholder had a large enough stake to be heavily involved in rejecting the offer. But penny stocks often have a fragmented base of small shareholders. That may mean that few if any have enough incentive to fight what they consider a low takeover offer.
This contrasts with large companies where institutional shareholders often have a financial interest large enough to motivate them to become involved in defending bids that they believe materially undervalue a company.
So I think a wave of acquisitions in 2025 could actually be a threat to some long-term owners of penny stocks who believe they are undervalued, rather than an opportunity.
