How to get the best deal in a takeover

Published in the Daily Telegraph, May 2015 by Dale Gillham

IINet sounds more like something out of a Terminator movie than an investment listed on the Australian exchange.

Rather than being “terminated”, iiNet (IIN) may soon be swallowed up by TPG Telecom (TPM).

Now if you hold IIN, or any company that may be a possible takeover target, then you need to know how to determine a fair price for your shares.

Firstly, there is more than one way for a takeover to occur;

  1. Via a friendly takeover or acquisition, where the bidding company makes an offer to the board of the target company, the board likes the offer and shareholders are advised to accept the deal and they vote on it;
  2. A hostile takeover, where the board of the company being taken over refuses to negotiate and advises shareholders not to accept an offer, in which case the bidder may make a direct offer to shareholders.

The IIN board has unanimously recommended the acquisition, however, some shareholders believe the offer isn’t enough.

As an IIN shareholder, you can vote on the deal in June. But how do you know whether the offer price is right?

Just because the offer is greater than the price traded prior to the announcement doesn’t mean it is.

Remember, in handing over your shares you will be giving up future potential and therefore you want to receive a healthy premium for your shares. So how do you work this out?

One way is to look over the company’s financials. You could spend days pouring over a company’s financial reports to piece it all together.

Not everyone can do that, and it takes a lot of patience and know-how.

Companies that take over other listed companies usually have a team of professionals to determine the price.

So, what hope does the average person have. Should we just agree?

As someone who likes to keep things simple, when a company is about to be taken over the first thing I do is pull up my charts.

The great thing about price charts is that most people can read them and it’s far easier than dissecting financial reports and tables of numbers.

I simply apply three techniques to my price chart.

One of the richest men to trade the markets was WD Gann, and he believed in applying price, pattern and time to determine future share price values.

It worked then and it still works today.

So, what does the IIN chart show?

Just before the announcement of the takeover, IIN shares had been falling and were trading close to $6.60, therefore it was possible for the share price to go lower before a recovery would occur.

That said, the analysis still indicated IIN shares were likely to trade closer to my target range between $10 and $11 in the next 12 months.

Given this, I believe the market is right to hold out for more from either TPM or a rival bidder.

Perhaps a figure between the current $8.60 offer and the midpoint of the target range would be more acceptable to shareholders. You decide.

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