When a company is subject to a takeover approach the money offered will nearly always be well above the current trading price.
The ‘takeover premium’ as it is dubbed is there to compensate shareholders for potential gains in the share price they would have seen in the future had they held on to the stock.
Many M&A deals stand or fall based on the size of this premium, with investors having to weigh up how well they think the company will do over the next few years should it remain an independent entity.
Takeover deals agreed in boardrooms won’t always be backed by the shareholders who own most of the company in question
This calculation has been made far more difficult by the truly unprecedented events of 2020.
The dramatic nature of the economic damage caused by the pandemic may make many investors feel they should just take any premium they can get on their shares right now.
Potential bidders are aware of this and are undoubtedly acting opportunistically in some cases.
We have seen buyers swoop in recently for many well-known names across UK plc including the AA, Countrywide, Codemasters, RSA and G4S.
Shareholders who miss the bigger picture and accept low-ball offers during the tail end of the pandemic risk doing themselves out of a lot of money though.
The vaccine breakthroughs have changed the landscape almost entirely. There is every reason to now believe the pandemic will be brought under control here during the first few months of 2021. Should this be the case, we can expect a strong economic recovery.
Companies that were floundering during 2020 could quickly look much healthier, and therefore much more valuable in terms of their share price.
There is also another factor at play. UK equities have been trading with a Brexit discount since June 2016.
Frank Sagnier, chief executive of Codemasters, which has been subject to a takeover bid from US rival Take-Two Interactive Software
The magnitude of this discount is debatable, but it’s clear investors around the world have been tightening the purse strings in relation to British companies due to the prolonged period of uncertainty over the nation’s future economic relationship with the rest of Europe.
This is likely to be a largely settled matter by the turn of the year, with all signs pointing to a trade deal being struck despite all the posturing and briefing.
It obviously won’t happen overnight, but the Brexit discount on UK shares should gradually lift over the next couple of years.
Shareholders won’t necessarily be wrong to accept a bid under these circumstances and there will be variations in their priorities and time horizons to consider, but most would do well to at least consider the implications of better times being just around the corner.