Stock Screening | Takeovers In My Fund Since The Start Of 2022 - What Do They Have In Common?

3rd Oct '23 by BnB

16 comments 1139 reads

There has been some interest here in takeovers, which have proliferated since the start of 2022 and its accompanying bear market. And some participants have been keen to identify the characteristics of potential future bid targets. Meanwhile, I have been quite fortunate in finding my investment strategy dovetailing quite profitably with the needs of acquirers, so I thought it worthwhile to carry out an analysis of those companies amongst my investments which have attracted bids.

Above all, it should be noted that mine is not a concentrated portfolio. It more closely resembles what an investment manager might like to call a "Global Excellence" fund of over 150 names, containing, as it does, a very high proportion of companies with powerful moats based on their dominance in a defensible niche. With very few exceptions, these companies exhibit outstanding operating numbers at levels familiar to owners of Terry Smith's Fundsmith and Smithson funds. And I am gratified that, for all that there is a crossover, in particular with the small and mid-cap fund, I have been preceding Smithson's managers into a number of names of late. Such is the advantage of the small investor.

With 150+ names, it's no surprise that there has been M&A in the portfolio. And I own a large number of acquirers as well as the hunted, from Microsoft and Alphabet down to "buy and builds" like Halma and Idex, a recent Smithson investment. But this thread is all about the acquired. So here, in reverse chronological order, are my takeover "winners" since the start of 2022, including a small number where my patience ran out before I could reap the reward.

Adevinta - European classified online ads, equivalent to Auto Trader- Sep 23

Splunk - US observability and cybersecurity platform - Sep 23

Renewi - Benelux recycling - Sep 23

Ergomed - UK contract research organisation - Sep 23

Abcam - UK diagnostic tools - Aug 23 - sold for lack of patience before offer received

Instem - UK pharma research software - Aug 23 - sold for lack of patience before offer received

Dechra Pharma - UK animal pharma - Jul 23

Network International - UK fintech for MENA - June 23

Momentive Global - US "Survey Monkey" software provider - Mar 23

K3 Capital - UK corporate finance platform - Feb 23

Aveva - UK industrial automation software - Dec 22

Chr Hansen…

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M48

3rd Oct '23

Lots of questions but for now…. Wow! I kind of guessed you were diversified but still that’s an outstanding achievement. Can’t be many fund managers worldwide (bar passive tracker types) that better that. Your only problem is that I hold 6 of your prospective 15 and so they have no chance! Thanks for sharing your experience here.

BnB

I think an important point that I did not make strongly enough in the post is that, whatever the qualities of the acquisition targets, most of the bids would not have arisen but for the existence of the bear market. Valuations have been very attractive, particularly to private equity buyers who operate away from the glare and scrutiny of the public markets.

Bar some cyclical blow-ups (XPP anyone?) my investments screen well for quality and that makes for easier sleep. And the steady stream of bids keeps me confident in my philosophy. But let’s not ignore that the bids were not there in these numbers during the rampant bull of 2021. Ultimately, to coin a phrase: “it’s the price, stupid!”

4th Oct '23

Looks as though Spirent will be cheaper still at open! The telecoms market is very challenged this year. With half a position currently, I’ll be debating whether to scale up or sell out.

DavidMcCabe

Thanks very much for sharing, very valuable.

David

Michael C

6th Oct '23

Thanks for this, I found it very interesting. Can I persuade you to extend the list of prospects to include shares outside the UK market? Please!

Silver Moon

You remind me of a Bournemouth bus conductor who studied form while on the job, picked a lot of take-over targets and became a millionaire. It was back in the ninteen-fifties. I've been lucky enough to have benefitted from a few takeovers over time but which have been outnumbered by bankruptcies. Yours are within a very short and recent timescale so I guess we can get ready for more to follow soon. Thank you for sharing.

doug2500

I'd be interested to hear what you did re: SPT

I chose to sell for 89p but I'm not convinced that was the right way to go. I made the decision I wanted out if I could get more than 80p and I did. Unlike XPP though there isn't any financial distress so possibly I was too hasty. Hard to put a number on what earnings they will post for this year though, and the 5G market wasn't as defensive as I'd thought.

Too much to go into in details. But in IT I would look at beaten-down names in cybersecurity, observability and application software. In healthcare, I would look at medtech, where valuations have been severely cut.

Investingnewbie

Thank for sharing. Really interesting, useful, and in our current Markey phase, uplifting. I assume you ignored the Stockopedia stock ranks, styles, risk, etc. when selecting?

carmensfella

That is a wonderfully informative post BnB and I have found an investor that holds as many companies as me. Incidentally Equals are presenting on the Mello investor show this Monday evening https://www.stockopedia.com/co... If you would like a free ticket as you are a shareholder just enter the code SHR100 and it will be complimentary and you get sent the recording too.

If possible I would be honoured to be able to chat through your strategy on one of our Monday shows. It is very relaxed and I have hosted these for years with many top fund managers and investors taking part.

Do let me know if that would be possible?

Watchdog

What a brilliant article. Thank you for sharing your thoughts and your detailed research and analysis. Like you, I firmly believe in the importance of a wide moat...but I lack the skills to discern which companies possess such an advantage!

I lack the skills to discern which companies possess such an advantage!

A small part is judgement. I have 40 years experience in the Tech sector and I know which products are well entrenched, I understand customer needs and I can envisage the impact of new technologies. A good part is in the numbers. Companies with high margins have pricing power - a key characteristic of a moat. Meanwhile moaty brands are staring you in the face. Luxury stocks like Hermes and Ferrari are in a different league to LVMH, let alone the likes of Burberry.

But much of the power to categorise lies in an unashamed adoption of paid-for research. I have the benefit of my bank's own stock analysis for global equities but would champion the work of Morningstar, whose c£150 pa subscription gives access to their detailed research on thousands of listed companies worldwide. Their wide-, narrow-, no-moat classification system is worth far more than the subscription - and anyone else's offering. For investors looking to research globally, this is where I would start.

Hi David

I'm very flattered by your suggestion. Thank you. My instinctive reaction is to doubt that my skills and methodology are sufficiently finely tuned yet to stand side by side with more proven investors. I had a spectacular 2020 and 2021, greatly outperforming my benchmark (my bank's balanced 60/40 global portfolio) and a disastrous 2022, hugely underperforming it. That suggests to me that I was not positioned appropriately on the risk/reward curve and my efforts in 2022 and 2023 have focused on moderating volatility without compromising my philosophy. Performance has been better than my benchmark throughout 2023, aided by takeovers and a heavy representation in IT. But not entirely to my satisfaction, ironically because of diversification in out of favour cleantech and medtech associated with the persistent drag of rising yields.

The aspect of investing at which I consider myself to be becoming more obviously adept is in trading the options of my companies, especially well out-of-the money covered calls. There's always the odd blow-up, but it's a potentially effective income-generating strategy when seeking yields from growth stocks with zero to low dividends, and has to date added 1-2% to overall annual fund performance without losing any upside on capital gains. So far, so good.

The charts of so many companies show a lost 5 years since 2018, when I bought my first share, reflecting above all the impact of regime change in inflation and interest rate policy on asset prices. I'd really like to see how my fund performs in a more "normal" environment. Steady rates will do, I'm not asking for rate cuts. Acknowledging that "events, dear boy, events" are always waiting around the corner.

Let me think about it.

I assume you ignored the Stockopedia stock ranks, styles, risk, etc. when selecting

Completely. Almost all my investments have a poor stock rank. They're of less help because I'm only 17% in the UK. But also because they don't give a good guide to moats.

7th Oct '23

I'd be interested to hear what you did re: SPT

As I explained elsewhere, I tend to have two or three names for each theme. A reflection of my lack of confidence in picking the absolute winner. Within 5G I had actually already sold Calnex for a good profit when it got silly expensive. After the latest Spirent profit warning, I sold Keysight Technologies, the 200lb gorilla in the sector, and where I had a much bigger position, for an insignificant loss <10%. Most of the proceeds were redistributed among favoured US industrials which have all fallen of late along with the market, and might be expected to rebound with the market, should an autumn/winter rally occur. Keysight would be less likely to share in that rebound following its very cautious last TU, and I fear a worsening of its outlook at the next report. With the remaining 20% of the proceeds I doubled down on my now small Spirent position at these historically low levels. I might be too early. But the company is not in any serious distress (compare XPP) and a return to anything like normality in a sector where telecoms providers are mandated by governments to provide upgrades would see the company worth twice its current SP. That keeps me invested in the 5G theme at a more moderate level with significant potential upside, albeit with a high level of short term uncertainty. I can live with that given the reduction in thematic exposure, not to mention the increased vulnerability of SPT as a takeover target.

Paul Scott

8th Oct '23

What an interesting article, thanks so much for posting it!

It confirms what I thought (but hadn't measured) that acquirers seem to focus on structural growth companies, in IT/software and healthcare mostly. There doesn't seem to be any interest in takeovers for value shares, more's the pity!

Best wishes, Paul.

Takeovers in my fund since the start of 2022 - what do they have in common?

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BnB

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