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Next year could see a tidal wave of takeover bids in London’s Alternative Investment Market (AIM). That is the verdict of investment bank Peel Hunt. It recently issued a report saying that as many as a third of the small- and medium-sized firms on the junior market could be takeover targets next year.
So could owning penny shares let me benefit from this bonanza if it materialises?
Investing for the right reasons
Some people buy shares hoping for a takeover. That strikes me as closer to speculation than investment. I am happy to invest in a company I think could be taken over, but not only for that reason. I always want to try and buy shares in great companies at an attractive price.
What happens when a company’s taken over
When a company gets taken over, owners of its shares are effectively forced to sell to the buyer at a certain price. That can seem (and may in fact be be) good as often it represents a sharp increase on the price the share was trading at prior to the offer.
For long-term investors though – and I believe in long-term investing – it can mean being forced to sell a share for less than one paid for it.
As an example, consider luxury leather goods brand Mulberry (LSE: MUL). The company has repeatedly dipped into penny share territory so far this year. That clearly excited major shareholder Frasers Group. It bid 130p a share and then upped its offer to 150p per share.
If I had bought Mulberry shares in late July at around 98p apiece, it could have meant a successful bid would see me netting a return of over 50% in a matter of months.
The choice is sell – or sell
But what if I had bought shares in the struggling firm long before, believing its strong brand, distinctively British positioning and luxury price point could make for a great business?
In 2012, Mulberry was selling for close to £24 per share. So a takeover even at £1.50 per share, let alone £1.30, would mean that £1,000 invested then would have turned into less than £63.
Frasers owned over a third of the company already (a 37% stake). But Mulberry’s biggest shareholder owned more than half of all shares and decided to reject the offer. If it had accepted it and the takeover proceeded, other shareholders would have had no choice but to sell their shares at the agreed price.
One risk I see with penny shares
In that example, one shareholder had a big enough stake to make it highly involved in rejecting the bid. But penny shares often have a fragmented base of small shareholders. That can mean few if any have sufficient incentives to fight what they see as a lowball takeover offer.
Contrast that to large companies where institutional shareholders typically have a big enough financial interest to motivate them to get involved in fending off bids they think materially undervalue a company.
So I think a spree of takeovers in 2025 could in fact be a threat to some long-term owners of penny shares they believe are undervalued, rather than an opportunity.
