How investors can spot stocks ripe for a takeover

One of the best ways to make money on the stock market this year has been to own firms that have attracted takeover bids, which invariably send the shares surging.

A flurry of buyers have swooped on London-listed companies this year and they have paid an average premium of 33pc to share prices before the bids became public, according to Refinitiv, the financial data group.

The supermarket Morrisons and the defence firms Meggitt and Ultra Electronics are the highest-profile firms to have attracted bids, but there are many British stocks still in the sights of cashrich buyers. Spotting the next targets now could bag an investor a big profit.

Jefferies, a stockbroker, said screening for companies with enticing characteristics for buyers was a good starting point. Businesses with a market value of less than $10bn (£7.3bn), profit margins of more than 15pc and with more than 95pc of their shares traded freely on the stock market were ripe for a takeover, it argued.

Using these criteria, it found 45 British stocks that could be on buyers’ radar. They included Rightmove, Games Workshop, Dechra Pharmaceuticals and Tate & Lyle.

Jefferies said possible targets tended to fall into three categories. The first was companies that had already been the subject of stock market chatter about a potential bid, such as BT, DS Smith, Imperial Brands and Smith & Nephew.

The second was those that could be acquired by another company to consolidate its dominance of an industry. Jefferies cited Entain, Just Eat, Brewin Dolphin, Abrdn and Burberry as examples.

Lastly, firms that had previously been the subject of approaches that had later fallen through could attract a new bid, it said. The broker highlighted Centamin and Spire Healthcare.

Another pointer, according to Richard Hunter of the stockbroker Interactive Investor, was that if a British company was trading on a cheaper multiple of profits than an overseas rival, the foreign company could snap it up to complement its own business.

“British stocks are cheaper relative to their earnings than overseas peers, which makes them attractive to buyers. Acquiring companies look for synergies with their targets, such as opportunities for cost savings or a potential foothold in a new market,” he said.

Another common reason for a takeover was for an acquirer to buy “specialised knowledge that adds to their own expertise”, Mr Hunter added.

Nevertheless, he said, investors should not buy shares in a company solely in the hope that it becomes a takeover target. “Buy a firm on its own merits. If a takeover takes place that’s great, but be prepared to hold on to the shares regardless.”