Whenever a company’s share price falls heavily, there is inevitably speculation that it could be taken over. Clearly, this does not always prove to be the case, but for Blinkx (LSE: BLNX) there seems to be considerable potential for bid rumours to begin to surface and, in time, for the company to be acquired.
Valuation
A key reason for this is that Blinkx looks dirt cheap at its current price level, with its share price having fallen by 70% in the last year. In fact, as at the end of September 2014, Blinkx had net assets of £161m, but now has a market capitalisation of just £134m. This means that Blinkx trades well below net asset value, with the company having a price to book (P/B) ratio of just 0.83. Such a low valuation will undoubtedly tempt potential suitors, since they are essentially able to buy assets at a discount to their current value.
Furthermore, Blinkx had around £74m of cash on its balance sheet at the end of September 2014, which would be very attractive to a potential buyer. And, with no debt, Blinkx has a very robust balance sheet that would also increase its appeal to potential suitors.
Turnaround Potential
While some businesses are bought because they are performing well, many are also purchased with a view to turning their fortunes around. Clearly, Blinkx would fall into the latter category and, as mentioned, it appears to have the resources (i.e. a pile of cash) to deliver a successful turnaround over the medium term.
In addition, its new strategy of moving away from desktop and into mobile seems to be the right one and, although it may take longer to effect than Blinkx currently envisages, signs of improvement could prove to potential buyers that the company does have a viable future as a profitable business.
Looking Ahead
Although it is very difficult to predict which businesses will become the subject of a takeover, Blinkx certainly appears to be a very suitable candidate for acquisition. It has a very strong balance sheet, trades at a significant discount to net asset value, and has a sound strategy that looks set to turn its disappointing performance around.
In fact, it is forecast to break even next financial year and then make a pre-tax profit of £1.9m in the following financial year. As such, this could be an opportune moment for a takeover and, even if it does not happen, investors in the stock could still benefit from all of the reasons listed above. Therefore, while still a relatively risky investment, Blinkx could be worth buying a slice of at the present time.