The sale of ARM Holdings (LSE: ARM) to Japanese telecoms group Softbank for £24.3bn means that shareholders in the UK tech success story will walk away with £17 per share.
The deal represents a 201% return on ARM shares over the last five years, without factoring-in dividends. For shareholders who’ve held the stock for 10Â years, the gain is a whopping 1,569%!
Investing in successful stocks that become bid targets can be very rewarding. While I wouldn’t suggest buying a stock simply because it might get taken over, I do think it’s worth looking for companies with the characteristics potential buyers look for.
UK #2 in chip design?
Softbank believes ARM could be a big player in the Internet of Things. Its chip designs could potentially feature in millions of newly-connected everyday devices. News of the ARM offer sent shares in Imagination Technologies Group (LSE: IMG) up by 10% on Monday morning.
The group has a similar business model to that of ARM, designing and licensing chip designs to for use in smartphones and other modern devices. But while ARM’s progress has been smooth and impressive — revenues have doubled since 2011 — Imagination’s hasn’.
Imagination is currently in the middle of a turnaround plan. Analysts are hopeful that profitability will be restored this year, but the shares already trade on 26 times 2017/18 forecast earnings. A potential bidder would have to believe they could transform a company whose profits have fallen continuously since 2012.
A valuable customer base?
TalkTalk Telecom Group (LSE: TALK) has been through the wringer over the last year, thanks to a highly-public cyber security attack.
That turned out to be less serious than expected and doesn’t concern me. I believe a potential buyer would be more interested in TalkTalk’s position as the UK’s leading budget broadband service, and its 3.9m broadband and telephone customers.
For a company such as Vodafone Group, TalkTalk could be a useful and affordable way of expanding market share in fixed-line services. An overseas player wanting to move into the UK might also be interested.
A big buyer would be able to refinance TalkTalk’s net debt of £679m at a lower cost. But if I was a shareholder it would concern me. I’d also be worried about the 6.9% forecast yield. TalkTalk’s dividend hasn’t been covered by earnings for some years, and could still be cut.
Built-in growth
Accounting software firm The Sage Group (LSE: SGE) is a company I wish I’d bought years ago. The group’s systems are integral to many company’s finance processes.
Sage’s dividend has risen by an average of almost 10% per year since 2010. An investor who paid 240p per share six years ago would now be sitting on a 180% capital gain and enjoying a 5.6% dividend yield on cost.
The group’s increasing focus on subscription services rather than packaged software sales should help to guarantee strong recurring revenues for many years to come. Unfortunately a strong share price performance means that Sage now trades on a 2016 forecast P/E of 24 and offers a forecast yield of just 2.2%.
I’m not sure the shares are good value at current levels, but this is certainly a stock I’d be happy to buy on the dips.