Shares of River & Mercantile Group (LSE:RIV) are up by double digits this morning, following an announcement by management. This latest upward momentum has pushed the stock’s 12-month performance to an impressive 80% return for shareholders.
So what does this business do? And why is it being propelled like a rocketship today? Let’s take a look.
What’s behind River & Mercantile’s share price growth?
River & Mercantile is a financial services company. The firm provides a wide range of services for its customers, including investment consulting, plus derivatives and fiduciary management. That may not sound particularly exciting, but the demand for such solutions has allowed the company to grow its assets under management to a massive £47.6bn.
2021 has been quite a transformative year for the business. With 12 new fiduciary clients added to the roster, income from its fees is on the rise. And the company is now seeking to become a specialist asset manager. As such, the board recently proposed selling its Solutions business to Schroders for £230m. The proceeds will be returned to shareholders if the sale is approved.
These developments appear to be the primary catalyst behind the strong performance of River & Mercantile shares this year. However, today’s sudden jump seems to have been triggered by a potential acquisition offer.
The company confirmed this morning it has been approached by AssetCo and Premier Milton regarding a potential buyout of the post-Solutions business.
Unsurprisingly, the possibility of a buyout has investors excited, resulting in the stock surging.
Taking a step back
Seeing the company receive acquisition interest isn’t too surprising. After all, it does have a healthy chunk of cash on the balance sheet with virtually no debt.
However, as exciting as receiving a premium may be, there’s no guarantee that a binding offer will be made. Nor that management and shareholders will accept the proposed deal. And even if they do, market regulators may decide to block the whole thing which, given the size of the business, is a possibility on anti-competitive concerns.
This is why, in my experience, investing in a business in the hopes of acquisition isn’t a winning strategy. Should a meaningful offer fail to materialise, River & Mercantile shares could quickly reverse today’s gains.
The bottom line
All things considered, I think I will be keeping River & Mercantile shares on my watchlist for now. Ignoring the prospect of a buyout, the group has managed to deliver some impressive growth recently. However, its institutional operations are starting to face some significant headwinds, especially in Australia. Here, newly introduced legislation has adversely impacted the investment behaviour of its clients.
With uncertainty about near-term operational performance and long-term existence as a standalone business, I’m not tempted to jump on the bandwagon.