Shire PLC: investing in my first takeover

I bought 15 shares of Shire PLC for about £40 each on April 25 following news that the company had accepted, on a preliminary basis, an acquisition offer from Takeda for £49 per share ($30.33 in cash and 0.839 new Takeda shares for each Shire share).

I actually didn’t think I would be able to buy at that price. The news that Shire had accepted the fifth bid from Takeda came out early that day, before the markets opened, and I thought that Shire would automatically rocket up to £49 at opening, but I decided to try my luck and put in a limit order for 15 shares at £40. How surprised was I when I saw that the order had been executed…

I invested £599.93 and paid a commission of £9.95, for a total of £609.88 (meaning a total cost basis of £40.66 per share).

Shire PLC order

This was a very unusual investment for me because Shire is a very large company and, so far, I’ve only invested in small companies because they have more room to grow. It’s also the first time I made a transaction without reading a company’s annual reports. I simply didn’t have the time, but had been following all the news on this for weeks and checked out both companies’ profiles, financials, research and news on the FT and Morningstar‘s websites. And my intention was not to invest for the long term, but only until the deal is closed or the shares reach the price offered by Takeda, whichever comes first.

The main reasons that made me invest were:

  1. I made another £500 contribution to my ISA at the beginning of April, and had over £640 in cash to invest;
  2. Shire’s high last year was a little over £50 and had fallen to under £30 before news of Takeda’s interest. 2017 net profit was £4,253.50 million (much higher than in previous years, but I assumed this was due to their merger with Baxalta in 2016 for $32 billion) and it had a market capitalisation of about £37 billion when I was considering investing, meaning it had a price to 2017 earnings ratio of 8.7 (quite reasonable);
  3. I liked the risk-reward ratio. At the time the offer was accepted, Shire’s shares were trading at £40, but the acquisition price is £49, leaving a potential £9 profit on the table. This can only be happening because the market is not confident the takeover will go through. I disagree with the market due to the following:
    • Takeda made four offers before they reached an agreement with Shire. They really, really want this company;
    • It is unlikely that regulators will block this takeover. There is no ill will towards Japan or Japanese companies (opposite China and the US) and there have been several approved large acquisitions by Japanese companies in recent years;
    • Takeda’s shares have dropped about 30% since the takeover was announced, from over JPY6,500 to about JPY4,650 (about £31.4) as of last Friday, meaning most of the shareholders who disapproved of the takeover are probably gone, and so there’s a very high probability that Takeda’s board of directors will approve it;
  4. If the deal is concluded in the first half of 2019, as announced, my return will be ((£49-£40.66)*15-£9.95)/£609.88=18.9%, which is quite a decent rate of return for a one year investment;
  5. If the deal doesn’t go through, Shire will probably fall back to £30 and I will lose £10 per share, a total of £150 plus commissions, which would account for about 3.8% of my portfolio at this time;
  6. Due to the above, I think there’s a 90% chance the deal will go through, so my estimated expected gross return on this transaction is 90% x £9 – 10% x £10 = £7.1 per share, a gross return of about 17.5% over my cost basis;
  7. There was a very strong curiosity component to my decision. I know that Warren Buffett used to invest in takeovers in his early years (he called them workouts) when he couldn’t find good long term investments, so he could put more of his money to work, and I wanted to see for myself how this would play out or what would actually happen in my ISA account once the money and Takeda shares are transferred in).

One thing I decided is that I need to start doing much bigger transactions than £600 so that my profit is not severely impaired by the commissions I have to pay. My gross profit here would be (£49-£40)*15=£135, but since I have to pay £9.95 each time I buy or sell, my net profit will be £115.1 (meaning commissions will take about 15% of my would be profit).

I will definitely analyse both companies more thoroughly after I write the CFA Level 2 exam but, for now, I feel very comfortable with my decision. Shire was trading at £40.625 (almost at my breakeven point of £40.66) as of last Friday. And I’m still surprised that Shire hasn’t moved up quicker. It’s not everyday you find £9 lying on the floor for the taking…

Free money, anyone?

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