If your first reaction to the $12.4-billion takeover deal between Loblaw Cos. Ltd. and Shoppers Drug Mart Corp. was “Wow, didn’t see that coming,” you’re not alone: Despite efforts by investors to find companies that are going to be snapped up with hefty premiums, deals rarely follow our whims.
Too often, investors focus on the wrong companies – preferring the appeal of a beaten-up has-been stock, in the hope that an acquirer will end its misery, to a thriving operation. Perhaps, then, it’s helpful to compare Shoppers Drug Mart to BlackBerry Ltd. (formerly Research In Motion Ltd.).
BlackBerry, of course, has its share of problems. Top among them: It has been losing market share, profits have turned to losses and the share price has collapsed more than 90 per cent from its high. But the fact that the stock has a troubled veneer hasn’t prevented observers from speculating that someone – anyone – should be looking at BlackBerry as a takeover target.
Contrast that situation with Shoppers Drug Mart, a company with a dominant market share in Canada, terrific brand strength and an excellent track record for profitability. Shoppers’ share price rose 27 per cent on Monday morning, after Loblaw announced the deal, taking the stock to a record high and eclipsing its previous peak, in 2008, by about 10 per cent.
That sort of jump illustrates why investors love to be on the receiving end of takeovers. But the deal also illustrates why investors often pick the wrong targets.
1. Obvious isn’t good. Just because a stock has a takeover buzz, doesn’t make it a target. In fact, if the buzz means that a takeover premium is already built into the share price, buzz is bad.
The thing is, Shoppers Drug Mart has been praised plenty of times before as a good stock, even if the praisers failed to see its potential as a target. (For evidence, check out these posts in the Globe here and here. Okay, okay, and some people believed Shoppers was an ideal candidate for Warren Buffett.)
2. Stocks that are down from their highs might make them cheap takeover targets relative to what a deal would have cost before, but it doesn’t necessarily make them attractive. Dealmakers want to get something out of the deal – and if investors can’t see much in the way of attractiveness, why would dealmakers? That might explain why BlackBerry is still an independent company, years after takeover rumours began to circulate.
The takeaway? Takeovers are nice, but most investors should look at companies that make attractive investments first, and takeover targets a distant second. That way, if a takeover never comes, you still have a great stock. And if a takeover does arrive, it will like come at a nice price.