Subsequent yr might see a tidal wave of takeover bids in London’s Various Funding Market (AIM). That’s the verdict of funding financial institution Peel Hunt. It not too long ago issued a report saying that as many as a 3rd of the small- and medium-sized corporations on the junior market might be takeover targets subsequent yr.

So might proudly owning penny shares let me profit from this bonanza if it materialises?

Investing for the precise causes

Some individuals purchase shares hoping for a takeover. That strikes me as nearer to hypothesis than funding. I’m joyful to spend money on an organization I believe might be taken over, however not just for that purpose. I at all times need to attempt to purchase shares in nice firms at a sexy price.

What occurs when an organization’s taken over

When an organization will get taken over, house owners of its shares are successfully pressured to promote to the client at a sure price. That may appear (and should the truth is be be) good as usually it represents a pointy enhance on the price the share was buying and selling at previous to the provide.

For long-term traders although – and I consider in long-term investing – it may well imply being pressured to promote a share for lower than one paid for it.

For instance, take into account luxurious leather-based items model Mulberry (LSE: MUL). The corporate has repeatedly dipped into penny share territory up to now this yr. That clearly excited main shareholder Frasers Group. It bid 130p a share after which upped its provide to 150p per share.

If I had purchased Mulberry shares in late July at round 98p apiece, it might have meant a profitable bid would see me netting a return of over 50% in a matter of months.

The selection is promote – or promote

However what if I had purchased shares within the struggling agency lengthy earlier than, believing its sturdy model, distinctively British positioning and luxurious price level might make for a terrific enterprise?

In 2012, Mulberry was promoting for near £24 per share. So a takeover even at £1.50 per share, not to mention £1.30, would imply that £1,000 invested then would have became lower than £63.

Frasers owned over a 3rd of the corporate already (a 37% stake). However Mulberry’s largest shareholder owned greater than half of all shares and determined to reject the provide. If it had accepted it and the takeover proceeded, different shareholders would have had no selection however to promote their shares on the agreed price.

One threat I see with penny shares

In that instance, one shareholder had a large enough stake to make it extremely concerned in rejecting the bid. However penny shares usually have a fragmented base of small shareholders. That may imply few if any have ample incentives to struggle what they see as a lowball takeover provide.

Distinction that to giant firms the place institutional shareholders usually have a large enough monetary curiosity to inspire them to get entangled in keeping off bids they assume materially undervalue an organization.

So I believe a spree of takeovers in 2025 might the truth is be a menace to some long-term house owners of penny shares they consider are undervalued, somewhat than a chance.