When companies open the war chest and plan takeovers, the stock market is quickly booming: steep price gains and disappointed hopes connect many investors with takeover situations. But reality looks different. In particular, professional investors like to mix their portfolios with takeover strategies and even see the investment as an alternative to bonds.

What's wrong? Dirk Sammüller, CIO of TBF Global Asset Management, is considered a proven expert in the field of takeover strategies. Two of the strategies he and his team are working on are no longer investable - investor demand was too great. For Sammüller, acquisitions or special situations are a wide field: "Acquisitions of listed companies are a process. At the beginning of this process, volatility is usually very high. Towards the end, it is very low and the correlation to the overall market is then small, "explains the portfolio manager. This makes such strategies particularly interesting for investors who want stable returns and the chance of additional returns.

 

Investing in acquisitions: The later the safer

Investors who focus on special situations are looking for suitable dates for an investment within a takeover process. In this way the opportunity-risk ratio per investment can be controlled. All in all, this results in a total package that appeals not only to investment professionals, but also to experienced private investors. Since acquisitions are regulated by law, the further the acquisition process has progressed, the lower the risk of negative surprises.

Sammüller cites examples of domination and profit transfer agreements as well as squeeze-outs. These two cases occur after a company has made a takeover bid and it has been accepted by a majority of shareholders. "Domination and profit and loss transfer agreements can be concluded if the acquiring company has a voting rights of more than 75 percent. The legal consequence of this is that both profits and losses will in future be borne by the new owner. In return, existing shareholders receive annual compensation in the form of a guaranteed dividend. This ensures that the respective share after conclusion of such contracts rather has the character of a bond, "explains Sammüller.

 

Waiting for rework

Although experts consider the compensation for closed profit and control contracts in Germany to be too low, a share will not be boring for a long time. "Investors in such companies have potential despite existing profit and control agreements. Namely, when a judicial claim procedure ensures that the acquiring company has to rectify. Investors often have to wait years for these improvements - but in return the sums are attractively attractive ", explains the portfolio manager, referring to improvements from the takeover of MAN by Volkswagen, which earned interest at five percent a year.

If an acquiring company achieves a share of voting rights of more than 95 percent, the so-called squeeze-out procedure usually occurs. As a result, the shares of the takeover candidate are to be withdrawn from the market and existing shareholders definitively resigned. "The squeeze-out process often results in additional sources of return. Companies sometimes agree with other shareholders over the counter, "says Sammüller. A walk is not the process from the first takeover offer to the squeeze-out. In addition to long waiting periods, investors must be aware that their stock is rarely traded. Also, takeovers often raise legal issues. Even experts like Sammuller work with specialized lawyers and often have to get their rights out in court.

 

Cyclical business

Although the takeover activity in Germany was dampened in the first quarter of 2019 and the experts at TBF Global Asset Management did not identify so many interesting situations last year, Sammüller sees potential: "The business is cyclical. After weaker years, there are always catch-up effects. The current low activity in acquisitions is expected to normalize over the course of the year. In addition, the process from the takeover offer to the squeeze-out can take years. We already see some attractive candidates on the market today, "said the manager, whose expertise is incorporated in the strategies Greiff Special Situations Fund and TBF European Opportunities, among others.