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Eighteen Telltale Signs
1.An outside company or individual (“beneficial owner”)accumulates more than 5 percent of a company’s stockand then files a Form 13-D with the Securities and
Exchange Commission.
2. A company that already has one outside “beneficial”
owner attracts a second or even a third outside investor
who accumulates a position of 5 percent of more.
3. An outside beneficial owner, in its Form 13-D filing, says
that it is seeking ways to “enhance shareholder value,”
“maximize shareholder value,” or speak to management
or other shareholders about “exploring strategic alternatives”—
all code phrases for potentially putting a company
up for sale to get the stock price higher.
4. An outside “beneficial” owner pays substantially more
than the current market price of the stock in a private
transaction with the company to establish an initial position
or increase its stake, or agrees to provide services or
something else of value to a company in exchange for an
option to purchase shares where the option’s exercise
price is substantially higher than the current market price
of the stock. This is often a strong indication that all parties
involved see substantially higher values ahead for the
company and its stock.
5. An outside beneficial owner adds to its stake in a company
through additional open market purchases of its stock.
6. An outside beneficial owner expresses an interest in selling
its stake in a company and says it will review strategic
alternatives—often a code phrase for a desire to have the
target company acquired by a third party to maximize the
value of the beneficial owner’s investment.
7. Adispute between an outside beneficial owner and the
company in which it owns a stake breaks out into the
open—often a signal that a battle for control of the company
will take place or that the outside beneficial owner will find
a third party to buy its stake as a prelude to a takeover bid.
8. A company in which an outside beneficial owner holds a
stake or is accumulating additional shares and/or which
operates in an industry where takeovers are proliferating
announces a stock buyback program
9. A company in which an outside beneficial owner holds a
stake or is adding to its stake is the subject of insider buying
by its own officers and/or directors.
10. A company with an outside beneficial owner and/or
operates in an industry where takeovers are proliferating
announces a “shareholder rights plan” designed to make
a hostile takeover more difficult.
11. A company in a consolidating industry sells or spins off
“noncore” assets or operations, thereby turning itself into
a “pure play”, which is often a signal
that the company is preparing to sell itself to a larger
company within its core industry.
12. A company in a consolidating industry takes a large
“restructuring” charge, in effect putting past mistakes
behind it and clearing the decks for future positive earnings
reports. Such action can be important to a potential
acquirer and is often a sign that a company is preparing
to sell itself.
13. A company in a consolidating industry announces a
restructuring charge that causes the stock to decline
sharply and becomes the subject of significant insider
buying and/or announces a stock buyback. This is usually
a sign that the stock market is taking a shortsighted, far
too negative view of what may actually be an early clue
that a takeover is on the horizon.
14. A company in a consolidating industry is partially owned
by a “financially oriented” company or investor, such as a
brokerage firm or buyout firm, that has a tendency to buy
and sell assets and that would be ready, willing, and able
to craft a profitable “exit strategy” for itself by engineering
a takeover of the company in question, should the
opportunity present itself.
15. The founder of a company who owns a major block of
stock (10 percent or more) passes away. This type of situation
often leads to a desire by the estate to eventually
maximize the value of the stock—in other words, a desire
to have the company acquired.
16. Two or more bidders try to acquire a company in a certain
industry, resulting in a bidding war. Since only one of
these bidders can be a winner of the target company,
there is a good chance that the losing bidder will look
elsewhere for another acquisition target within the industry.
In a case like this, you should browse through other
companies within the industry looking for one or more of
the Telltale Signs on the list.
17. A small-to-medium-size company in a consolidating
industry achieves a breakout from a “superstock breakout
pattern”; i.e., the stock penetrates a well-defined resistance
level at least 12 months in duration following a
series of progressively rising bottoms or support levels,
which indicates that buyers are willing to pay increasingly
higher prices to establish a position. This pattern creates
the appearance of a “rising triangle” on the chart. The
best superstock breakout patterns occur when volatility decreases
markedly in the weeks or days prior to the breakout.
18. Acompany that owns a piece of another company is itself
acquired. Many times it can pay dividends to look into a
situation where a stake in one company is “inherited”
through a takeover of another company. Many times, if
Company Aacquires Company B, which, in turn, owns a
stake in Company C, you will find that Company C becomes
a takeover target in one of two ways: (1) Company
Amay eventually bid for the rest of Company C if this fits
its overall business/acquisition strategy or (2) Company A
may sell off the inherited stake in Company C to a third
party, which then bids for the rest of Company C. Atakeover
of a company whose stock is “inherited” through
another takeover becomes even more likely when there is
already a business relationship between Company Aand
Company C.