Which Penny Stock Companies Are Takeover Targets - dummies

Which Penny Stock Companies Are Takeover Targets

By Peter Leeds

Not all penny stocks are appropriate takeover targets. When a corporation is assessing specific companies for potential acquisition, it considers several factors. Although predicting any potential takeover can be a crapshoot, you can increase your odds of benefiting from it by considering the factors that could make a company attractive to another, larger corporation.

By being aware of what makes a superior acquisition target, you can look for opportunities to purchase shares in potential target companies and then reap the profits when those shares are purchased in a takeover. Even without an eventual takeover, the specter or rumors of the possibility can sometimes lift share prices higher.

When small penny stock companies are surrounded by larger ones

When a company is small, yet surrounded by much larger ones, a buyout is possible. But when that company is too tiny or new, or the bigger fish are too large, then that actually lowers the odds of a takeover. The penny stock in question needs to be large enough to be noticed.

When the industry is trending toward consolidation

Takeovers instigate other takeovers. When a very fragmented industry suddenly starts consolidating, numerous companies may be bought out. Larger players in the industry don’t want to be left out of the action while their peers get stronger, and any that were thinking about a potential acquisition may now be motivated to act. Getting positioned in front of a trend while it passes through an industry can be very profitable.

When the penny stock shows financial strength

Growing revenues attract the attention of larger companies. If the penny stock is profitable, that’s even more compelling. The bigger corporation may enjoy economies of scale and, as such, be able to increase the profitability of the smaller business’s sales. Any time a small company can be acquired and its financial results will instantly be accretive to the bigger corporation’s financial statements, it will likely be part of a takeover.

When penny stock company acquisition is cheaper than production

In some cases, it is less expensive for a company to acquire another than to build up the business on its own. For example, it is often easier for a gold mining company to buy a smaller producing mine than to explore for the resource, get the necessary permits, build the mine, and start extracting and selling the gold. Never mind the time that would be saved!

To acquire the penny stock company employees, clients, or intellectual property

When the value of the assets and alliances — such as the employees, clients, or intellectual property — of a company are great, perhaps even greater than the entire value of the company itself, they are often acquired through takeover. Larger companies may acquire penny stock companies because they want their employees, customers, intellectual property, or clients.

To eliminate competition

When an upstart or tiny company becomes a thorn in the side of a bigger player, or it would become even more expensive for the larger company to compete with the smaller company than buy it, the larger company may instigate an acquisition.

When the penny stock company has a similar corporate culture

Although simply having matching corporate cultures isn’t a reason for one company to take over another one, the presence of matching corporate cultures does increase the likelihood of a takeover if other factors also suggest that the merger would be beneficial. For example, an upstart Internet company that lets its employees bring their kids to work and make their own hours may mesh well with organizations with similar cultures.

Similarly, when the corporate cultures don’t match, that fact could negate an acquisition, even when all other factors indicate that it would be a good idea. In our same example, a 200-year-old conventional 9-to-5 business would be unlikely to acquire the upstart with the easygoing culture.