How to React to Takeover Bids

CORPORATE takeovers, buyouts and spin offs continue feverishly after a record boom in 1988, and no end appears in sight. The effects aren't felt just on Wall Street. Investors all over the country need to know how to react as well. Suppose you wake up one fine morning, turn on the radio or look in the business pages of your newspaper, and find that a company in which you own stock is supposedly a takeover target. What should you do?

The primary rule is: Don't chase rumors. There are far more false stories out there than real deals. But if a stock you own does become an active takeover target, your choices are many.

You may be asked to consider what is known as an equity buyback plan. If you are, break out the bubbly and hold on to your shares. Maybe even buy some more. When a company announces that it is buying back its own common stock, chances are strong that the price of the shares will rise.

Another form of corporate maneuver that investors increasingly must ponder is the leveraged buyout. This basically means that the firm's own management or an independent investor proposes to buy up the shares owned by the public and take the company private.

If a leveraged buyout proposal comes your way, do nothing until you have read the official offering statement. Then see what you are really getting for your shares. Do accept the deal if you figure out that over the long term the transaction will yield you a substantially higher return than would selling at the current market price. But be wary of offers in which you will be paid in low quality 'Junk bonds" as well as cash. Often the bonds in these deals are riskier than the stocks you are holding.

If a company whose stock you own decides to spin off one of its divisions, you have to answer a couple of questions:

First, should you hold on to your shares in the parent firm, or perhaps even buy more? The best answer is that the parent firm is often worth keeping if the spin off rids it of unprofitable, debt laden divisions, or if the deal unloads businesses that the parent lacks the expertise to manage. Second, should you get rid of the stock you receive in the spun off enterprise? The answer is: Don't automatically sell those shares. Give the company a year or so to prove itself. If it does not do well within that period, then sell.

A more difficult deal to decipher is a hostile takeover bid. Basically, you have to decide whether to hold on to your shares or to sell out. The primary piece of advice is: Don't get greedy. Sell out if the stock rises to within 10% of the price the raider proposes to pay.

But say the shares have not risen quite that high yet. Then you still might consider selling and taking whatever profits you have earned as a result of the takeover bid if the management seems to stand a fighting chance of beating back the takeover offer. It usually does so if it owns more than 10% of the firm's stock. If management seems too weak to resist, you would be wise to hold on to your stock, wait for the raider's last offer, then get out.

You also want to delay selling if the target firm actively seeks a so called White Knight to pay a still higher price or if it announces an offer to buy its own shares. A bidding war could result and kick up the price of your stock. Of course, do not sell if you think the price of your shares will eventually rise anyway, with or without the takeover.