It has certainly been a promising day for shareholders in software company Micro Focus (LSE: MCRO). Micro Focus shares moved up over 90% in early trading today. That sort of increase does not happen for no reason. In this case, it is the announcement of a takeover bid.
Sometimes a bid highlights some existing value that has been overlooked in a business. So, should I still add Micro Focus to my portfolio – or have I missed the boat?
The first thing worth noting is that despite today’s surge in Micro Focus shares, the longer-term picture is less rosy.
Even including the latest increase, over the past year the shares have risen just 18%. That means that, before the bid, they were lagging badly on a 12-month basis. Looking at the past five years, the shares have lost three-quarters of their value. Seen from yesterday, today’s share price looks great. But seen from the perspective of a long-term shareholder, even the bid premium cannot disguise how value-destroying it has been to own Micro Focus shares.
Micro Focus bid
In fact, I think that helps explain why the bidder has offered such a high price premium. The premium of around 98% to yesterday’s closing price means that Canadian bidder Open Text is offering to pay almost double the share price of 24 hours ago.
A takeover bid premium is common, as it helps persuade shareholders to part with their stock. But a 98% premium is unusually high. I think it is an acknowledgment of the fact that Micro Focus shares have been on a long, slow decline in worth over the course of many years. The bidder presumably hopes shareholders will see the offer as generous and therefore accept it.
Deal or no deal
I think there is a fair chance the deal will go through given the terms of the offer, which Micro Focus’ board of directors is recommending.
It is possible that a third-party bidder could emerge, which might push the price up further. Then again, at the time of writing, Micro Focus shares are actually trading at a slight discount to the offer price of £5.32 a share. I would not buy shares simply in the hope of a higher offer, as that is trading not investment.
Instead, I would consider the fundamentals of the investment case for Micro Focus shares from first principles.
My move on Micro Focus shares
I had already been eyeing Micro Focus shares in the past year. Even now, after today’s price jump, they have a yield of over 4%. If I had bought yesterday I would be in line for an 8% yield and perhaps now a large takeover premium to boot.
What concerned me about Micro Focus as a candidate for my portfolio was the business performance. Revenues fell at the interim stage and net debt stood at $3.7bn. The takeover could help resolve the company’s debt problem and I therefore see a logic for it. But I chose not to invest in Micro Focus a few months ago based on the business fundamentals. Doing so now the Micro Focus shares have jumped dramatically would be illogical for me.
The post Micro Focus shares have soared 90% today! Should I get in now? appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.