As ARM Holdings plc flies on takeover bid, who could be next?

ARM Holdings chip
ARM Holdings chip

The sale of ARM Holdings (LSE: ARM) to Japanese telecoms group Softbank for £24.3bn means that shareholders in the UK tech success story will walk away with £17 per share.


The deal represents a 201% return on ARM shares over the last five years, without factoring-in dividends. For shareholders who've held the stock for 10 years, the gain is a whopping 1,569%!

Investing in successful stocks that become bid targets can be very rewarding. While I wouldn't suggest buying a stock simply because it might get taken over, I do think it's worth looking for companies with the characteristics potential buyers look for.

UK #2 in chip design?

Softbank believes ARM could be a big player in the Internet of Things. Its chip designs could potentially feature in millions of newly-connected everyday devices. News of the ARM offer sent shares in Imagination Technologies Group (LSE: IMG) up by 10% on Monday morning.

The group has a similar business model to that of ARM, designing and licensing chip designs to for use in smartphones and other modern devices. But while ARM's progress has been smooth and impressive -- revenues have doubled since 2011 -- Imagination's hasn'.

Imagination is currently in the middle of a turnaround plan. Analysts are hopeful that profitability will be restored this year, but the shares already trade on 26 times 2017/18 forecast earnings. A potential bidder would have to believe they could transform a company whose profits have fallen continuously since 2012.

A valuable customer base?

TalkTalk Telecom Group (LSE: TALK) has been through the wringer over the last year, thanks to a highly-public cyber security attack.

That turned out to be less serious than expected and doesn't concern me. I believe a potential buyer would be more interested in TalkTalk's position as the UK's leading budget broadband service, and its 3.9m broadband and telephone customers.

For a company such as Vodafone Group, TalkTalk could be a useful and affordable way of expanding market share in fixed-line services. An overseas player wanting to move into the UK might also be interested.

A big buyer would be able to refinance TalkTalk's net debt of £679m at a lower cost. But if I was a shareholder it would concern me. I'd also be worried about the 6.9% forecast yield. TalkTalk's dividend hasn't been covered by earnings for some years, and could still be cut.

Built-in growth

Accounting software firm The Sage Group (LSE: SGE) is a company I wish I'd bought years ago. The group's systems are integral to many company's finance processes.

Sage's dividend has risen by an average of almost 10% per year since 2010. An investor who paid 240p per share six years ago would now be sitting on a 180% capital gain and enjoying a 5.6% dividend yield on cost.

The group's increasing focus on subscription services rather than packaged software sales should help to guarantee strong recurring revenues for many years to come. Unfortunately a strong share price performance means that Sage now trades on a 2016 forecast P/E of 24 and offers a forecast yield of just 2.2%.

I'm not sure the shares are good value at current levels, but this is certainly a stock I'd be happy to buy on the dips.

A potential takeover target?

ARM's growth and eventual takeover has been years in the making. To make the kind of 1,000%-plus profits being celebrated today by ARM's early investors, you may need to focus on smaller companies.

One opportunity about which our in-house experts are very excited is featured in 1 Top Small-Cap Stock From The Motley Fool. The company concerned has a strong track record of growth and currently looks very cheap to me.

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Roland Head owns shares of Vodafone Group. The Motley Fool UK owns shares of Imagination Technologies. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.