Bookworm: Should you view stocks like a private equity buyer?

Welcome to the latest edition of Bookworm, my regular column where I explore insights from investing and business writing that I found interesting or useful.

Each insight falls under one or more of our three guiding principles: owning high quality assets, fostering a long-term mindset, and putting process over emotion.

Today’s insight has elements of all three, but I’ll put it under ‘long-term mindset’ for reasons that will become clear later.

Today’s insight

Today we’re going back to the source of the first ever Bookworm – Anthony Bolton.

Bolton is a former fund manager who racked up returns approaching 20% per year while in charge of Fidelity’s Special Situations fund. Not just for one or two years, but over a period of 28 years.

Bolton’s book Investing Against The Tide discusses his approach to investing, and it includes a short section on investing in potential buyout targets.

This is because many of his fund’s investments culminated in the company being bought out at a premium to recent share prices.

My home market in the UK has had a flurry of these deals recently. A few examples of buyouts featuring high premiums include:

In August 2024 it was announced that a company I owned in my portfolio, brokerage platform Hargreaves Landsdown, would be taken private at a price more than 50% above where shares traded previously.
In November 2024, insurance firm Avivia agreed to buy Direct Line in a cash and stock deal valuing each Direct Line share around 75% higher than its previous market price.
In June 2025, precision measuring equipment manufacturer Spectris announced that it had received a bid valued roughly 80% above where its shares previously traded.

The idea of securing a juicy premium makes seeking out potential takeover targets attractive at first glance. But as we’ll see later, there are caveats to this.

It’s also important to underline that Bolton seemed to view takeovers as a natural byproduct of his investing approach, which centred on buying out of favour but financially sound companies, as opposed to something he was dependent on predicting correctly in the short-term.

He did, however, share some insights on which qualities might make a company more attractive to potential buyers. Let’s take a look at them now.

The most important thing for private equity buyers?

As Bolton notes in his book, willing buyers usually come from one of two groups: companies wanting to consolidate an industry and private equity groups. For the rest of this article, we are going to focus on the latter.

“Although bids from private equity are sometimes for industrial reasons” Bolton says, “more often than not, it’s the financial characteristics of a particular company that makes it attractive”.

What Bolton is referring to here is the ease of securing financing to complete the deal - usually debt that will be taken on by the target company itself.

What makes a company easier to finance, then? Above everything, Bolton says that “bidders prefer companies with steady, predictable cashflow”.

Taking Bolton’s emphasis on ‘financeability’ a bit further, you might also be encouraged by low starting levels of debt. Either on an absolute basis or relative to the company’s cashflow or its business model.

Add in that private buyers often seek to take advantage of poor near term sentiment to take out companies at depressed valuations, and we end up with three qualities that could make something a super attractive buyout candidate:

Steady and predictable cashflows
Levels of debt that leave room for more leverage
A depressed valuation

A recent example from the ASX

Johns Lyng Group (JLG) is a company that I own shares in. Its recent announcement of a bid from private equity didn’t seem to surprise anybody, perhaps because it had several of the qualities we’ve talked about today.

When the bid was announced, JLG’s market value had halved in the last two years. Its valuation was clearly depressed, to the point where it traded roughly 50% below Morningstar’s Fair Value estimate before the bid was disclosed.

In terms of it being a ‘doable deal’, JLG’s net debt recently stood at roughly $150m versus an operating profit of around $80m in fiscal 2024. That doesn’t seem a worrying debt burden when you consider 1) JLG’s dependable base of revenue from everyday insurance repairs and 2) its capital light operating model that gushes cash.

In short, JLG shares looked cheap and the company appeared relatively easy to lever up if a buyer wanted to. Hence nobody’s surprise when private equity came knocking.

Could this underpin a whole strategy?

Targeting potential buyout targets and pocketing a premium when they get taken over sounds exciting. But like most things in investing, it isn’t as straightforward as that.

In the book, Bolton stresses how hard it is to predict specific buyout targets in the short-term. This can be especially dangerous if the basis for this prediction is some kind of hot tip. This, Bolton says, “generally only creates commission for the brokers”.

Also consider that in highly depressed situations, a ‘premium price’ might only deliver a profit to those who bought the shares very recently.

In the case of Johns Lyng, for example, you could also have argued its attractiveness to acquirers when the stock was 30% higher just a few months ago. As much as anything, making big profits from predicting a takeover requires a lucky entry point.

A byproduct rather than something to rely on

Bolton says that he experienced a lot of takeovers in his portfolio because he was seeking many of the same qualities and financial metrics that private buyers were, albeit for different reasons.

While a private buyer might seek a strong balance sheet and reliable cash flows because it made a deal easier to finance, for example, Bolton viewed these qualities as downside protection during a turnaround.

As a result, Bolton seemed to view takeovers as a byproduct of his approach rather than something that he relied on predicting. I have had a similar experience in my portfolio.

As I alluded to earlier, I recently exited my investment in the UK brokerage platform Hargreaves Lansdown after a deal was agreed to take it private. And now it seems that my holding in Johns Lyng could meet a similar fate.

I did not foresee either takeover, or buy the shares hoping that one would transpire. I simply thought that I was being offered a low price to own companies with fair long-term prospects, strong financial positions and decent competitive advantages.

Those are qualities that many private buyers would like to see in a potential target, so it is natural that our paths will cross at some point. I wouldn’t want to own a company I didn’t like the long-term prospects of, though, purely to try and beat PE to the punch.

In defence of hunting takeover targets

Despite the obvious flaws with betting on a near-term transaction, the ‘buyout friendly’ qualities we’ve identified today are hardly bad things for companies in your portfolio to boast. They can be sources of long-term strength as well as attracting buyers.

Let’s also remember that estimating a range of prices that an informed buyer might pay for the whole business is a Buffett-approved way to gauge whether a company’s shares trade cheaply or expensively.

All in all, I think that considering the potential attraction of a company to buyers has some merit but with an important condition:

Investors should make sure that the prospect of a juicy payout doesn’t distract them from their broader strategy, or lead them to shares they wouldn’t be happy holding in the absence of a transaction.

Buyouts aren’t always good

While we are on the topic of buyouts, it is worth remembering that buyouts aren’t always good for shareholders.

Not only can the transaction trigger a capital gains liability. The need to redeploy the cash introduces reinvestment risk. Even at a premium to recent prices, there’s also a good chance you’re being taken out below fair value. The buyer clearly thinks so.

In many ways, I’d rather own a business in a position to be the buyer of an attractive takeover target than the one being sold and delisted. And I certainly wouldn’t hold a stock purely because I’m waiting for somebody else to take it off my hands.

Disclosure: I owns shares in Johns Lyng Group.