A takeover can generate a significant premium to the small cap’s stock price.

This month DHR International Inc. (DHR) announced its interest in acquiring Caldwell Partners International Inc. (TSX: CWL). This, after DHR had acquired over one million shares of stock in Caldwell Partners in a flurry of open market buying on the TSX exchange. In a press release, DHR had expressed its initial level of interest is to offer up to $2 per share for all of Caldwell Partners’ stock. At $2 per share, this would imply a gain of 278% (including dividends) for this investment opportunity since we first recommended Caldwell Partners to our list of Investorfile’s Top Ideas – Small Cap Value Stocks (See: Caldwell Partners International: US expansion pays "dividends” for small cap value investors).

Investing in undervalued small cap companies that are fundamentally strong can be very rewarding. But, more often than not, a shareholder value–enhancing event like a takeover of such companies can generate significant premiums to the small cap’s stock price and just as important, instant liquidity for such investments.

Of our first 13 Top Ideas profiled in the Investorfile blog, three stocks no longer trade as a result of a takeover or privatization event. Radiant Communications Corp. was acquired by Comwave Networks Inc. in a takeover at $1.43 per share. We gained 180% in the value of this stock over a 14-month period. (See: Justice served and big gain for minority shareholders of Radiant Communications ). From the privatization of DDS Wireless International (DDS) we earned a return of 50%, including dividends. DDS was the first stock on Investorfile’s Top Ideas list. In Galvanic Applied Sciences’ privatization, a modest profit was earned only three months after we first recommended the Company’s stock.

It is our opinion that any one of the small cap stocks on Investorfile's Top Ideas list could be subject to a takeover bid in the future, as these companies continue to grow their revenue bases. Other analyst(s) in the investment community agree. Case in point: In a recent research report about our Top Idea’s stock Avante Logixx Inc. (TSXV: XX) published by Cormark Securities, it was written that longer-term Avante Logixx could be an attractive take-out target for a larger residential security company. Currently Cormark Securities has a 12-month target of $0.60 for the shares of Avante Logixx.

For Caldwell Partners, we are not surprised that there is interest in acquiring the Company. As a matter of fact we suggested the possibility of a strategic buyer emerging in a recent blog post (See: Caldwell Partners’ rapid growth will not go unnoticed much longer). As for DHR International’s pursuit of Caldwell Partners, time will tell what transpires. That said, if Caldwell Partners is not acquired by DHR, eventually another suitor in the future will and hopefully at a share price that will make Caldwell shareholders smile.

Author's Ownership Disclosure:
TSX: CWL -Yes
TSXV: XX - Yes

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