Want another reason to invest in small caps?
Wait -- let's recap the standard fare. First, you've got the "small firm effect," academia's way of telling us that small caps generally outperform large caps. Second, small firms tend to have less going on, and are thus easier for the nonprofessional to keep abreast of, than their bigger brethren. Third, the returns on these little guys often march to the beat of a different drummer than those of the Dow Industrials or S&P 500, meaning small caps often provide a nice diversification benefit.
OK, you already know by the title where this is going -- buyouts. So take a look at this chart: InVision Technologies' (NASDAQ:INVN) stock responding to a pending buyout by General Electric (NYSE:GE). InVision was trading in the $30s, but GE's offer of $50 per share includes a premium to gain control of the company -- your sudden windfall.
Sure, the hopes of those who envisioned InVision (sorry) at $60 with certainty one day will be dashed. But nothing's certain -- including the pending buyout -- and since the time value of money is on your side with the immediate spike, why not leave the pocket change to the arbitrageurs and take the cash? You're way ahead in my book.
Now anyone who knows MCI (OTC BB: MCIA) used to be called WorldCom before it was MCI again knows that buyouts don't just happen to small companies. Also, the change-of-control premium is as hard to predict as the likelihood of a particular stock's being bought out in the first place, meaning that all this buyout business is definitely a fringe benefit of (small) stock investing, not a reason to go out looking for buyout candidates -- although I, for one, won't stop you.
And sometimes, it's not even the "best" companies being bought out. A young reader of my Pixar (NASDAQ:PIXR) article wrote to discuss the article and separately asked for my thoughts on small-cap software company Marimba (NASDAQ:MRBA). I felt Marimba was nothing special -- barely above being a short candidate, actually. But bigger BMCSoftware (NYSE:BMC) felt (and acted) otherwise, driving this supposedly lame stock up 65% with an announced buyout.
I'll stress that buyouts aren't to be banked on, nor are they solely the domain of small cap stocks. Rather, they fall into the "another good thing" category about small-cap investing, so if you haven't considered small caps before, maybe now's the time.
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Fool contributor James Early owns none of the stocks mentioned in this article.
