There's good reason to get excited when even the ugly ducklings of the ASX are looking like tasty targets.
The latest downtrodden stock to come under the takeover spotlight is engineering contractor Cardno Limited (ASX: CDD) as the stock surged 10.6% to $2.61 in early trade following news that an investor had bought a 10% stake in the business.
What's more, this investor paid $2.60, which is a 10.2% premium to the stock's last closing price on Thursday.
Cardno has crashed 31.4% in the last two days after it revealed yet another profit downgrade, which has destroyed management's credibility with investors.
No one knows who this investor is but there's speculation that it is a private equity firm as these corporate raiders are actively scouring for deals.
Private equity companies are cashed up and have been crystalising profit by exiting investments through a string of initial public offers (IPOs) like accounting software company MYOB Group Ltd (ASX: MYO).
The speculation surrounding Cardno follows similar rumors about fellow contractor UGL Limited (ASX: UGL) and private equity's counter-cyclical investment strategy is good news for investors for two reasons.
The first is that is shows there is value in the embattled sector even though most investors can't see past the weak and uncertain trading conditions in the wake of the commodity slump.
The other point is that the ill fortunes facing some of these contractors may not be totally caused by sector headwinds but by poor management decision making as private equity would typically only bid for a company that it thinks it can manage better.
There's of course no guarantee that a bid for either company would eventuate but it does show that corporate raiders are massing at the door to the sector as Worleyparsons Limited (ASX: WOR), Bradken Limited (ASX: BKN) and Skilled Group Ltd.(ASX: SKE) have received bids or are thought to be in the sights of a bidder.
I won't buy a stock for only its takeover appeal and I would stay away from Cardno and UGL for now, although I see longer term value in the last three stocks.
Even if you weren't keen on investing in the sector, this is one area you should keep an eye on.
For those looking for more attractive investment options, sign up for free below to see what the experts at the Motley Fool have uncovered.
