Investors are betting that they have not heard the last of the takeover of Hub24 Ltd (ASX: HUB) even as the investment platform provider brushed off IOOF Holdings Limited's (ASX: IFL) advances.
Hub24 said that IOOF's $2.75 cash bid that was made on October 8 "is inadequate and does not reflect the underlying value of HUB24".
However, the Hub24 share price jumped 0.8% to $2.69 as the market isn't quite ready to give up hope of a deal.
Hub24's share price could be heading even higher even if takeover speculation goes quiet. If you look at Diversa Limited's (ASX: DVA) share price performance since April when it was announced that Equity Trustees Ltd (ASX: EQT) had made a non-binding offer, Diversa's share price has rallied 26% since.
All the posturing by potential targets doesn't change the fact that the investment and superannuation services space are ripe for mergers and acquisitions due to the need for scale.
What makes small caps like Hub24 and Diversa even more appealing is the fact that these companies have grown big enough, or are close enough, to finally turning a profit.
Interestingly, IOOF's and Equity Trustee's drive for scale through acquisitions might be motivated by a sense of self-preservation as these companies could quite easily become targets themselves in a sector that is dominated by bigger players.
So what is the right strategy when approaching the sector, bearing in mind that trying to pick targets is usually a mug's game? I would prefer to avoid the "middle" or mid-sized companies in the sector as they are probably in the least enviable position as their keenness for growing via acquisitions could tempt them into making mistakes.
Their more limited scale in terms of funds under advice or management also means they tend to earn a lower return on equity compared to their bigger rivals. These stocks could well represent the next wave of consolidation, but I don't recommend investors buy stocks just for this theme.
On the other hand, the big rally in the junior players on the back of takeover hopes makes it harder to find value among the illiquid stocks.
This essentially leaves the big end of town and that's where I would prefer to focus my efforts as I still see value in these stocks, such as AMP Limited (ASX: AMP) and Magellan Financial Group Ltd (ASX: MFG).
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