At first glance, animal supplements manufacturer Dechra Pharmaceuticals (LSE: DPH) looks like it ought to have been a handsomely rewarding investment. Up 8% in today’s trading as I write and over 40% in just a couple of months, the shares could be sold today for far more than they recently cost. The five-year increase of 32% in the Dechra Pharmaceuticals share price is also impressive.
But a price snapshot can only ever tell part of the story. It is one I think holds a valuable lesson for investors whether or not they own these shares. That lesson is about the importance of valuation and not overpaying for shares even in an outstanding business.
Takeover offer
The reason the stock surged a couple of months ago was because Dechr revealed it was in takeover talks. Today the company announced that it has reached agreement on the terms of the takeover, which will proceed at a valuation of £38.75 per share.
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At this point, a look at the share price chart may be helpful.
Clearly, investors who bought into the company earlier this year before the announcement will be quids in.
But what about others?
Many long-term shareholders are in for a tidy payday. But the offer price is significantly lower than the historical highs hit by the stock. As the chart above shows, some fairly recent buyers from the past several years will have paid much more for their shares than they will now receive for them.
Imagine I had bought at the very end of 2021, for example. The takeover price confirmed today is 27% below what I would have paid for shares back then.
No choice
A takeover like this being finalised means that shareholders effectively have no choice but to sell. Once the takeover is complete, the shares will be delisted from the London stock exchange.
Even if some holders think Dechra has a strong business and could do very well in future, they will no longer be able to be part of that.
Valuation lesson
That is an important lesson for all shareholders, in my view.
If a company has an outstanding business, then it makes sense that a falling share price could lead possible suitors to run their rule over it. They make take advantage of a share price fall to make a takeover offer.
Paying too much even for an excellent company can be a costly mistake.
Last February, I wrote: “Although Dechra is a growth company with a proven business model in an attractive field, (its current) valuation looks far too high for me.” The share price at that point was higher than the amount shareholders will receive following today’s takeover announcement.
Valuation always matters to an investor.
Even if, as a long-term investor, I think a great company will be able to grow into an oversized valuation in years to come, I could be wrong. A takeover might force me to sell my shares sooner, perhaps at below what I see as the company’s underlying value. Indeed, that is what happened to my Stagecoach shareholding last year.
Not paying enough attention to valuation when buying a share can be a costly mistake!
