Investing in takeover targets when out of favour

Isn't it funny how a resource rich area or particular metal/commodity can go in and out of favour?  Sometime ago coal seam gas was the hot energy source.  It was the sector that everyone thought that consolidation and market activity was inevitable.... then nothing.  It simply dropped off the radar.  Royal Dutch Shell and PetroChina made a takeover bid for Arrow Energy (AOE) a week ago and suddenly it is all on again with Bow Energy (BOW) and Eastern Star Gas (ESG) making good share price gains since.  The bid for Arrow Energy was made with the share price languising at $3.48, a price probably not seen since about July last year.  Take a look at the Arrow Energy chart below:

For me when a takeover target share price is depressed it is one of the best times to consider taking a position.  I say this because this is the time that a takeover bid is most likely to be launched.  If a takeover bid is to succeed it obviously needs to a premium to the current market price.  Why make a bid for a company when the price is trading at $4.50 and you have to add a premium when you can make a bid when it is trading at $3.50 and then by the time you add a premium it possibly can still be under $4.50???  Whilst Eastern Star Gas has the last week been riding the coat tails of Arrow Energy you can still see the way this strategy could have worked as shown in the graph below:

Eastern Star Gas was trading at almost a one year low and has bounced from $0.65 to $0.85, a healthy gain of 30%!  It has been speculated that Eastern Star Gas would be taken over by Santos Limited for sometime now.

Strike Energy Research Note

• Hartleys has released a research note on Strike Energy (STX)
• Report dated 10/03/2010
• 6 month price target: $0.50
• STX last trade: $0.25 (11/03/2010)
• Research report link

CuDeco Limited up after confirming talks with Chinese parties

CuDeco Limited (CDU) surged today after it made the announcement to the ASX that it was in 'discussion with a number of different entities in relation to different aspects of the Rocklands project'.
I like the point that it goes out of it's way to state 'number of different entities'.

The company was forced to show it's hand and meet continuous disclosure rules after it was reported in the 'China Daily' that Xiangguang Copper was looking to take a stake in CDU.

The stock closed up $0.54 to $4.70 on volume of 1.4million shares.