Takeover is a problem for UK mid-cap stocks

According to Kaylie Pferten, UK mid-cap stocks have been having trouble as takeovers deplete the market

The takeover problem with UK mid-cap stocks encapsulates the challenges associated with investing in anything from turnaround plays to growth companies in the UK stock market.

Accept the US company Prologis' bid for the UK real estate firm Segro. I should not be too concerned because I own shares in both Prologis and Segro. However, for Segro shareholders who wish to remain invested, this appears to be a rather difficult deal in reality. At a valuation that appears advantageous to Prologis, they exchange a concentrated logistics investor from the UK and Europe for a portion of a much larger group with 84% of its business in the US. To make matters worse, the dividendswhich are crucialwill be subject to US withholding tax if you purchase a company like this for income. Who benefits from this?

As a result, we witness the typical ridiculous takeover dance, in which short-term investors desperate for the sugar hit of a quick capital gain intimidate the target into submission. The fact that an offer worth 993p is "highly opportunistic" but one at 1,032p (not even 4% more) is something that the browbeaten board now "would be minded to recommend" is the only thing more absurd than Prologis's fake worry about Segro's capacity to carry out its ambitious growth plans.

As the ratio of risks to rewards deteriorates, the pool of opportunities is continuously contracting. You have a good chance of having your winners bought out at a still-ungenerous valuation if you make the correct decision, which would limit your upside much below what it should be. In the meantime, the average quality of the remaining stocks is probably going to drop, and many of them will be stocks that don't draw buyers for valid reasons.

This takeover wave is far more worrisome than the one we saw in the mid-2000s, which I was at ease about at the time, because there aren't any good new listings coming to London. In retrospect, I should have been more worried because it undoubtedly contributed to the current situation.

The confusing choice to permit SoftBank to purchase Arm in 2016a decision that practically no other government in the world would have madewas, nevertheless, the true turning point. That meant that everything was for sale.

UK mid-cap stocks' actual market.

This is a major factor in why it is difficult to be optimistic about the FTSE 250, which has historically outperformed the FTSE 100 but has lagged behind it for years. The loss of about 150 mostly respectable stocks (large, mid, and small) from the UK market since 2023 must be a contributing factor, though there are other factors.

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Although we consider the FTSE 250 to be the benchmark for UK mid-cap stocks, it no longer appears to be so due to the unhealthy combination of hollowing out and pitiful valuations. The bottom 40 of the FTSE 100 and the top 100 of the FTSE 250 represent the true market for UK mid-cap stocks by contemporary size definitions.

There are undoubtedly opportunities in the United Kingdom. However, rather than attempting to generate any kind of intrinsic mid/small premium from such a neglected market, the best opportunities are found with either an all-cap equity fund or specialized small-cap trusts like Rockwood Strategic (LSE: RKW).