Why did the Avast share price explode this week?

Business development to success and FTSE 100 250 350 growth concept.

The Avast (LSE:AVST) share price exploded this week, surging by over 16% within the first few minutes of trading on Thursday morning. The stock continued to climb throughout the day, reaching a final stock price of around 596p. This pushed its one-week performance to nearly +20%!

While its 12-month performance remains lacklustre at around 5%, despite this recent momentum, the question remains – what caused this sudden surge in growth? Let’s take a closer look and whether it’s too late to buy the shares for my portfolio.

The exploding Avast share price

In my experience, seeing double-digit growth in a single day is either attributable to awe-inspiring results or a potential takeover offer. In the case of the Avast share price, it’s the latter. Rumours had been circulating that Avast was in talks with NortonLifeLock regarding a potential merger. And on Thursday morning, management released a statement confirming this, stating it’s in “advanced discussions” with its competitor.

Knowing this, it’s pretty understandable why the Avast share price surged.  If a deal was to go through, the company said it would be completed using cash and shares. But there was no official indication regarding the acquisition price. According to The Wall Street Journal, the deal could be worth up to $8bn (£5.79bn). And analysts at Berenberg are even more bullish, stating the firm should be sold for no less than $10bn (£7.23bn).

Comparing the latter figure to today’s market capitalisation of £6.15bn indicates the Avast share price could continue to climb by another 17%. Needless to say, that sounds promising.

The risks that lie ahead

While the prospect of further growth is alluring, it’s important to remember that these price estimates are ultimately speculation. The actual acquisition price remains unknown, even to Avast, which is still in negotiations. What’s more, it’s entirely possible that this deal might fail to go through at all. In the words of the management team: “There can be no certainty as to whether any transaction will take place”. And the firm has rejected takeover offers from competitors before.

Given that the Avast share price is currently being heavily inflated based on the prospect of a buyout, should a solid offer fail to materialise, it could very quickly come crashing down.

The Avast share price has its risks

The bottom line

Avast’s freemium cybersecurity solutions have proven to be immensely popular with consumers. To date, its software platform has attracted over 435 million users, and I wouldn’t be surprised if this alone is why NortonLifeLock wants to buy it. After all, it could very easily use this network to upsell its existing products.

But at this stage, there remain many unknowns. As I see it, market speculation seems to be the primary driving force behind the Avast share price at the moment. And that isn’t something that tempts me to buy the shares. Therefore, I’m keeping this business on my watchlist for now.

The post Why did the Avast share price explode this week? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Avast Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.