Monday, November 7, 2016

Investing In Mergers?

Every once in awhile a company offers to buyout another company.  You'll either get an all cash, cash and stock, or stock offer as consideration for the transaction. Generally investors like all cash offers since the acquiring company can see it's stock price fall making the ensuing transaction less favorable if it involves stock.

Most of the time when a company announces a buyout offer the target company sees its share price rocket higher to right around, and in some cases above, the offer price. After the ensuing euphoria a lot of times the shares will drift away from the buyout price as investors and funds unload shares to realize a profit, or maybe they feel the deal will fall through and want to get what they can before prices drop again.

For example assume Company A offers to acquire
Company B for $50/share.  If the stock of company B is trading at $40 before the announcement then shares will likely start trading at $49-$49.99/share that day.  It happens quite often during the following months that shares will trade back to $47-$48/share leaving you with the potential to take in $2-3/share in profit, or a 4.1%-6.3% profit by the time the merger closes.

The risk is the deal falls through for various reasons and the shares you bought at $47-$48 end up trading back to down $40 or lower leaving you with an unsatisfying loss.

The key is to keep an eye on these mergers and evaluate which ones offer the least regulatory & business hurdles.  That I might save for another article, but there are a few of these mergers where an investor can capitalize on this price spread right now.  Here are a few examples, and note I'm not recommending any person go out and buy these shares since there is risk each deal can fall through. But they can serve as a starting point for you to begin researching.

WhiteWave Foods(WWAV) - Danone has agreed to buy WhiteWave Foods(WWAV) in all cash deal for $56.25.  Currently WWAV trades just under $54 netting you a potential 4.1% gain.

Valspar(VAL) - Sherwin-Williams(SHW) has offered to buy Valspar in an all cash deal for $113/share. Though rumors regarding asset sales required by the FTC has the offer valued around $105/share. Currently VAL trades at $100 for what looks like 5% upside at worst if the deal goes through with numbers being tossed around right now.

LinkedIn(LNKD) - Microsoft(MSFT) has offered to acquire LinkedIn(LNKD) in an all cash deal for $196/share. Currently the stock trades at $190/share for a potential 3.1% gain.

St. Jude Medical(STJ) - Abbot Laboratories(ABT) has offered to buy St. Jude Medical(STJ) for $46.75 in cash and 0.8708 shares of ABT that currently trade for $39.80. That gives us total consideration of $81.40 as of today. Shares of STJ trade for $78.70 giving us a potential gain of $2.70 or 3.4%.

Now all of these deals have the risk of not being done or blocked by regulators so keep that in mind.

Disclosure - Long WWAV

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