M&A Question

M

mjt

I'm watching TVLY premarket on Tuesday; it's moving up, so I check the news before I decide to jump on the bandwagon. It's being acquired by another company that already owns a lot of the shares. The price is $23 cash; it's not a stock-for-stock deal. The stock goes all the way up to $25 and change. I guess some analyst came out and said it was worth more. (according to CNBC; I couldn't find any such comment)

I managed to make a little on this, but I hesitated because I thought there was no way it could trade over $23. Does anyone know why a stock being purchased for cash would trade over the purchase price? Is it because there is the possibility that the acquirer might be outbid? If so, why would traders automatically jump to the conclusion that someone would outbid them?
 
One of the most hard-lined rules that's been emblazoned in my little pea brain over the years is this: If you think that it can't go any higher (or lower), it can. If you're absolutely sure it can't, it will. I'm sorry I wasn't able to answer your question, but I've been burned so many times looking for reasons to justify my trades that I tend not to look to deep for answers.:) Hope you find what your looking for.
 
I recall reading where prices tend to go 10-20% higher than the initial bid. I'll bet all the risk arb folks diving in head first add something to the equation as well (buying the target, shorting the acquirer).
 
quite often after an initial bid, the company can become a target for other companies or white knights. In this case, it has to be expected that another company will come in and bid higher, or the firm will reject the offer stating it is not enough.

Arbs are not stupid. They will not pay higher than they think the company is worth or will be bid.

Once a final deal is on the table the stock price should trade at the discounted cash value of the takeover price from when payment should occur.
 
Originally posted by mjt
QUOTE]

Does it really matter why? If the chart, volume, etc. shows strength then trade strength and dump it at the earliest sign of weakness. Figuring out why things happen is important, but may not have any impact on the trade. Just keep your ear to the market and let it tell you what it wants. :)
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What usually happens when a parent tries to buy up the minority shares of a child outstanding, the stock will trade above the value of the bid. Most of the time, the parent has to pay more to make the child happy.

Past example. TD buying out TWD (cash) and CSFB buying out DIR (cash)

Current examples. LTD buying out IBI (stock) and XEL buying out NRG (stock)
 
It's quite a risk buying a stock that just gapped up 30%. Will be interesting to see what happens in the next week or two.
 
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