(2)-Effect of MnA on stock prices – Part II

This is part II of the article Effect of MnA on stock prices - Part I. Please start reading this article from the first part, before proceeding with this part.

Let's see some examples of how MnA deals have worked in the past, and how have the prices reacted:

Sometimes in 2003 or 2004, Nirma declared that it is taking over a small company called Core Healthcare. Core healthcare was in the business of making distilled water and glucose bottles. At the time when the news came in, core healthcare was supposed to be a "deceased" penny stock, and was trading at petty levels of around 2.5 to 3 Rs.. However, as soon as the rumor of takeover came in, the stock price of core healthcare started to jump. Within a matter of 3-4 days, it touched a high of 27 Rs. From 3 Rs. to 27 Rs. just in a matter of 3-4 days, means a 9 times increase or 800% increase. It even touched a year high of 30 Rs. The actual takeover happened quite late, but the news or better to say rumors, ensured that the markets reacted to it immediately and prices increased.

Goldman Sachs recently bought a stake in IFCI. Result - IFCI prices have been increasing continuously from the levels of 12 Rs. to 65 Rs and even more.

Recent buyout of Air Deccan by Kingfisher is another example of MnA. Deccan needed 200 Crore Rs. by July end to pay its loan that it had taken from the bank. Airline was running in loss and there was no other way to raise money. Ultimately, it had to give in to the pressure and sell itself. However, when the news of Air Deccan takeover was confirmed, the stock price did not show a significant change. The reason - market was already aware of the ailing situation of air Deccan, so it was almost certain that either this airline will collapse or will be bought out. Since there was no such possibility of a complete collapse given the credibility of captain Gopinath or the business operations of the airline, the only way left was a sell off. Hence, the stock price was already increased long time before the news of takeover was confirmed.

Internationally, the Tata -Corus takeover bidding game gave thumbs up to Corus investors, but many Tata investors felt that Tata has paid a heavy price for acquisition of Corus, hence the price went down for Tata Steel. While the bidding was going on, there were offers for Corus from other bidding companies as well. Whenever there use to be a higher offer from the competitor of Tata, the prices of Tata used to go up a bit, but not significantly. Finally, when the game ended, it was the share price of Tata that went down a bit.

As you can see from the above three examples, the market prices are subject to variability in behaviour. Sometimes the prices remain same, sometimes they do increase, and sometimes they decrease. However, one thing is certain and can be clearly observed - It's the market news that immediately changes the prices, irrespective of the time when the actual takeover happens. Once again it proves the Efficient Market Hypothesis, even in case of MnA. What may happen in the long run is uncertain, whether the MnA transaction will be beneficial with positive synergy or whether it will turn out to be a loss making gamble, it is not sure. The result comes out only in the long run and is uncertain. But for trading activities, it's the news that rules the market and the news immediately assimilates all the good and bad aspects of any MnA deal into the stock price, driving it up or down.

How can you and I benefit from the MnA news? Well, I really don't know! :- )
Let's talk about certain cases:

I have a stock that is being taken over, what should I do?
If you are lucky enough to have a stock in your portfolio about which there is a news or rumor for a takeover, then Congratulations! You are lucky to have one of the stocks out of the big universe of more than 10,000 stocks, which is being taken over. Hold on to it and wait for the prices to zoom. If the rumor turns out to be correct, then you can make good amount of money.

I have a stock that is taking over another company, what should I do?
If you have a stock that is taking over some other company, then the decision is yours. If you believe that the acquisition will help create positive synergy, hold onto it for long term and don't worry about the short term price fluctuations. If you are a trader in short term and believe that the news may impact it negatively, you may like to short it or sell off your holdings, to take advantage of price falls that may happen.

I don't have any stock for the companies about which there is news/rumors of MnA deal, should I trying trading by buying/selling any of the involved stocks?
If you don't have any of the stock, either of big company or small company, should you act on news? Well, ultimately it's your call! You have to decide whether to take a bet or not. Just keep in mind that markets are efficient, so jumping in on news is beneficial only to the fulltime traders trading for huge volumes within a span of few seconds, as I've explained in my article on Efficient Markets. If you are lucky with your bet, you'll win.

Please read the comments and post your views and queries in the comments section which helps in open discussion and avoid duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.