The surest way to profit from takeover speculation in the stock market is to bet it’s wrong.
Electronic news services, brokerages and newspapers reported at least 1,875 rumours about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg. A total of 104, or 14.5 per cent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 per cent, betting on declines yielded average profits of 1.2 per cent in the next month, an annualised gain of 14 per cent.
Opportunities to employ the strategy are increasing as mergers recover from the worst recession in more than 70 years, data compiled by Bloomberg show. After bottoming in 2008, the number of unconfirmed stories about possible mergers surged 71 per cent to 611 last year from 2009, data compiled by Bloomberg from more than 50 news providers and brokerages show.
“Sell into the strength,” said John Orrico, who focuses on mergers & acquisitions at New York-based Water Island Capital LLC, which oversees about $2.2 billion. “We see it as an opportunity to sell if we think the rumour is false or ridiculous, which in most cases they are.”
Short selling to speculate on declines on supposed takeover targets produced more than twice the average return generated by US stocks, data compiled by Bloomberg show. At the same time, companies in the Russell 3000 Index had the same chance of being acquired in any 12-month period since 2005 as those that were the subject of merger stories, the data show.
Stocks tracked by Bloomberg fell 0.2 per cent, 0.6 per cent and 1.2 per cent on average in the day, week and month following a rumour report, Bloomberg data show. The S&P 500 rose 0.03 per cent, 0.2 per cent and 0.5 per cent on average during the same periods.
The 14 per cent annualised profit from short selling compares with a 6.2 per cent yearly return since 1900 before dividends for US stocks, inflation-adjusted data from the London Business School and Credit Suisse Group AG in Zurich show. Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.
Akamai Technologies Inc has been the subject of more buyout rumours than any other US company since the start of 2005, data compiled by Bloomberg show. The provider of computing services that speed delivery of Internet content remains independent after being named 21 times.
‘Playing with fire’
The most recent instance was December 16. After rallying 1.7 per cent when the speculation was reported, shares of the Cambridge, Massachusetts-based company lost 3.8 per cent in the next week as the S&P 500 gained 1.1 per cent.
A telephone call and e-mail to Jeff Young and Jennifer Donovan, spokesmen for Akamai, weren’t returned.
“Don’t chase rumour stocks,” said Michael Vogelzang, Boston-based chief investment officer at Boston Advisors LLC. “You never know where you are in the chain, whether you’re the first to hear it or the last. You’re just playing with fire because you know if it doesn’t work out, it’s going to come down.”
Netlist Inc, a maker of computer-memory systems, rose 1.9 per cent when rumours were reported on December 28, 2009, that Microsoft Corp might buy the Irvine, California-based company. The shares declined 2.2 per cent a day later, 9.4 per cent a week later and 31 per cent in 30 days. Netlist makes memory modules that go into servers, so Microsoft is not the type of company that would want to go and buy them,” said Richard Kugele, an equity analyst at Needham & Co in Boston. “There’s a difference between hardware companies and software companies, and it’s just completely outside the bounds of what they do.”
Jill Bertotti, a spokeswoman for Netlist at Allen & Caron Inc, declined to comment.
By the time market chatter is publicly reported, it’s been passed around trading desks via instant messages and e-mail and is usually old news, according to Todd Salamone, an equity analyst at Schaeffer’s Investment Research in Cincinnati. Profiting from the reports is impossible because shares have already rallied, he said.
“I don’t know where that stuff comes from,” he said. “The rumours tend to create a pop, and eventually the fundamentals and technicals take over, especially in those situations that prove to be only rumours. It’s a very short-term event.”
Rumour origination
“The question that remains unanswered is where does the takeover story originate,” said Michael McCarty, managing partner at Differential Research LLC in Austin, Texas. “It’s most likely from someone who’s interested in selling.”
Deliberately spreading false rumours may violate securities laws, especially if the intent is to sway prices, said James Cox, a professor at Duke University School of Law in Durham, North Carolina. Proving a market-manipulation case is difficult, according to Peter Henning, a law professor at Wayne State University in Detroit and a former federal prosecutor.
