Companies are in constant need for growth. In the past, we have seen companies that are super successful underperform. This happens not because the companies’ are not solid enough but because investors don’t have any growth prospects in future. For instance, to a large extent, Apple has had an excellent year this year with record sales. However, investors have increased their concerns about the company’s reliance on just one product: iPhone. Another company worth noting is Yahoo which has had a difficult year with investors failing to see any intrinsic value in the company. Other companies that have been hammered because of this are: GoPro, Fitbit, and HP.
To unlock value of these companies, managers have various tools on their disposal. The most common tool is consolidation. This year alone, we have seen mega deals. In fact, in 2015, deals worth more than $5 trillion have been announced and executed. Some of the most prominent deals so far include: the merger between Dow Chemicals and DuPont, the merger between Sab Miller and AB Inbev, and the merger between Lafarge and Holcim. These deals have helped create large corporations which is a good thing for traders. Other deals that have been announced or speculated this year include: Apple and GoPro, CVS acquiring Omnicare, Williams acquiring Williams partners, and Valeant acquiring Salix Pharmaceuticals.
Traders and investors are constantly looking for these deals because in one way or another, money will be made or lost during these transactions. In fact, there are day traders whose major strategy is to trade during such news events.
In many cases, when a consolidation deal is announced, the acquirer usually faces a challenge with growth. In this, the company faces a major challenge to improve the value of the shareholders’ wealth. To solve the situation, the company goes after a company that has the products it feels it needs. For instance, Monstanto is one of the leading Agricultural chemicals company in the world. However, the company is concerned about its growth. As a result, the company looks at Syngenta and finds its viable for acquisition. This is particularly so because Syngenta is currently struggling too.
As a trader, when such news breaks, you can make money by buying the company being acquired and going short the company making the acquisition. In the case above, it would be ideal to buy Syngenta and go short Monsanto. This is simply because the acquirer will always pay a premium to the shareholders of the other company.
However, these deals don’t close all the time. This happens because of a number of reasons. One, the antitrust agency might turn down the company’s request to merge. This is particularly so if the agency believes that the consolidation will not be beneficial to the customers. A good example is when Comcast dropped its offer to Time Warner Cable because of antitrust issues. Another reason why this might be the case is when the shareholders of the company being acquired feels that the proposed deal will undercut them. A good example of this is when Angie’s list declined its acquisition by internet giant, IAC.
When this happens, it is usually a bit complicated to the day trader. In many cases, the inverse of what happened above happens. The company being acquired declines because investors believe it was a mistake. This is what happened when Angie’s list declined the offer. The company’s shares went down by 8% while that of IAC went up by 1.2%.
During these M&A issues, it is important for a trader to constantly follow the company and the major news websites for any information. For instance, following Bloomberg and New York Times can help you get the news as it breaks. Also, it is important to be on the lookout for fake M&A offers which are on the rise particularly in social media.