The big news yesterday was the failed merger talks between Sun Microsystems and IBM. Sun Microsystems (JAVA) lost almost 23% of its value after the news hit the street. JAVA exploded on March 17 after rumors of a potential bid by IBM made Sun’s shares 79% more expensive.
The major sticking point was that Sun Micro believed IBM’s rumored offer of $9.40 to be too low. This news should be a lesson for all would be merger arbitrageurs to never initiate a position in an arb deal before the deal has been announced officially. Without a clear written intent from both companies, there is added uncertainty whether the deal would go through in order for the arbitrageur to close their position at a profit. That’s why arbitrageurs should expect higher risk adjusted returns if they waited for the official announcement of the deal before deciding whether the deal is worth participating in or not.
Another example of a badly timed merger arb play was the talks between Yahoo (YHOO) and Microsoft (MSFT) early in 2008. Back in February 2008, MSFT proposed to acquire YHOO for $31/share, which was a 62% premium to the closing price for the dot com company. After the announcement Yahoo jumped by 48% to 28.38. Check out my analysis of MSFT.
After three months of uncertainties however Microsoft decided that Yahoo (YHOO) valued itself too much and withdrew from negotiations, sending Yahoo shares down 15% for the day. Investors and institutions which bought Yahoo (YHOO) stock around $28.38 expecting to make an easy 9% gain were hugely disappointed.
As always, once the intent of BOTH companies is announced in favor of the deal and all the details have been accepted by both companies, should one consider initiating a merger arbitrage play. Otherwise, you would be speculating, which is not what Ben Graham and Warren Buffett preach as a winning investment philosophy.
Relevant Articles:
- Warren Buffett – The Ultimate Dividend Investor
- 40 Value Stocks that Graham Would Buy
- Arbitrage Opportunities – CEG and ROH
- Microsoft (MSFT) Dividend Stock Analysis
Popular Posts
-
The S&P Dividend Aristocrats index tracks companies in the S&P 500 that have increased dividends every year for at least 25 years ...
-
A dividend champion is a company which has a 25 year record of annual dividend increases. There are only 146 such companies in the US toda...
-
Today marks the 18th year of the Dividend Growth Investor blog. I started it on my kitchen table 18 years ago, as a way to share my throught...
-
A dividend king is a company that has managed to increase dividends to shareholders for at least 50 years in a row. There are only 52 such ...
-
The S&P Dividend Aristocrats index tracks companies in the S&P 500 that have increased dividends every year for at least 25 years ...
-
Anne Scheiber worked as an auditor for the IRS. She retired at the age of 51 in 1944, and focused on managing her portfolio for the next 51 ...
-
In his book, Stocks for the Long Run, Wharton Professor Jeremy Siegel proves that stocks have been the best performing investing for the pas...
-
Dividend Capture strategies are gaining popularity among speculators who don’t want to be too exposed to market risk, while also being able...
-
There has been a lot of buzz recently about the emergence of large trillion dollar companies. It looks like every investor out there wants t...
-
Back in May 2007 I had a net worth of $2,000 . I then promptly exchanged most of that networth for an old vehicle so that I can get to wor...
