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Strategies & Market Trends : Speculating in Takeover Targets -- Ignore unavailable to you. Want to Upgrade?

To: richardred who wrote (2354)	9/17/2010 10:50:05 AM
From: richardred	1 Recommendation Read Replies (1) \| Respond to of 7265

How corporate raiders institute hostile takeovers by B. J. Lexus * Writing Level StarWriting Level StarWriting Level StarWriting Level StarWriting Level Star A corporate raider is an investor that acquires a majority stake in some listed companies, then either resell them at a profit or break them up, that is, divest from unprofitable divisions or liquidate, if necessary. Corporate raiders are sometimes labeled as locusts by some critics. As an alternative to a full takeover of the company, the strategy of the investor is often to exercise pressure after the acquisition of a minority interest on the management. This can then lead to the resignation of the leadership or at least in part, to the implementation of the demanded strategy. If the individual parts of a company have a higher value than the whole, a smashing of a company can result in gains through the release of funds. And the sale of financial investments and real estate, but equipment and intellectual property rights (trademarks, patents) can also be realized. The raider can initiate a study of the target company, and try to understand if the company is in a structural crisis, if it is in an economic crisis or viable. The raider evaluates each type of asset of the company to be purchased such as an upgrade of production facilities, patenting, entrepreneurial skills of managers, real estate, trademarks, proximity to markets, availability of local entities to participate in the consolidation, known personalities to act as positive testimonials. The raider uses the stock exchange, and confidential information to mop up shares of a company at the lowest possible price, to ensure total control through a hostile takeover bid. The raider usually never accepts to be a minority shareholder, always preferring to have a free hand and tries to reach objectives quickly. Typical actions of a raider involves the fusion of two complementary companies with products that may share the same basic components and tend to sell in separate markets. They often buy a company with a famous name and excessive production costs and merge with a young company with low production costs. In this way the new enterprise benefits from the famous registered trademark and the chain of commercial distribution while maintaining low production costs. Furthermore, the purchase of a prestigious company, also involves the acquisition of patents, technology, competent technicians and scientists, including advanced manufacturing processes. To make the cost of a merger administrators, accounting officers, and even executives are often made redundant without regret. The raiders do not usually have any kind of sentimentality in closing branches, obsolete industrial plants or removing secondary brands at a loss. helium.com

To: richardred who wrote (2354)	9/18/2010 7:15:07 PM
From: richardred	Read Replies (1) \| Respond to of 7265

Rumor-trage Makes a Comeback By STEVEN SOSNICK \| MORE ARTICLES BY AUTHOR Options traders often try to target future takeovers by buying call options. Just remember, most acquisition rumors are just that. BE WARY OF TAKEOVER RUMORS in the options market. Just as some investors specialize in merger arbitrage, many options traders appear to specialize in "rumor-trage"—betting on future takeovers by buying call options on potential targets. Some of this speculation is logical. It is not unusual to see calls on stocks that are competitors to a recently acquired company purchased by those who believe that a specific takeover may presage broader industry consolidation. Much of the speculation, however, seems wishful, ill-conceived, and sometimes even potentially manipulative. Investors often ignore this side of the market because they are focusing only on their profit potential. This is the hallmark of rumor-trage: someone purchases a large block of calls, which is quickly recognized by the trading community as unusual trading volume. How? Most online brokers provide facilities to scan for stocks with sharply increasing options volumes or volatilities. Higher than average call volumes are also frequently reported by the financial media. The rationale for concluding that the trading volume is a sign of something unusual is sound, and it is based on experience: out-of-the-money calls, which typically can be bought for a relatively small amount of money, are used by those seeking maximum profits on takeovers. If a deal materializes, the inexpensive calls surge in value because companies are often taken over at premiums to recent share prices. Of course, the vast majority of these well-placed calls are not bought by corporate insiders trading on illegal information, but still options traders are hyper-vigilant about them. (My firm has been victimized by illegal insider trading, and it was very costly.) The transformation from speculative trade to full-blown takeover rumor comes as part of, or shortly after, the initial report of the unusual options trading volume. A headline may come across one of those trading volumes services in a form like "XYZ: Rumor: XYZ Corp moves up on takeover speculation." At that point, whether or not the rumor has any basis in fact, the options market treats the stock as "in play." Volatilities on at-the-money and out-of-the-money calls that expire in a month or two tend to rise, if they haven't already done so, as market makers try to protect themselves or profit from the speculative trading that follows. Given the somewhat predictable nature of this behavior and its response, many options traders believe some speculators purposely trigger this activity, effectively "pumping and dumping" the calls, which is one reason why the options market's track record of predicting takeovers is unusually bad. In my experience over the past decade, only a small percentage of takeover rumors have resulted in a deal within the next few weeks. Yet certain stocks seem to be perpetually in play: Harley Davidson, (HOG) Hershey (HSY) and General Mills (GIS) are current examples. The takeover rumors persist as long as the open interest exists. This is a variant of the greater fool theory. Call holders–which may include the very people who started the initial rumor—need a catalyst that allows them to sell for a profit. This is one reason why takeover rumors tend to exist until the contracts expire. Still, it is tempting for traders to participate in takeover rumors because of potential high returns. But rather than just buying a speculative call, I have seen some sophisticated speculators use "spreads" to try to profitably trade rumors. When a rumor takes hold and a stock pops higher, well capitalized and disciplined traders often sell front month, out-of-the-money calls whose implied volatility is the highest above historical norms. Since it can be dangerous to sell them outright in case the rumor proves true, they often hedge with the purchase of an outer month, at-money or in-the-money call and then trade stock to hedge any residual stock exposure. Rumor-trage is a mainstay of the modern marketplace. If you do it, remember this fact: most takeover rumors are just rumors. online.barrons.com