If you were a shareholder in
3PAR (
PAR
), McAfee (
MFE
)
or
Cogent (Nasdaq: COGT)
this summer, you're likely quite pleased with the news that each of
those companies will be acquired a nice premium.
[Read:
Why Today's Intel Deal Makes Tech Even More
Appealing
]
But the good news comes with a catch: should you take profits? Or
should you hold on in hopes of further gains? The short answer: it
depends.
To figure out how to play the
buyout
game, we first need to separate any buyout-related price spike into
two camps.
The first camp involves stocks trading below the price a buyer has
offered. This indicates that the deal may not go through due to
regulatory anti-trust reasons, or simply because the buyout target
has made it clear that it has no intention of selling the company
in the near-term. If the stock is at a discount because of
anti-trust concerns, then try to assess how real those concerns
are. The government would likely never allow a merger between two
companies that control most of a market, such as
Time Warner (
TWX
)
and
Comcast (Nasdaq: CMCSA)
. But either of those firms would likely be able to acquire a
smaller regional player. And if the stock is at a discount to a
buyout offer because of a reticent seller, a sweeter offer may well
emerge. But you need to ask yourself if there is significantly more
upside to be had by sticking around. If you're sitting on a +50%
gain and hoping for another +5% or +10%, then the answer is
probably not.
But what about stocks that are trading even higher than the buyout
offer? Shares of Cogent now sell for $11, roughly 5% above the
buyout offer made this week by
3M (
MMM
)
. Investors are betting that a better offer will emerge now that
Cogent has expressed a willingness to be bought. By my math, 3M is
getting Cogent on the cheap, and Cogent might fetch a higher offer.
[Read
how David identified Cogent as a "Deep Value" stock
before 3M's buyout offer
.] But it's unclear if such an offer will emerge. If it
doesn't, then shares will soon fall back below the $10.50 offer
price. (Buyout prices often reflect a small discount to the offer
to account for the small chance that a deal falls through).
Playing it safe doesn't always pay off. In the case of 3PAR,
investors might have looked to book profits when
Dell (Nasdaq: DELL)
offered to buy the company for $18 a share and the stock
immediately zoomed to that price. A bidding war ultimately ensued,
pushing shares to $27. That scenario was highly unusual, but you
can make an argument for sticking around for at least a few days,
as there was little risk that shares would fall much below that $18
offer.
[Read:
This Company's 10-Day, +169% Run is Heating up an
Entire Sector
]
Rumors = profits
But what should you do when rumors push a stock up sharply? Shares
of
Saks (
SKS
)
are up nearly +25% on Tuesday to $8.25 on rumors of a potential
buyout. Trouble is, rumors are often put out there by traders
looking to "pump and dump" a stock. The Saks situation is a bit
tricky because the rumored price is $11 a share, sharply higher
than current levels. In this instance, the rumors have more merit
as they are being disseminated by a legitimate media organization
-- The U.K.'s Daily Mail. But if these rumors had emanated from
Wall Street's trading floors, then investors would be smart to sell
as quickly as possible, as these deals rarely ever actually
materialize.
Even as shares of Saks may have more upside if a deal materializes,
it would be foolish to commit fresh money. There's a reason why
shares are stuck well below that potential price: hundreds of
investors have done the math and concluded that the risk and reward
are in balance as to whether a deal happens. Unless you possess
inside information (which you shouldn't), then you have no greater
insight as to how this plays out compared to the rest of the crowd.
Action to Take -->
You can't ignore this M&A frenzy, as it is likely to continue
into the Fall. Cash-rich firms, especially in the area of
high-tech, need deals in order to get back into growth mode. Yet as
I've written before, it's unwise to try to buy stocks you think may
be good buyout candidates -- as the vast majority of buyout rumors
never come to fruition.
But it is wise to consider whether a stock is very undervalued in a
consolidating industry in the context of a broader investment
analysis. For example, I think that
CommVault (Nasdaq: CVLT)
,
Micron Technology (
MU
), Blue Coat Systems (Nasdaq: BCSI), Integrated Silicon (Nasdaq:
ISSI)
and
Tellabs (Nasdaq: TLAB)
are all reasonably-priced, have strong customer bases, and toil in
industries that are currently seeing a good amount of deal-making.
I'd buy those stocks on their fundamentals. Any buyout offer would
be icing on the cake.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.