Priceline (PCLN) has announced that it is buying Open Table (OPEN) for $2.6 Billion, or $103 per share; a 46% premium to yesterday’s closing price. If I employ the kind of 20/20 hindsight that usually makes dealers laugh, then the deal, or something similar, was inevitable. The market spent the entire months of March and April punishing stocks, particularly in the tech and biotech sectors, whose price had risen based on expectations of growth.
At some point some of them were bound to look appealing as takeover targets, particularly to companies who had themselves experienced phenomenal growth. Extrapolating from that that every other similar stock is also a target, however, is a step too far.
Priceline is all too aware of the growth potential of online booking companies. Stock in the company has risen around 1200% over the last 5 years.
Given that, Priceline’s record of growth by acquisition, and the apparent synergy between travel and restaurant booking services, this deal was, as I say, inevitable with hindsight. I have said many times that when something like this happens, we poor retail traders and investors are always too late to trade the news. If we are smart, though, we can trade the reaction.
Such a reaction always comes and is frequently overdone. Stock in Open Table gapped up in the seconds after the announcement before being halted, then resurfaced above the $103 deal price... not much opportunity there. At first glance the deal looks to be a decent one for Priceline and makes sense, but it isn’t a game changer and represents a hefty premium; PCLN barely drifted slightly lower in the pre-market this morning so again, not much opportunity in the short term.
I can assure you, having spent nearly 20 years in dealing rooms around the world, that the fact that the two major players in the deal give little or no opportunity for profit will not deter traders from trading the news. When you are paid the big bucks to trade, you feel obligated to do something, anything even, when big news breaks.
This, it seems to me, is the most likely explanation for this morning’s jump in both Yelp (YELP) and GrubHub (GRUB). Presumably the logic behind these two trading up around 10% in the pre-market this morning is that they too could be takeover targets; that is certainly what the talking heads are saying. What it looks like to me, though, is traders who missed out on the real deal doing something, so as not to feel left out.
Actually, this morning’s news makes it less, not more likely that either YELP or GRUB will be bought soon. Like Google (GOOG) currently is in tech devices and Facebook (FB) is in social media, Priceline is a travel/reservation related company’s best chance of being bought. Are we honestly expected to believe that they chose to bestow their blessing on Open Table without considering other options? If they did look at Yelp and GrubHub, then the fact that even a company with a penchant for flashy, somewhat risky buyouts passed on both surely makes any takeover in the near future a remote possibility.
It could, I guess, be traders taking the news as a signalthat a company well placed to know sees evidence of a lot more potential in the area. That may be the case, but even before today’s moves, forward P/Es of 113 for GRUB and 371 for Yelp would suggest that potential was pretty much priced in.
Whichever way I look at it, the reaction to news of the buyout in early trading today falls into two distinct categories. The reaction in the stock of the players themselves seems logical enough. Long term the best opportunity there is probably Priceline. PCLN has drifted a little lower, but on the surface the acquisition looks like it would be almost immediately accretive and a good fit.
The upward reaction in the related stocks YELP and GRUB, however, looks to be at least overdone, if not unwarranted. As excitement fades and short term profits are taken I would expect both to drift lower, or at least to underperform the broader market. Selling, either to cut a long position or establish a short one would make sense. Once again, the best opportunity available is based on an overreaction to the news, not the news itself.