Wednesday, April 30, 2008

Post Take-Over Announcement Plays-Part II

Yesterday we looked at buying stocks on take-over companies just after the news of the proposed acquistion was announced. We saw that if one had bought the stock at the closing price on the day of the announcement one could reap an average annual rate of return of around 8.7%. (The data was based on analysis of 57 companies during the period between March through July of last year.) At the end of the article, I wondered if one could do better by buying at the opening price. I crunched through the numbers this morning and here are the results:

You can see that you'll do better in general by buying at the open, but not because the opening price was lower than the closing price. Actually, the data showed that half the time the opening price was better and half the time the closing value was better. What made the difference were the three times when the opening price was significantly lower than the closing price, by more than 5%. There were three other times when the opening price exactly matched the closing price.

There was one instance where the opening price was significantly lower than the closing price. This happened on May 1st, 2007 when Newscorp announced their take-over bid for Dow Jones. Since take-overs of this type are unusual occurrences, I removed it to see what the numbers would like. The results are indicated by the Special Case in the above table. You can see that the standard deviation becomes a more reasonable value, although the total returns are reduced. But hey, an average annual return of 9.5% ain't too shabby.

So if you're looking to play this strategy, the moral of the story is to buy on the open. Another way to play it in shaky markets is to wait a week or two and see if the stock drops. Even take-over targets are subject to market direction and if you think the overall market is due for a breather, sit tight and wait for the price to drop.

But the mo' bettah play is to hunt for potential take-over targets. That's where you'll make the really big bucks. In an upcoming blog we'll look at the criteria inherent to take-over candidates and see if we can put together a portfolio of potential targets. Ta-ta!

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