On July 18, I began the MANDA Fund which employed the simple strategy of buying stock in the acquiree on the day of the takeover announcement. The fund (click on Portfolios under Blog Resources) currently consists of four holdings. Although there have been other takeovers announced during this time, only those four made the cut...so far. But I do have some takeover candidates on the radar screen and if their prices drop enough for the returns to become attractive, I'll buy them on the condition that their deal is still on track.
If you're a home gamer--Cramer-speak for you folks who want to build your own M&A portfolio, here's some tips for you to (hopefully!) make better choices, and if you want to become a home-gamer, look at Recipe #13: Post-Takeover Tacos for instructions.
1. Buy stocks in cash-only deals. That isn't to say that you should shun deals involving cash plus a percentage of the acquiring company's stock completely, but be aware that if you buy in too early, you risk the possibility of a stock drop. Take Teva's (TEVA) bid for Barr (BRL) which was announced on July 18th. The offer is for $39.90 in cash plus 0.6272 shares of Teva priced at the close of the deal. You could buy Barr today for $67.74, but what if Teva's stock drops between now and merger close? One missed earnings estimate could send it plunging and you'd be waving bye-bye to your profits. The thing to do is to put both stocks on your radar screen and start monitoring the news and price movement about a month or so before the deal is expected to close. If the market looks bullish, Teva's price is advancing, and a decent return on Barr can be made, then by all means take a chance and buy some.
2. Don't buy stocks that are trading above the offering price. I know this sounds like a no-brainer, but look at Imclone (IMCL). Bristol-Myers (BMY) made an offer for the company on July 31st for $60/share. Since then, Imclone has been trading at a $4 premium as many company insiders including Carl Icahn, Imclone's maverick Chairman, feel that the company is substantially undervalued. But if the Microsoft/Yahoo! deal can fall through, so can this one. And who's to say that Bristol-Myers will raise the ante or that another suitor is waiting in the wings with a better offer? What with my crystal ball in the shop, this deal is just too risky for me.
3. Be careful of contingency deals. Those are the ones like the recent APP Pharmaceutical (APPX)/Fresenius SE (FMS) deal where FMS agreed to pay $23/share for APP plus as much as a $6 premium if certain financial milestones are met. The contingency amount will not be made until the second quarter of 2011, three years from now! I don't know about you, but I'm not interested in waiting around until then especially since there are no guarantees that the milestones will be met.
4. Read the news on both the acquirer and the acquiree. If there's any potential sticking points--hostile takeovers and regulatory concerns spring to mind--then it's best to hold off. Look how long it took the XM/Sirius merger to clear their anti-trust issues.
5. Check to see if the acquiree will be posting dividends before the deal closes. This will not only affect the current price of the stock but also your expected returns.
6. Do the math. Make sure that you'll be getting a decent rate of return. This is another no-brainer but one that some may overlook. If you estimate a 4% return on the deal but it's not expected to close for a year, this is not a great trade. You could probably do better putting your dough in a CD or a treasury.
That's about it for now. M&A activity has been understandably slow what with vacations, the Olympics, and the anemic market, but I expect it to pick up once the Wall Street honchos return to their corner offices.
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