Positioning For Merger And Acquisition In Any Market

It’s every investor’s dream to own a stock that rises rapidly, and there’s no more rap­id source of share price gains than when a company becomes a takeover target.

That dream can become a reality for many investors who own diversified stock portfolios, because attractive acquisition targets exist in every industry: media, chemicals, banks and more. But do you know the signs of a stock buyout?

If you’re lucky enough to own a stock that becomes a takeover target, it would be wise to have a plan already in place, so that the excite­ment of the moment does not interfere with your decision on whether to hold the stock for further gains or take the money and run.

Generally speaking, you should aim to sell your takeover target soon after the buyout of­fer emerges and the share price shoots upward.

That is because after the initial run-up, which takes just a day or two, there’s usually very little remaining upside to the share price, and it could easily take 6-18 months for the buy­out to be completed. If you continue to hold the stock, that means your capital is inactive, not providing you with growth potential during that entire waiting period.

Keep reading, as we’ll discuss some common scenarios that can affect your decision to hold vs. sell the takeover stock. But first, you’ve got to own the takeover stock!

How to Buy Stocks That Become Attrac­tive Takeover Targets

Imagine that you run a big company, and you’re looking to acquire a smaller company in order to boost your profits, your product assortment or your competitive advantage. Do you want a company with rising profits or a company with stagnant or falling profits?

Do you want a company with lots of debt or minimal debt? Do you want a company with an expensive stock, or an inexpensive stock?

By screening your stock selections for good balance sheet characteristics, you not only end up lowering risk in your stock portfolio and increasing your odds that investors will be attracted to your stocks – thus buying them and driving the share prices up – but you also increase the odds that you will own shares of a company that a bigger company might want to acquire!

Can debt-ridden or money-losing companies also be takeover targets? Of course they can. Your stock selection process can help your odds of success, but that doesn’t cancel out all other stocks’ odds of success.

As value investors, you play the odds in a manner that can help your portfolio succeed, whether your stocks become takeover targets or not.

Signs of a Stock Buyout: Is the Buyout Offer a Rumor or a Fact?

Are there signs of a stock buyout that you can predict? If a stock buyout is just a rumor, the stock price could climb, based upon the market’s expectation of a buyout.

It’s not unusual for rumors of a buyout offer to emerge a couple of days before the actual offer. But other times, the rumor fizzles along with the recent stock price gains.

If your stock runs up on a rumor, you could use a stop-loss order to protect your capital against a share price reversal and lock in your profit, or you could buy a put option as an in­surance policy.