TakeOver Trading.

[jklondon]

Just wanted some evaluation on an idea I have been toying with - I have implemented the idea on a very small scale without rules and so far its done very well (LSE,Lastminute - todays jump)

*****

M&A Trading Basket.

Ok the idea is pretty simple. I select portfolio of stocks that have a “high” change of receiving a takeover offer this year. I would suggest sticking to FTSE 100 & 250 stocks.

We pick a few key sectors e.g. Travel, Technology, Utilities and then select a few from each of these sectors pick say 2 stocks (TBC) to enter in as long positions.

This is pure fundamental analysis play where the underlying company details would require analysis in conjunction with sector trends (although I would use TA to back-up entry)

Stops / Exit strategy need to be considered i.e sell on initial jump or cover with a tight stop, personally I feel this will need to considered on the case by case basis.

*****
Workable investment strategy? Good expected return i.e my aim is to beat the index ? Strategy for setting Stops Limits? Anyone care to share the analysis workload i.e own a few sectors?

Ciao.

 

[LION63]

Not a bad idea, in the old days (1980s) the 'Arbitrageurs' in the USA used to pop up all over the place playing this game and some of them made a fortune. However, it can be very dangerous and you will find that in most cases the stops are absolutely useless. The reason I say this is quite simple; let us assume that company X fits the criteria and one is monitoring it, the rumours start that a buy out fund are looking at them and there are also a couple of trade buyers in the wings. Company X's shares were trading at 200p prior to these rumours and now they have nudged up to 225p, so far so good, because breakup value is about 350p. A few days later, a couple of hedge funds declare their small stakes of 2 - 5 % and say that they are for investment purposes the shares rise to 250p. A week or so goes by and there is speculation as to the likely bidders, take out price etc.; the weekend press carries the story that a bid would be forthcoming the following week. On Tuesday morning Company X announces to the market that it has received a bid approach at a level substantially higher than the current share price, as a result the shares soar to 320p. Unfortunately, three weeks later Company X releases a statement that all bid talks have been terminated and the shares plummet to 215p at the market open.

Based on the above scenario, would you answer the following questions?

1 At what stage did you buy into this situation?
2 When did you cut and run?
3 Why did you close the position at the time you did?

I am not attempting to belittle your endeavour or say it will not work, rather I am just trying to point out one or two things that you might have overlooked and they might be worth adding to your strategy. In the 1980s it was a very good and easy way of making money on both sides of the Atlantic but every now and then, one lost a few Pounds/Dollars on a trade and the reasons are mainly in the paragraph above.

 

[jklondon]

Not a bad idea, in the old days (1980s) the 'Arbitrageurs' in the USA used to pop up all over the place playing this game and some of them made a fortune. However, it can be very dangerous and you will find that in most cases the stops are absolutely useless. The reason I say this is quite simple; let us assume that company X fits the criteria and one is monitoring it, the rumours start that a buy out fund are looking at them and there are also a couple of trade buyers in the wings. Company X's shares were trading at 200p prior to these rumours and now they have nudged up to 225p, so far so good, because breakup value is about 350p. A few days later, a couple of hedge funds declare their small stakes of 2 - 5 % and say that they are for investment purposes the shares rise to 250p. A week or so goes by and there is speculation as to the likely bidders, take out price etc.; the weekend press carries the story that a bid would be forthcoming the following week. On Tuesday morning Company X announces to the market that it has received a bid approach at a level substantially higher than the current share price, as a result the shares soar to 320p. Unfortunately, three weeks later Company X releases a statement that all bid talks have been terminated and the shares plummet to 215p at the market open.

Based on the above scenario, would you answer the following questions?

1 At what stage did you buy into this situation?
2 When did you cut and run?
3 Why did you close the position at the time you did?

I am not attempting to belittle your endeavour or say it will not work, rather I am just trying to point out one or two things that you might have overlooked and they might be worth adding to your strategy. In the 1980s it was a very good and easy way of making money on both sides of the Atlantic but every now and then, one lost a few Pounds/Dollars on a trade and the reasons are mainly in the paragraph above.

LION - the points you have raised are perfectly valid and they are actually difficult to answer generically - i.e. it depends on the situation in question. However:

1. I would not have brought "into the situation" as it were i.e. I would either have a position prior to the rumors or no position at all.
2. I would have cut and run after the first jump OR taken a judgment call that there would be a chance of further "significant" jump and set a stop (yes these can be ineffective in these types of situations but you could always set a guaranteed one using IG - tightest allowed is 5% from the market price).
3. Again it would depend on the situation - so I guess I am initially proposing a more discretional style rather than mechanical.

Would be useful to get other opinions..

 

[LION63]

WHITBREAD

Vultures are circling leisure group Whitbread looking to launch surprise takeover moves. Private equity bidders including Apax, CVC and several US buyout firms have taken notice since last month's downbeat news on current trading and the company's sale of its Marriott hotels franchise. The hotel franchise had always been seen as a major stumbling block for any potential bidders. Although Apax appears not to want to lead the way, it is said to be keen to join a consortium to team up for the giant deal. Plans are at an early stage, but the vultures want to break up the group and sell off its various parts. However, they are keen to retain the Premier Travel Inn division, considered the jewel in Whitbread's crown. Duke Street Capital is among firms sounded out by several of the conspirants about taking on the David Lloyd Leisure clubs, with the prospect of adding them to its existing Esporta fitness business but adopting the David Lloyd brand. Brewer Greene King is thought to have been sounded out about taking on Whitbread's pubs business. However, it could face keen competition from other pub operators. The pubs and fitness clubs were at the weak links in Whitbread's poor April trading update, when CEO, Alan Parker, revealed that the businesses had suffered from a downturn in consumer spending. Whitbread restaurants, including Costa Coffee, could be run as a separate company or sold to rivals. The company's stake in the UK Pizza Hut franchise could probably be readily sold on. One venture capitalist in the group is reported to have said: 'Any discussion you have with them is met with the response: 'We aren't deciding anything until the new chairman comes in September.'' However, he also asserted, 'The sharks are circling. Most people involved can see something will happen before too long.' Shares in Whitbread have climbed steadily over the last few weeks, opening this morning at 850p and quickly rising to over 950p. Analysts estimate that breaking down the business into smaller pieces could push the value well over 1,000p per share. Much of that valuation is taken up by the successful Premier Travel Inns. However, to persuade investors to accept a venture capital-backed takeover, an attractive premium would need to be paid. Fund managers would probably not settle for much less than 1,350p a share, or £3.5bn. One analyst reckons the pubs (£1bn) David Lloyd Leisure (£700m) and the Inns (up to £2bn) would fetch more than that if sold separately.

 

[jklondon]

yep noted the WHITBREAD move today the questions is how much truth there is to this rumour, WHITBREAD certainly does have some attractive companies in its portfolio. If I were to play this one I would wait for a while - perhaps a week - watch for some profit taking and then potentially pounce. Having said this there could be a 1200 bid tomorrow!

 

[LION63]

"Having said this there could be a 1200 bid tomorrow!"

There might well be but what you do not know, you do not miss. Besides, being that there is a long weekend coming up either of two things could happen. Firstly, speculators could pile in ahead of a bid early next week, in which case the slow to act miss out. Secondly, people might decide to bank their already substantial profits, then the slower to react look very astute. I know which camp I would rather be in.

The numbers certainly look mouth watering enough to tempt the likes of myself especially as there would only be limited downside (depending on the instrument used). The shares at 925p trade on a PE of 14.4 and yield 3.2% which makes them cheaper than their peers. Whitbread is a leisure conglomerate and certainly a decent breakup candidate and any corporate action should be at least 20% higher than the current price.

Having said that, it is involved in areas of discretionary spending and if these rumours drag on and the economy continues to slowdown, the buyout funds may walk away or choose to hold fire. That would lead to heavy losses.

YOU PAY YOUR MONEY AND YOU TAKE YOUR CHANCES.

 

[ducati998]

jklondon,

Ok the idea is pretty simple. I select portfolio of stocks that have a “high” change of receiving a takeover offer this year. I would suggest sticking to FTSE 100 & 250 stocks.

Why limit yourself to these particular indices?

We pick a few key sectors e.g. Travel, Technology, Utilities and then select a few from each of these sectors pick say 2 stocks (TBC) to enter in as long positions.

Same question, why limit yourself to these industries?

This is pure fundamental analysis play where the underlying company details would require analysis in conjunction with sector trends (although I would use TA to back-up entry)

Obviously not a pure Fundamental play if you are using TA to second guess. TA in these situations is a complete waste of time. Your strategy is based on finding undervalued assets, that make them attractive to competitors, or new entrants, looking to buy into a sector, rather than invest in a pure start-up.

Stops / Exit strategy need to be considered i.e sell on initial jump or cover with a tight stop, personally I feel this will need to considered on the case by case basis.

Are you talking about a TA stoploss?
Waste of time. Will end up costing you money, via losses triggered by the stops.
You definitely need an exit strategy, but this is not the one.

Workable investment strategy? Good expected return i.e my aim is to beat the index ? Strategy for setting Stops Limits? Anyone care to share the analysis workload i.e own a few sectors?

Pure "RISK ARBITRAGE" as you are advocating, is not feasable for small accounts, ie less than $10M.
The reason is quite simple, for the 100% success rate you seek, where approval from all parties has been passed, the spreads are tiny, and if you take them, it needs to be done with size, to make the dollar return worthwhile, as the % return is low.
If, you are looking at the larger spreads, there is a reason for this, the deal may not be consumated, due to shareholder approval, regulators etc, and then as LION has stated, the price can drop very quickly, hence your reward to risk ratio is skewed negatively in many cases.
And lastly, to make a success of this strategy, you really need quite wide diversification to make it work at all, even this is not very satisfactory.

cheers d998