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The Problem With Trading Buyouts
This year will be remembered by investors and consumers for a lot of reasons: a volatile market (good and bad), a politically heated election (a Republican landslide) and a disappointing economy (unemployment barely budged), among other things.
Unfortunately, 2010 won't be remembered as a year for mergers or acquisitions, as far fewer of them actually panned out than were predicted. (To learn more, see What Makes An M&A Deal Work?)
So what? If the fiascoes aren't remembered, they can't be learned from. And, given that many of these assumptions proved very costly for those betting on a buyout, it's definitely something traders should tuck away in their mental file. So, to help on that front, here are some of 2010's acquisitions that not only didn't happen, but cost investors a bit for rolling the dice.
IN PICTURES: Eight Ways To Survive A Market Downturn
Microsoft/Adobe
The most recent non-acquisition is also the highest-profile one - Microsoft's (Nasdaq:MSFT) non purchase of Adobe (Nasdaq:ADBE). ADBE shares soared from $25.73 to $28.69 when Microsoft chief Steve Ballmer was spotted at Adobe's headquarters. Ballmer set the record straight the next day, and Adobe shares fell back to close at $26.99, off by 6% after the 11% pop.
It's not an earth-shattering loss, but it's also not one that everyone can afford to take. Fortunately, ADBE shares have since made their way back to post-buyout-rumor levels. There's still no buyout though, despite enough praise for the idea from the investor community.
Citrix and ... Nobody at These Prices
The much-discussed buyout of virtualization tech firm Citrix Systems (Nasdaq:CTXS), despite the fact that it still hasn't happened yet, has actually been a good thing for investors. On the other hand, given that the company hasn't been bought yet, one has to wonder how long CTXS shares will be able to justify a price in the $60s versus a price in the $40s early in the year, and a trailing P/E in the mid-40s. In fact, some buyers paid as much as $71 in early October on lingering buyout hopes.
On the other hand, the 2011 projected P/E of 28.7 is a little more palatable - if it can be achieved.
The buzz of potential buyouts by Oracle (Nasdaq:ORCL) and Cisco Systems (Nasdaq:CSCO) - just to name a couple - may have been what's staved off any other deals. The 50%+ price runup this year so far has actually priced Citrix beyond what most companies may feel comfortable paying. Ergo, only a nasty pullback from here will fan the M&A flames again. Talk about bittersweet - hopefully investors were actually willing to own Citrix for the long haul, because now they do.
California
And finally, the most frustrating non-buyout of all is likely to be California Pizza Kitchen (Nasdaq:CPKI), not just because of the loss involved, but because this snake bit investors twice.
Rumors of an acquisition first emerged on April 9 after the Wall Street Journal reported that the company was looking for a suitor. CPKI shares jumped from $18.18 to $20.74 that day and moved as high as $24.00 during interday trading, but they haven't been back anywhere near there since then.
The same rumor popped up again in late July, pushing the stock to high of $20.00. However, there was the same result: no deal was made, and the stock resumed its slide the very next day. Shares are currently near $17.00.
Lesson Learned
To be fair, several deals have been done this year that have proven very fruitful. The bulk of the fruit, however, was enjoyed by the folks who were in a position before the M&A chatter surfaced. Most investors who were chasing the news in hopes of a buyout price bump from their entry level were behind the eight ball at every turn.
Lesson learned? You have to spot buyout candidates before the rest of the market figures it out, rather than share the same news everyone else is reading. It would be easier and more profitable to buy great stocks, and just be patient.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
So what? If the fiascoes aren't remembered, they can't be learned from. And, given that many of these assumptions proved very costly for those betting on a buyout, it's definitely something traders should tuck away in their mental file. So, to help on that front, here are some of 2010's acquisitions that not only didn't happen, but cost investors a bit for rolling the dice.
IN PICTURES: Eight Ways To Survive A Market Downturn
Microsoft/Adobe
The most recent non-acquisition is also the highest-profile one - Microsoft's (Nasdaq:MSFT) non purchase of Adobe (Nasdaq:ADBE). ADBE shares soared from $25.73 to $28.69 when Microsoft chief Steve Ballmer was spotted at Adobe's headquarters. Ballmer set the record straight the next day, and Adobe shares fell back to close at $26.99, off by 6% after the 11% pop.
It's not an earth-shattering loss, but it's also not one that everyone can afford to take. Fortunately, ADBE shares have since made their way back to post-buyout-rumor levels. There's still no buyout though, despite enough praise for the idea from the investor community.
Citrix and ... Nobody at These Prices
The much-discussed buyout of virtualization tech firm Citrix Systems (Nasdaq:CTXS), despite the fact that it still hasn't happened yet, has actually been a good thing for investors. On the other hand, given that the company hasn't been bought yet, one has to wonder how long CTXS shares will be able to justify a price in the $60s versus a price in the $40s early in the year, and a trailing P/E in the mid-40s. In fact, some buyers paid as much as $71 in early October on lingering buyout hopes.
On the other hand, the 2011 projected P/E of 28.7 is a little more palatable - if it can be achieved.
And finally, the most frustrating non-buyout of all is likely to be California Pizza Kitchen (Nasdaq:CPKI), not just because of the loss involved, but because this snake bit investors twice.
Rumors of an acquisition first emerged on April 9 after the Wall Street Journal reported that the company was looking for a suitor. CPKI shares jumped from $18.18 to $20.74 that day and moved as high as $24.00 during interday trading, but they haven't been back anywhere near there since then.
The same rumor popped up again in late July, pushing the stock to high of $20.00. However, there was the same result: no deal was made, and the stock resumed its slide the very next day. Shares are currently near $17.00.
Lesson Learned
To be fair, several deals have been done this year that have proven very fruitful. The bulk of the fruit, however, was enjoyed by the folks who were in a position before the M&A chatter surfaced. Most investors who were chasing the news in hopes of a buyout price bump from their entry level were behind the eight ball at every turn.
Lesson learned? You have to spot buyout candidates before the rest of the market figures it out, rather than share the same news everyone else is reading. It would be easier and more profitable to buy great stocks, and just be patient.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
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