With everyone's focus on the current financial crisis, new opportunities to make money have sprung up. Mergers and acquisitions have become an area for opportunity in investing because attention has shifted away from these situations.
What happens in a typical acquisition is the buyer (acquirer / bidder) makes an offer to buy a company (seller / target) for more than the seller's stock price currently is (premium). This provides an incentive for the target company to accept the offer. As long as the offer is in cash and the transaction is successfully executed, there are guaranteed gains for the target company's shareholders.
For example, the popular InBev acquisition of Anheuser-Busch presented a huge profit opportunity. InBev offered $ 70 in cash for each share of (BUD) stock. If you bought shares of Anheuser-Busch (BUD) on Oct. 29, 2008 (long after the acquisition announcement) at $ 59.83, you would be almost guaranteed a profit of 17%, or $ 10.17 a share. Now, with the stock at $ 68.50 as of Nov. 14, the merger presents only a 2.2% return. Annualized, that return is 13%, so it's still not a bad deal.
Opportunities like this exist more right now than in a more normal stock market because investors are fearful of stocks in general and are just protecting their money. This takes the focus away from situations in mergers as there is a "flight to safety". It is usually hard to find merger opportunities because the market is efficient enough that investors usually buy the stocks up to the offer price as soon as the announcement coming out. Now times are different, and you can take advantage of that.
Like Warren Buffett says, "Be fearful when others are greedy, and be greedy when others are fearful." Now is the time to be greedy when people are fearful.
Making money on acquisitions depends on a few main contingencies:
- The deal must be very likely to go through-research news and shareholder reactions to offers.
- A premium must be presented to the shareholders- the offer should be significantly higher than the current stock price.
- Cash offers are best and easy to value- stock deals can change value because of fluctuations in buyer's stock prices.
There is always a way to make money, crisis or not, and I will help you along the way!