Until a few days ago, Huntsman's (NYSE:HUN) shares were staging a nice rally. Around the first of the year, the stock was at $17.39. By Feb. 1, the shares were fetching more than $23.
Was it because the company had a strong fourth quarter? No -- just rumors that the company would get bought out. This week, the rumors proved wrong, and the stock sold off by 8%.
Interestingly enough, Huntsman, which got its start in 1970, was built through many acquisitions. The company is now a chemicals manufacturer with more than $11 billion in annual sales.
Huntstman's board did evaluate several offers, but considered them too low -- something for investors to chew on. If sophisticated investors with strong insight into Huntsman's operations and prospects aren't willing to pay a big premium for this company, should average investors buy in?
True, there was apparently interest from private equity firms -- such as Apollo Management -- which typically seek lower valuations on deals. However, it appears that other suitors included strategic buyers such as Lyondell Chemical, which can offer a higher valuation (because such buyers can usually realize product and cost synergies).
If these companies' unwillingness to pay up for Huntsman is any indication, I'd guess that the company's future is not much stronger than its valuation. But from a broader perspective, the Huntsman scenario is a classic case study of the dangers of investing on rumors. Over the last few months, we have seen several rumors of buyouts that have broken down, such as with Affiliated Computer Services (NYSE:ACS). As mergers and acquisitions activity increases, we're likely to see more of this. As an investor, it's probably a good idea to just say no to these rumors.
Fool contributor Tom Taulli does not own shares mentioned in this article.
