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1, 2, 3, 4, I Declare a Bidding War

By Sean Williams - Apr 2, 2013 at 2:11PM

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Expectations that a bidding war will escalate send shares of this skin aesthetics company shooting higher by 16%.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Obagi Medical Products (NASDAQ: OMPI) -- a maker of skin aesthetics, as well as prescriptions and over-the-counter treatments for skin ailments -- jumped as much as 16% today after receiving a takeover offer from German drug maker Merz Pharma.

So what: The offer from Merz, which is expected to be funded entirely by cash on hand without the need for additional financing, is for $22 per share. What's interesting about the bid is it comes just two weeks after Obagi agreed to be purchased by Valeant Pharmaceuticals (BHC -1.41%) for $19.75 per share. Merz contends that it had been in talks to purchase Obagi long before Valeant's offer was presented, and that its all-cash deal reflects a clearly superior bid.

Now what: The expectation now is that Valeant will try to one-up Merz's offer, as is evidenced by the fact that Obagi is trading at nearly $1 more than Merz's $22 all-cash offer price. Trying to play the bidding war game can occasionally garner a trader short-term profits, but it ends in losses as many times as it results in gains. Obagi and Merz would make a smart fit since Merz is looking to expand abroad, and its $22 cash offer is almost certainly going to be voted the better offer by Obagi's board. Unless Valeant really wants to boost its offer, Obagi is Merz's to lose.

Craving more input? Start by adding Obagi Medical Products to your free and personalized watchlist so you can keep up on the latest news with the company.

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