Companies announcing buyouts usually treat their investors to a nice payday.
For instance, when Sallie Mae (NYSE:SLM) recently announced that a group of suitors, including JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), were offering to buy the student-loan marketer for $25 billion, its shares immediately shot up 18% to $55 apiece. That's a little less than the prospective buyers' $60-per-share offer, given investors' concerns that regulators might not allow the deal to go through. Such hesitance is fairly typical -- most of the time, when a merger or acquisition deal goes public, investors who sell out right away can still snare an amount close to what the acquiring company is offering.
That's happened surprisingly often for folks over at Motley Fool Hidden Gems. No less than six of the small-cap growth companies singled out by Tom Gardner and Bill Mann have been bought out by larger rivals. On average, subscribers who bought those companies enjoyed 165% returns on their investments. Just this month, a seventh pick announced its imminent acquisition.
What am I gonna do?
For investors in these companies, the biggest question after a takeover announcement is, "What do I do now?" Sometimes, the acquirer offers its own shares in exchange for yours, and you must decide whether you want to hold its stock. Other times, the acquirer just offers cash for your shares. Then it's just a matter of when you sell.
Now or later
On one hand, you can simply wait for the merger to go through. Your broker should handle the transaction for you, putting cash or new shares directly into your account, which can spare you commissions and transaction fees. But if the deal falls through, so may your shares -- sometimes sharply. After AT&T (NYSE:T) recently backed out of its plans to acquire Telecom Italia (NYSE:TI), the smaller firm's shares fell 2%.
That said, selling immediately after a takeover bid has its pitfalls, too. Another company may make a higher bid, leading to a bidding war that could push the stock even higher. If you sell too soon, you may miss out on a lot of additional profit. For instance, back in 2005, Verizon (NYSE:VZ) and Qwest Communications (NYSE:Q) were locked in a pitched battle to buy MCI, each repeatedly raising the stakes in an effort to outbid its rival.
That also happened to Hidden Gems recommendation TransMontaigne. Both the commodities division of Morgan Stanley (NYSE:MS) -- which initially offered $8.50 per share -- and oil services firm SemGroup -- which countered with a $9.75-per-share offer -- went tit-for-tat in raising their bids. After several volleys back and forth, Morgan Stanley finally won, with an offer of $11.35 per share. Had you sold your shares immediately after the initial bid, you'd have missed an extra 33% profit.
First, do nothing
When a company I own announces a buyout, I first determine whether I have a better place for my money. If I'd like to invest in another stock, I'll probably book my gains and move on. If I don't have a better prospect, I'll wait awhile to see whether other suitors express interest. If no one else seems to want to step up to the plate, I'll finally sell my stake.
In any case, you'll often realize a good profit that you might otherwise have waited years to earn. Just look at the premiums Hidden Gems subscribers realized the day after the stocks they owned announced their buyouts:
|
Pre-Buyout Price |
Day After Price |
Change | |
|---|---|---|---|
|
Saucony |
$19.29 |
$22.65 |
17.42% |
|
CNS |
$28.56 |
$37.01 |
29.59% |
|
Alderwoods |
$17.90 |
$19.35 |
8.10% |
|
Transkaryotic Therapies |
$30.44 |
$36.05 |
18.43% |
|
Fairmont Hotels & Resorts |
$35.15 |
$41.50 |
18.07% |
|
TransMontaigne |
$7.74 |
$9.22 |
19.12% |
Of course, sometimes you'll wish that your companies hadn't been acquired. You may believe that you'd have earned even better returns had the firm stayed independent. Still, it's easier to accept a takeover bid when it gives your portfolio an immediate pop.
In seventh heaven
Sharp-eyed readers might have noticed that I haven't yet mentioned the seventh Hidden Gems recommendation to get snapped up by a willing buyer. You can discover the identity of this takeover candidate absolutely free with a 30-day guest pass. It'll give you full access to archived issues, previous recommendations, subscriber-only discussion boards, and more. Click here to start today.
Fool contributor Rich Duprey owns none of the stocks mentioned in this article. You can see his holdings here. Bank of America and JPMorgan Chase are Income Investor recommendations. The Motley Fool has a disclosure policy.
