Friday, January 16, 2009 3 comments ++[ CLICK TO COMMENT ]++

Market signals not very accurate when it comes to M&A

UPDATE: Jae Jun astutely observes that PSD is supposed to pay out a dividend as well so you may want to hold until the ex-div date. It seems that the date of record is Jan 21st and Yahoo Finance says ex-dividend date is the 16th. So one should sell after the 16th (or to be absolutely safe, given how Yahoo Finance may not be accurate, you may want to hold until the 21st.)

Puget Energy annouced that it is planning to close the buyout by February 6th. The stock is now trading very close to the buyout price. I want to point out how the market pricing is almost useless when it comes to M&A. Consider the following chart of PSD share price over the last month (chart courtesy bigcharts.com):



The takeover price is $30 and the stock jumped to around $27.50 after the regulator approved the deal late last year. There was some uncertainty but the really interesting observation is the trading from yesterday, the 15th, right before the company press release. There was a big sell off, taking the stock down to $26.50 and some may have thought that the market knew that this deal was going to collapse. In fact, I see many newbies--I'm a newbie too so this isn't a diss of newbies--often arguing that the 'market must know something.' Well, here we have a case where it was selling off sharply yet the outcome was the complete opposite.

I'm not saying that one should ignore the market completely; rather, all I'm saying is that one shouldn't blindly assume that sharp price movements are caused by superior knowledge. This is especially true of M&A where information is tight (at least in well-regulated countries like USA and Canada) and no one really has much of an advantage.


(The question for me and others with a long position is whether to sell off now or wait for the deal to close. If we wait for the close, we will get exactly $30 and there is generally no brokerage commissions (depends on the case though.) But if we sell into the open-market right now, we will lose 1% to 2% (depending on the price you can get) and will pay commission. Of course, if you decide to sell right now, you can re-invest the proceeds right away if you see some opportunity. Read the update note at the top (you also get a dividend if you hold the shares until ex-div.))

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3 Response to Market signals not very accurate when it comes to M&A

January 16, 2009 at 3:51 PM

also if we hold we get the dividend.

January 16, 2009 at 4:10 PM

Oh... good point Jae... I didn't even think of the dividend... just checked and it seems the ex-div is Jan 16 but date of record is jan 21(according to Yahoo Finance). Technically, we can sell after today and still get the dividend but I would wait until the 21st to make sure...

January 17, 2009 at 6:38 PM

another interesting but very minor point.

"PSD: To ensure that shareholders continue to receive dividends at the current rate until closing of the merger, Puget Energy plans to pay a special pro rata dividend based on the number of days from the last regular dividend record date (Jan. 21, 2009) until the closing date of the merger, payable to shareholders of record as of a date prior to the closing to be established by the board of directors"

News link

Better than any treasury today :)

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