Friendly takeovers as a Short term investment opportunity

This blog is a continuation of my previous blog, ‘How to make a fortune out of hostile takeovers?’

Feel free to visit, http://vigneshrajan87.blogspot.com/2012/10/how-to-make-fortune-out-of-hostile.html.

In this blog, I am going to contrast hostile takeovers and friendly takeovers in the context of considering both of these as a short-term investment opportunity. Softbank Inc, a Japanese corporation, acquired 70% of Sprint. Sprint stock surged and Softbank’s stock went down.

In my opinion, friendly takeovers are a good investment opportunity. If we need to gauge that against a friendly takeover, it is less promising than a hostile takeover. I am making this argument primarily based on the Sprint-Softbank deal. This may not be the case in some historically prominent deals like AT&T-T-Mobile deal (Though it did not materialize).

Fig 1 & Fig 3 clearly shows that investors are not comfortable with Softbank’s decision to acquire 70% of Sprint. There are two prospective reasons for this discomfort. First, each common stock holders may have lesser stake in the company (in terms of % of the company that they own). It is less probable for this to be the reason.  Second, Softbank is acquiring a less profitable company (Sprint has recording a loss in the past years). I think this is the main reason for the drop in Softbank’s stock.

We can see from Fig 3 that Softbank stock has lost up to 23% on a daily basis and 6672% on an annualized basis.  We can make a great deal of money short selling the stock for a day or two. We can see the effect of investment behavior on October 16 as the stock starts to surge. This is nothing but a correction effect. Investors have pushed the stock really down and market is trying to rectify it. In this case, timing is another important factor. The time taken for the correction effect could vary with the company. In the case of Softbank, it took five days to correct the overreaction. As an investor, I would make a Safer bet by short Softbank’s stock for a day once the announcement is made by Softbank.  

From Fig 2 & 4, Investors of Sprint are really happy as the stock has surged up to 14% on a daily basis and 4679% on an annualized basis. Trying to explain the economics of the surge of Sprint’s stock, there is a higher demand for Sprint’s stock and so higher has become the price. Why? Sprint’s investors trust Softbank and they think Softbank is going to transform Sprint into a profitable company. Rest is investors’ behavior. The stock surged for about 5 days and then correction effect has started. As an investor, I would buy Sprint’s stock once the announcement is made and I will sell in about 24 hours from the time of announcement.       

Fig 1: Stock price chart of Softbank (TYO: 9984)

FIG 2: STOCK PRICE CHART OF SPRINT NEXTEL CORP. (NYSE: S)

FIG 3: Table showing stock price change in Softbank

DATE	Softbank (IN $)	CHANGE IN THE STOCK PRICE (IN %) SINCE 10/11/12	CHANGE IN THE STOCK PRICE   (IN %)    SINCE 10/11/12 (ANNUALIZED)
11-OCT	$37.10
12-OCT	$30.31	-18%	-6672.71%
15-OCT	$28.50	-23%	-2819.87%
16-OCT	$31.90	-14%	-1277.69%

 FIG 4: Table showing stock price change in SPRINT

DATE	SPRINT   (IN $)	CHANGE IN THE STOCK PRICE  (IN %)  SINCE 10/10/12	CHANGE IN THE STOCK PRICE (IN %)   SINCE 10/10/12 - ANNUALIZED
10-OCT	$5.07
11-OCT	$5.72	13%	4679.49%
15-OCT	$5.67	12%	1079.88%