Another way to make excellent short term profits is “Single Stock M&A Play” ‘” and these opportunities are coming up in 2009, especially in the mining, energy and financial sectors.
To implement this strategy, I used the following factors to determine if there is a trading opportunity available:
- Announcement of a takeover activity
- At least one keen counter-bidder
- Willingness to pay up and pay more premium (desperate bidders), this can mean a desperate competitor unable to sustain a new entrant into the market, control of a key infrastructure or market share
The most successful examples I have done were Maytag (3 takeover parties were involved) ; London Stock Exchange (several bidders), the success was also extended to both Nasdaq Markets and NYSE-Euronext ‘” at the time, it was a global consolidation of financial exchanges, and that had earned very nice returns for 2 months.
By applying the same strategy, I then moved the funds to European utilities sectors and also achieved the same results.
Then I also repeated the same strategy on European telecommunications companies ‘” and it had also returned with good results.
In 2008, I had repeated the same strategy on a number of junior mining companies in Australia ‘” the timing was a perfect timing when a large number mining companies were going through placements and have invited Chinese, Japanese and Korean investors to take up significant interests.
What about now?
By applying contrarian investment theory, you can apply the same strategy in today’s market.
In today’s markets ‘” the M&A strategy can be applied to both the bidder and the target company.
Some of my M&A CFD trader friends have used is called “Protecting Premium”, basically using CFDs to short the target stocks in case the M&A deal falls over, which has happened quite frequently this year due to lack of counter-bidders.
However, in some cases, this would not work ‘” and you have to review the details of the takeover plan. In the case of Rio Tinto, for example, the company had dropped the Chinaco deal and decided to merge its iron ore assets with BHP wit a massive rights issue for capital raising ‘” the plan actually boosted the share price considerably.
Also, for single stock M&A strategy, in the current market, you can also short the bidder’s stock when they announce the takeover activity, or if the company has decided to make a large scale capital raising to complete an acquisition.