Buy on rumor, sell on news with Yahoo and Microsoft deal?
moneyrelations :: Feb.11.2008
This weekend, a source familiar with Microsoft’s bid to takeover Yahoo announced that Yahoo will reject the $44.6 billion offer as too low.
I find the situation unfolding before me as a very valuable real life lesson to examine the well-known phrase “buy on rumor, sell on news”.
Previously, I had also used this news event to explore institutional ownership and how it affects the share price of Microsoft, Yahoo, and Google.
Originally, Microsoft’s bid was valued at $44.6 billion in a cash and stock deal which equated to $31 per share of Yahoo stock. Since the Street was dubious of the offer, the total package declined to $41.7 billion or $28.95 per share since Microsoft’s share price fell itself.
Once again, let’s look at what happened on February 1, the day the offer hit mainstream media.
Notice Yahoo’s high of $29.83 and the close of $28.83 for that day.
So does one consider this a buy on rumor that the deal would come to fruition or a sell on the news of the offer?
Let’s say that an investor bought shares of Yahoo at $29 targeting below Microsoft’s $31 per share bid even though in reality, the offer had then dropped to $28.95 per share. What happens if the deal is rejected? Will it still have this support or will it retreat to pre-takeover prices? According to reports, Yahoo wants at least $40 per share but this might be just gamesmanship on the company’s part. Or Yahoo might be serious about not wanting to be associated with Microsoft and try to find another partner as it also has been rumored.
Truth be told, keeping up with these rumors is tough; as individual investors we’re probably the last to know what is really going on.
Yahoo had been a takeover candidate before and its recent struggles prompted the latest offer sheet. Perhaps the new catch phrase for takeover acquisitions should be buy before rumor because you like the company and sell on news of rumor because you’re getting good money for your shares.
An investor might be leaving money on the table for full takeover value, but this is getting into speculation if the deal will even materialize.
Regardless, it will be interesting what transpires today for Yahoo and Microsoft.
In the news, Investing, Investing myths ::
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