On March 16, news came out that Peet's Coffee might be acquired by Starbucks. Since then PEET(Peet's coffee stock) went up almost 15% and I was really not surprised but wanted to understand if buying such stocks has any risk associated with it. Here is what I found while researching..
An acquiring company always pays a premium purchase price which is higher than target's stock price. Based on this, target's stock jumps on the potential merger news but not up to the purchase price. So,
An acquiring company always pays a premium purchase price which is higher than target's stock price. Based on this, target's stock jumps on the potential merger news but not up to the purchase price. So,
- when do the experienced merger arbitrageurs buy such stocks? - when the deal is announced. They usually hold the stock until merger is completed and then sell. Also if acquiring company uses it's own stocks to purchase then you should sell some/more of the stocks of acquiring company if you own them.
- What is the biggest risk? - if deal falls through. In general about 90% of announced deals are completed.
- Is there an opportunity? - as you can see from the table below, there is always an opportunity..
- Here is one tool designed for Merger Arbitrage stocks, it updates automatically during regular hours. http://www.sinletter.com/merger-arbitrage/
- final thought, buy PEET or wait for announcement - too late now, wait for announcement. What do you think?
