Shorting Stock-Based Takeover Bids Results In Profits
Chris Vermeulen | Aug 14, 2012 04:25AM ET
As detailed in previous articles, profits can be made from shorting stocks that are being taken over in stock-based acquisitions. That has taken place with Savannah Bancorp (NASDAQ:SCBT ).
Savannah Bancorp was up more than 60% yesterday due on news that it would be acquired by SCBT Financial Corp in Wednesday. Under the terms of the merger, shareholders of Savannah Bancorp will receive 0.2503 shares of SCBT Financial common stock for each share of Savannah Bancorp common stock. It soared on Wednesday, going from around $5.50 to about $9.50. SCBT Financial Corp. fell, as is the usual for takeover bids: the target rises and the buyer falls.
After closing Thursday at $9.50, it opened Friday at $9.32. It filled the gap to reach its high for the day of $9.46 around 10 am. It then fell to reach its low of $9.10 around 11 am. It closed on a downtick at $9.39. Volume was about five times the average.
Obviously, speculators took profits. But it is likely that many existing shareholders sold as the offer from SCBT Financial Corp. is stock-based. Many, many things can upset a stock-based deal. The price of the stock can fall. In addition, others would rather take the money now rather than wait.
In stock-based deals, traders should look to profit from going short on the target after it surges when the offer is first announced. Traders should also look to profit from going long on the buyer, after its falls when the bid is disclosed to the public. As the chart below reveals and market action has clearly demonstrated, profits can be made on stock-based takeover deals. Mean reversion trading results in gains from the buyer, in this case SCBT Financial Corp., eventually returning to established price level based on its merits as a publicly traded entity.
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