The takeover chatter in the marketplace has reached a fever pitch as some unscrupulous traders prey on investors desperately searching for returns in an environment where merger activity is picking up as companies deploy the record cash on their books.
“It’s been an easy environment for some traders to get rumors started due to the acceleration of activity,” said Pete Najarian, founder of OptionsMonster.com and a ‘Fast Money’ trader. “It’s like chum in the water.”
At least six stocks were moving higher today because of takeover speculation, according to market intelligence site theflyonthewall.com. Companies with buyout offers on the table, such as Potash and ZymoGenetics , traded above their current offer prices on speculation another buyer would step in or that a higher bid was coming from the same buyer.
“When you have a 10-year rate of approximately 2.6 percent, you are starting to see speculators take a portion of their portfolio and play news or takeover stocks in the hope that one quick hit can make an incredible amount percentage wise and beat The Street,” said Joe Kinahan, chief derivatives strategist for TD Ameritrade’s Thinkorswim. “This type of strategy is fraught with problems over time and tough to be really good at.”
M&A activity is certainly picking up, with a $130 a share bid on the table by BHP Billiton for fertilizer maker Potash , and just last night, a $9.75 offer by Bristol-Myers for biotech ZymoGenetics. After all, companies have a record amount of cash on their books relative to assets and they have to do something with it. But with the actual deals, come the rumors.
In one of the more egregious examples Wednesday, the New York Times jumped on speculation they would be taken over by billionaire Carlos Slim. This has been one of the more common rumors to float since Slim increased his stake in the company to 14 percent last May. A Slim spokesman denied the speculation to Bloomberg News and the shares retreated after their morning pop.
“The speculation is out of control and this will end badly with all else held constant,” said Michael Block, chief equities strategist for Phoenix Partners Group.
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