Takeovers provide a range of different trading opportunities. Many investors closely scrutinize the financials of the predator and the prey to decide the merits of the offer. Others, like Warren Buffet, play the arbitrage opportunities, trading today’s value against a known, or estimated future value. This is the classic investors play and the objective is to buy in now in anticipation of the 'takeover dance'. This dance starts with a takeover offer. Its followed by a ritualistic rejection of the offer as being undervalued or inadequate. The third step is an increase in the offer, followed by a possible coy refusal. Sometimes there is a third round of offers. It’s a predictable market axiom, and often a profitable dance.
However the dance rules have changed in recent years, with many more partners cutting in with the sole intention of breaking up the dance. Just ask BHP traders about the Potashdeal. This cozy relationship was stymied by political interests. The proposed Singapore Exchange takeover of the Australian Securities Exchange faces the same fate with deal spoilers coming from multiple directions including, somewhat astoundingly, a bid by the competition authority.
Just because a takeover offer makes economic and business sense does not make it immune from outside interference. Simple arbitrage, based on balance sheet analysis, is no longer sufficient to alleviate the increased risk of failure. The AMP takeover offer for AXA Asia follows a rejected takeover deal that saw the target in play, and then out of play, for many months.
The market brings together the collective wisdom – and ignorance – of multiple market players. Their behavior is reflected in price, which provides one of the most effective ways of assessing the risk of failure, or possible success, in modern takeover offers. In the SGX-ASX case, these analysis methods told traders within 24-hours that the proposal had a high probability of failure. The relevant assessment metric was the current share price and the projected takeover offer price. With an offer of $48.00 on the table from the SGX there was no reason why the ASX should trade at $44.00. If the offer had a high probability of success then the initial ASX trade price would be at least $48.00. The ASX slump from $44.00 to $37.00 was simple confirmation the deal was dead in the water. Any change in the chances of success will be shown quickly by a lift in ASX prices to the $48.00 offer level.
The same market metrics are applied to the AMP offer for AXA Asia. This is essentially a $6.43 offer. The announcement of the offer created an instant gap up in the AXA , lifting from $5.78 to an open at $6.20 on Monday. Apart from an initial spike of enthusiasm that pushed prices to $6.26, there was no resounding endorsement for the deal. The Monday close was $6.17 – below the $6.43 offer on the table. Price continues to languish at this level. It's not the same resounding rejection of the deal in indicated by the ASX price behavior, but nor is it unqualified support for the AMP takeover offer.
This suggest the market is anticipating more hurdles before this becomes a a done deal. The traditional two step takeover dance is signaled when the opening price is near to or above the on the table offer price. The dance continues with prices edging higher in anticipation of another higher offer.
When prices edge lower, below the takeover offer price, it suggests caution. The music sounds the same, but the dance steps are different.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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