Merger & Acquisition (M&A) deals by Government (Olam & Citic Pacific)

Have you noticed that sometimes, few weeks prior to the announcement of M&A deals, the share price of the companies being acquired has often risen a lot without much newsflow on its prospect?

These are two of the deals that saw the share prices of the acquirees rallying strongly 1-2 months before the deal announcement. Coincidentally, both involved government (Singapore and China). They caught my attention because I was monitoring these stocks during that time as the price rallies before the announcements were really strong.

Olam International
Date of announcement of acquisition by Temasek: 13 March 2014
Offer price: $2.23
Impact: share price rose by 12% to $2.23 on 14 March 2014.

Share price performance 1.5 months before the deal: 37.5%. (from $1.45 at the beginning of February 2014 to $1.995 on 13 March 2014)

Citic Pacific Ltd (rebranded as Citic Ltd after the acquisition completed)
Date of announcement of reverse acquisition of its parent company: 26 March 2014
Offer price: $13.48
Impact: share price climbed as high as 31% over the previous day’s closing price.

Share price performance < 2 months before the deal: 27%. (from $9.61 in early February 2014 to $12.20 on 21 March 2014.

I believe there are many deals in which the acquirees’ share prices were flat before the announcement.

But for cases in which there were sharp rallies before the announcement, do they seem to you that some people with relevant knowledge have taken some advantage of the deal by buying the shares before the deal announcement?

When I was working in M&A deals last time, my deal involved just private companies. But my colleagues were working on deals involving public listed companies. It’s so easy to hear in the office what public listed companies were involved in their deals. My friend working in a big bank can hear easily what companies his colleagues sitting next to him were working on (mostly public listed companies). This may happen all the time. With this knowledge, one can easily buy the shares of the acquirees weeks before the announcement and profited 20-30%. This breaks the law as it’s considered insider trading and I’m certainly against it.

But when the sensitive information is so easily shared (intentionally or unintentionally) in the office, some people will tend to take advantage of it as they think they won’t get caught. Indeed, I do think for small time investors, authority will not catch them as they are making just few thousands or tens of thousands of insider trading profit, too small to catch authority’s attention.

Consider the two deals above. If you bought the shares 1-2 months  before the announcement, you could be sitting on 20-50% profit in less than 2 months. If you invested $100k, you got back 20-50k.

If you possess sensitive information like above, will you take advantage of it?

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