On June 18, a strange thing happened to shares of Nokia Corporation (ADR) (NYSE:NOK): they rose as high as 12% from their opening price, accompanied by exceptionally high volume. Soon enough, rumors broke out that Huawei, a leading telecommunication giant, is considering a buyout of Nokia.
Twice in one month
This isn’t the first time in June that shares of an alleged target company are skyrocketing. During the pre-market session on June 6, shares of Sodastream International Ltd (NASDAQ:SODA) traded higher by 26% to a price over $87. The gains were in response to a report that PepsiCo, Inc. (NYSE:PEP) was looking to buy the at-home soda maker. This marked the second day in a row that these rumors were being spread, although Wednesday it was Coca Cola looking to buy Sodastream International Ltd (NASDAQ:SODA). Apparently, the rumor mill has been working exceptionally hard lately.
The underlying rational
Almost all buyout rumors have some underlying logic. Nokia Corporation (ADR) (NYSE:NOK), for instance, is sitting on a bag of approximately 14,000 different patents. It only makes sense for Huawei to buy the whole company and integrate its patents into Huawei’s new line of smartphones, rather than spend years in court fighting over them. At a cheap price-to-sales ratio of only 0.4x, it makes perfect sense to buy Nokia in its entirety. In Pepsi’s case, buying Sodastream International Ltd (NASDAQ:SODA) will add a new business segment to Pepsi–the make-at-home segment. This way, PepsiCo, Inc. (NYSE:PEP) can also benefit from customers who wish to prepare their own carbonated sugar water at home, rather then go out and buy themselves a bottle of soft drink. Contrary to Nokia Corporation (ADR) (NYSE:NOK), though, Sodastream International Ltd (NASDAQ:SODA) isn’t cheap. It’s trading at a price-to-sales of 3x, and a price-to-earnings of 31x.
From rumors to action
So, if an investor wishes to make money from an M&A activity, she must correctly time the M&A announcements and either purchase shares of the target company or sale short the shares of the acquiring company, right?
Well, not exactly. It turns out that this timing-task is on the verge of impossible. In addition, any attempt to purchase shares of the target company after the M&A rumors have become common knowledge has been proven to be a non-profitable strategy. As an illustration, anyone who bought Sodastream International Ltd (NASDAQ:SODA) at the peak price of $87 is now sitting on losses of 16% in less than a week. These type of fast and furious losses are difficult to recuperate. But there is another way, a profitable one, to play M&A rumors.