Daniel Long submits:When the rumor mill gets going about a potential buyout target, investors can generally become interested for one of two main reasons. The first is when the potential target has a strong foothold on technology, staff or demographics that the potential suitor perceives as essential to its future earnings growth or even survival. When this is the case, shares for the firm being bought will often have high multiples due to big R&D and other costs relative to current earnings. The buyer in this case will likely be overlooking the value concerns just to get their hands on what they so desperately need, and a bidding war can easily ensue. Because of this, however, the stock tends to rise quickly, well before any buyout is announced, and can often trade higher than what is ultimately paid.The other less exotic scenario occurs when a company has great long term fundamentals, but has been beaten down by short term forces. The buyer of these types of companies is generally looking for a solid investment to add to their balance sheet, something that will generate income right away. When this happens, the stock will likely see less action leading up to a deal, and a premium is often paid. This is because traders believe that the potential suitors will be more likely to low-ball any offers, and will have plenty of time to wait. The financial condition of the prey in this case is often the determining factor as to what price is paid. As different as the results can be for investors of these two scenarios when the sitting ducks are eventually acquired, a further divergence in results can occur if the companies are in fact not bought out. When something that was in dire need suddenly is not, chances are it will be left on the curb. Investors holding a value play, on the other hand, may benefit from the strong fundamentals that kept them from being overtaken in the first place.Complete Story »
