{"id":105473,"date":"2017-05-02T10:46:30","date_gmt":"2017-05-02T14:46:30","guid":{"rendered":"http:\/\/countingpips.com\/?p=105473"},"modified":"2017-05-02T06:47:15","modified_gmt":"2017-05-02T10:47:15","slug":"trump-performs-first-miracle-resurrects-dead","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/05\/trump-performs-first-miracle-resurrects-dead\/","title":{"rendered":"Trump Performs First Miracle \u2013 Resurrects Dead"},"content":{"rendered":"<div id=\"inves-20827219\" class=\"inves-below-title-posts inves-entity-placement\"><div id =\"posts_date_custom\"><div align=\"left\">May 2, 2017<\/div><hr style=\"border: none; border-bottom: 3px solid black;\">\r\n<\/div><\/div><p>By <a href=\"http:\/\/WallStreetDaily.com\/\"><u>WallStreetDaily.com<\/u><\/a> <img loading=\"lazy\" decoding=\"async\" class=\"attachment-home-th size-home-th wp-post-image\" style=\"display: block; margin-bottom: 5px; clear: both;\" src=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/05\/0417_deadmoney_feature.jpg\" sizes=\"auto, (max-width: 580px) 100vw, 580px\" srcset=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/05\/0417_deadmoney_feature.jpg 580w, https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/05\/0417_deadmoney_feature-300x155.jpg 300w\" alt=\"Trump Performs First Miracle \u2014 Resurrects Dead\" width=\"580\" height=\"300\" \/><\/p>\n<p><img decoding=\"async\" style=\"float: left; max-width: 85px;\" src=\"https:\/\/duip7hn7nchpo.cloudfront.net\/editor-circle-louis-basenese.jpg\" alt=\"Louis Basenese\" \/>It only took a day for the takeover explosion to spill into May, as two more deals were made public yesterday.<\/p>\n<p>Jive Software Inc. announced that it was being acquired by ESW Capital in a $462 million deal.<\/p>\n<p>The offer represents a 20% premium to where Jive Software was trading on Friday.<\/p>\n<p>Duke Realty Corp. (DRE) also formally agreed to be acquired as part of a $2.75 billion cash deal with Healthcare Trust of America Inc.<\/p>\n<p>Despite the fact that 68 deals have already been consummated in 2017, with 91 more pending\u2026<\/p><div id=\"inves-848235491\" class=\"inves-in-content inves-entity-placement\"><hr style=\"border: 1px solid #ddd;\">\r\n<div id=\"inpost_ads_header\">\r\n<p style=\"font-size:10px; float:left; color:#666;\">Free Reports:<\/p><\/div>\r\n<div id=\"inpost_ads\"> \r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/1ApBOV\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2018\/06\/graph_techs_PD.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t     <a href=\"https:\/\/goo.gl\/1ApBOV\"><b><u>Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p><br><br>\r\n<br>\r\n<br>\r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/f3RrHX\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2019\/01\/cot_pie_80.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t    <a href=\"https:\/\/goo.gl\/f3RrHX\"><b><u>Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p><br><br>\r\n<\/div>\r\n<hr style=\"border: 1px solid #ddd;\">\r\n<br><\/div>\n<p>Most of my readers remain oblivious to the explosive nature of takeover investing.<\/p>\n<p>If you\u2019re among the oblivious, please take notice \u2014 Trump is resurrecting previously dead money.<\/p>\n<p>The president\u2019s first 100 days in office have witnessed $729.14 billion in takeover deals hit the books.<\/p>\n<p>Without any barriers to entry, Main Street investors have every right to claim their slice of the pie.<\/p>\n<p>I asked my senior analyst, Martin Hutchinson, to conduct a precursory review of takeovers. That is, because I\u2019m projecting over $3 trillion in deal flow this year.<a name=\"video\"><\/a><\/p>\n<p>Hutch\u2019s full analysis is below.<\/p>\n<p>Ahead of the tape,<\/p>\n<p>Louis Basenese<br \/>\nChief Investment Strategist, <em>Wall Street Daily<\/em><\/p>\n<p><script src=\"https:\/\/fast.wistia.com\/assets\/external\/E-v1.js\" async><\/script><\/p>\n<div class=\"wistia_responsive_padding\" style=\"padding: 56.88% 0 0 0; position: relative;\">\n<div class=\"wistia_responsive_wrapper\" style=\"height: 100%; left: 0; position: absolute; top: 0; width: 100%;\">\n<div class=\"wistia_embed wistia_async_q2asglvmt4 videoFoam=true\" style=\"height: 100%; width: 100%;\"><\/div>\n<\/div>\n<\/div>\n<hr \/>\n<p><strong>Question: <\/strong>Martin, you\u2019ve agreed to help us compile the ultimate library of investment catalysts. Now, these are the most important investment catalysts out there, and they\u2019re baseline concepts that every investor should know about.<\/p>\n<p>Today we will be discussing takeovers. So let\u2019s jump in right now, Martin. I\u2019ll start at the very beginning. What\u2019s a takeover?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Well, a takeover is when either a company or a financial institution makes a bid for a company (in which you owns shares).<\/p>\n<p>Usually, it\u2019s great news for you as a shareholder. The bids can be either partial or complete. In other words, they can take over part or all of your company. They may use cash, they may use shares or they may use some bizarre mixture of the two.<\/p>\n<p><strong>Question:<\/strong> Correct me if I\u2019m wrong, but a bigger company would look to take over a smaller company to grow \u2014 just to bolt on a whole line of business. It would allow the larger company to grow in a nonorganic fashion, so to speak, by just basically taking over another company\u2019s operation. Is that why takeovers are mostly done?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> There are a lot of reasons why takeovers are done. But that\u2019s the good news, in the sense that the management actually has a coherent strategy. Bolting on an additional new business by taking over another company is by and large the most effective way of adding a new business to your existing lines \u2014 if you\u2019re not already in that business. Because growing new businesses from ground zero can take an awfully long time and cost a lot of money.<\/p>\n<p><strong>Question:<\/strong> But you\u2019re suggesting that there are other reasons why a company would do a takeover?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> There are indeed other reasons. I mean, one reason, for example, is you buy a competitor because it increases your market share. That\u2019s why all the takeovers were done in the banking sector back in the \u201990s, for example. They were expanding their geographical reach and expanding their market share of U.S. banking.<\/p>\n<p>As a result, we\u2019ve got several big banks that own about 10% of the total now. We had none at all in 1990. So those market share takeovers are another set that are interesting.<\/p>\n<p>Those are both positive takeovers. There\u2019s also a negative takeover in the sense that you\u2019ve got a declining business. With this, you\u2019d combine two operations in the same business and then you\u2019d cut out the costs and fire a lot of people.<\/p>\n<p>Retailing, for example, is having to do that quite a lot. I think you\u2019re going to see a lot of takeovers in the retailing space in the next couple of years, just with people combining their operations, selling stores, laying off employees, combining their computer systems, reducing their overhead.<\/p>\n<p>So hopefully at the end of it ending up with a more profitable operation. But quite often, they\u2019re just pouring more money into a declining space.<\/p>\n<p>Then, finally, the other reason for doing takeovers is what one can describe as sheer bloody empire building by management. Because there is, unfortunately, the simple arithmetic by which the larger the company you control, the larger the CEO compensation package can be in terms of cash, bonus, stock options and so on.<\/p>\n<p>So quite often, managements just build an empire for the sake of having built an empire. You can see that, for example, with Valeant, which was the drug company that bought a lot of other drug companies and then pushed up the prices of their drugs. And it did it all with leverage, and eventually the house of cards came tumbling down.<\/p>\n<p>So those last two examples \u2014 where it\u2019s cutting costs \u2014 are probably not beneficial for the shareholders being taken over. (Although going bust is obviously worse.) Then empire building by management, if you are a shareholder in the inquiring company, you\u2019re going to want to ask some very hard questions of management if it looks like they\u2019re doing that.<\/p>\n<p><strong>Question:<\/strong> Now, Martin, say you own shares of a takeover target \u2014 regardless of whether it\u2019s one of the two reasons to take over that are positive or one of the two that are more viewed as negative. If you\u2019re a shareholder of the takeover target, the offer will be at a premium.<\/p>\n<p>So you win either way if you\u2019re the shareholder of that company, correct?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Correct, provided you sell out.<\/p>\n<p>In other words, the market price adjusts immediately fairly close, usually, to the price of the takeover.<\/p>\n<p>Why? Because there\u2019s an arbitrage game whereby big professional traders can buy the shares and then tender them into the bid, assuming it\u2019s going to work. Or better still, hope a takeover war will break out in which two or more bidders come in and push the price way up.<\/p>\n<p>Those arbitragers will make out like gangbusters in that case, one will certainly make decent money, if they buy the shares immediately and then tender them into the bid.<\/p>\n<p>But for you as a small shareholder, you\u2019re actually better selling into the initial offer, because the share price will get you 80% or 90% of the way to the bid value immediately.<\/p>\n<p><strong>Question:<\/strong> If you don\u2019t mind, Martin, let me walk our listeners through exactly what you\u2019re talking about \u2014 in the hypothetical.<\/p>\n<p>Suppose you own ABC Corp. that\u2019s trading for, say, $6 a share\u2026 and another company just came in and offered $9 a share to buy the company. That price is signed off by the shareholders. That wouldn\u2019t trade at $9 upon the announcement. It might trade at $8.25 or so as the details are worked out and it passes all the regulatory hurdles.<\/p>\n<p>You\u2019re suggesting just go ahead and sell it at $8.25 right then and there and take your profit?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Go ahead, sell at $8.25. You\u2019d make $2.25 on $6 investment. Frankly, it\u2019s not worth waiting for the other 75 cents. In general, that\u2019s my advice.<\/p>\n<p>The reasons for that? The arbitrage game is for pros. And the bid can get derailed by antitrust or other regulatory things. If it\u2019s a multinational company, you\u2019ve got the EU, the Japanese and God knows who else involved. If the buyer has offered you shares that are worth $9, you may find that the buyer\u2019s share price goes down.<\/p>\n<p>I got caught that way once where the buyer\u2019s share offer was worth $59, and then I held and transitioned into the bid and ended up with shares worth $42, which is what they were worth the day before the bid.<\/p>\n<p>So in fact, I\u2019d have done much better not buying the thing at all. But certainly, I\u2019d have done better selling on day one and not waiting, because the buyer\u2019s shares went down.<\/p>\n<p>Then finally, if it takes months and months to close, that\u2019s dead money. You\u2019re waiting there for the thing to close. Maybe it\u2019ll be interesting once it\u2019s closed, but it\u2019s not going to do anything exciting while lawyers are busy pushing papers around and, indeed, incurring costs, which are very, very substantial in these.<\/p>\n<p>Eventually, the buyer\u2019s shareholders are going to pay those costs. That\u2019s no good for them, either.<\/p>\n<p><strong>Question:<\/strong> Martin, through my experience in trading, the chart always looks the same when a company has been taken over \u2014 or at least while a takeover is still pending.<\/p>\n<p>It usually has the normal volatility you would typically see in a stock, but then all of a sudden you\u2019ll see a day where the stock gaps open much higher. Then it starts to trade in a very tight range, but it\u2019s still trading shares. That\u2019s typically a company that has a takeover bid in play, and we\u2019re just waiting for it to formally close, correct?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> That\u2019s correct. So it\u2019s dead money while it\u2019s trading in that narrow range, which is not a bad thing. But if the buyer has offered you shares, those shares can go down in value. You are still at risk.<\/p>\n<p>The only reason to hold off after the bid\u2019s announced is if you think there\u2019s going to be a higher bid in the takeover battle. Because, obviously, sometimes, once the company\u2019s agreed to a takeover, it\u2019s been put in play. If it\u2019s anything of a unique asset or has a very attractive position within the industry, then there\u2019s quite a good chancethat other companies will come in and bid higher.<\/p>\n<p>Obviously, in your initial example, you own the shares at $6, somebody comes in and bids at $9. If you think that\u2019s all there\u2019s going to be, you\u2019re better off selling at $8.25, not waiting around. But the real gold is if somebody comes in and bids $11 and then a bidding war breaks out between the two and they end up selling for $14. At that point, you\u2019ve made real money.<\/p>\n<p>But those are less common than you might think. Because if you\u2019ve got that situation where the first price they think of is $9 and then it ends up at $14, the guy who pays $14 has almost certainly paid too much and ripped off his own shareholders. He\u2019s going to get some nasty questions in the next Annual General Meeting.<\/p>\n<p><strong>Question:<\/strong> Do you want to cover the tax advantage, Hutch, before I go with the takeaway?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> If you\u2019re a shareholder, there\u2019s a tax advantage in not selling immediately and holding and then tendering, if it\u2019s a share-for-share swap. So if the bidder offers you just shares and therefore becomes a share-for-share swap\u2026 100 of ABC becomes 50 of DEF, and then that\u2019s a nontaxable event. So there are no capital gains taxes to pay.<\/p>\n<p>Whereas, if you sell for the $8.25, or if the bid was for cash at $9, you\u2019ve got to pay capital gains taxes on your capital gain.<\/p>\n<p><strong>Question:<\/strong> Sounds like the key takeaway here is that if you can own companies, if you\u2019re playing the small-cap game, it\u2019s good to own companies that have a competitive business that might get taken over. Not only do you like the company itself, but it might be attractive to a bigger company. Because you win in the takeover game by holding the takeover target and you get that initial pop.<\/p>\n<p>Is that the key takeaway here? To own small-cap companies that are also good takeover targets here, Hutch?<\/p>\n<p><strong>Martin Hutchinson: <\/strong>I think that\u2019s right. You\u2019ve got particular sectors, like resources, for example. Big mining companies are always losing their resources because the mines get depleted. So they\u2019re always looking to buy small companies that haven\u2019t developed the resource but have got a bunch of mineral rights. Then those small companies become great takeover targets.<\/p>\n<p>So overall, mining companies or otherwise, it\u2019s a great thing to own a company that might get taken over, because you may get an additional pop.<\/p>\n<p>Before we wrap, I just want to clarify the note about tax advantages with certain takeovers. A takeover bid that\u2019s cash doesn\u2019t get a tax advantage. You have to pay capital gains tax when you either sell the shares for cash or tentatively tender it into a takeover bid of cash.<\/p>\n<p>But if the takeover bid is for shares, then that\u2019s what\u2019s called a share-for-share swap. In other words, you\u2019ve exchanged 100 shares of ABC for 50 shares of DEF. That\u2019s a nontaxable event. So you can then go through that without paying capital gains tax, which is an additional advantage.<\/p>\n<p><strong>Question:<\/strong> Great insights as always, Hutch. Thanks a lot.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Great to be with you.<\/p>\n<p><strong>Question:<\/strong> This is <em>Wall Street Daily<\/em>, signing off.<\/p>\n<p>Smart investing,<\/p>\n<p>Martin Hutchinson<br \/>\nSenior Analyst, <i>Wall Street Daily<\/i><\/p>\n<p>The post <a href=\"https:\/\/www.wallstreetdaily.com\/2017\/05\/02\/trump-performs-first-miracle-resurrects-dead\/\" rel=\"nofollow\">Trump Performs First Miracle \u2013 Resurrects Dead<\/a> appeared first on <a href=\"https:\/\/www.wallstreetdaily.com\" rel=\"nofollow\">Wall Street Daily<\/a>.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By WallStreetDaily.com It only took a day for the takeover explosion to spill into May, as two more deals were made public yesterday. Jive Software Inc. announced that it was being acquired by ESW Capital in a $462 million deal. The offer represents a 20% premium to where Jive Software was trading on Friday. Duke [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-105473","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105473","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=105473"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105473\/revisions"}],"predecessor-version":[{"id":105477,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105473\/revisions\/105477"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=105473"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=105473"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=105473"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}