In investing, it is important to start with the notion that someone out there knows more information that you do, whether they have run more numbers or have some sort of information that you have not come across. Scouring the internet or news stories to find something that appears as if no one has considered, and acting upon such news is not what I would consider a sound investing strategy: someone will always know more.
If you followed such strategy, you might have bought Twitter upon the news that Salesforce was interested in possibly acquiring the company. Investors got behind speculating upon a Tweet by one of Salesforce’s executives praising the power of Twitter. If one was looking some sort of micro piece of information to invest in, a Tweet may have been just that under-the-radar news that would appeal to such a strategy. News speculators would have smiled as more and more companies were speculated to be lining up to buy Twitter, and its stock continued to rise from around $18/share pre-speculation to over $24/ share. Reports of Google hiring an independent consulting firm to evaluate a buyout would have had new Twitter shareholders giddy for a payday. Well as it turns out, the old investing proverb “buy on the rumor, sell on the news,” would have worked against you in this case.
Rewind to mid-June when Microsoft purchased LinkedIn, shares of LinkedIn were actually down on the day prior to Microsoft’s buyout-- no one knew LinkedIn was about to be purchased. Yet on that same day, news speculators drove up Twitter’s stock 7% on no other news then that a similar technology company was bought out at a premium. If LinkedIn was precedent for social media purchases where the deal was kept behind doors, investors shouldn’t think they could gain an edging by riding headlines. A massive company like Google hiring a consulting firm is just Google doing its due-diligence as a business, not an indicator of a potential opportunity. A company Google’s size may evaluate hundreds of business for acquisition in a given year, only difference being- you don’t hear about it. In the case of Time Warner and AT&T, two massive businesses, the deal was reported by The Wall Steet Journal as the deal was all but done, with very little room for speculation. And that’s the way AT&T likes it.
The Power of the Media
The media plays a very strong role in influencing the general public, as well as the investing world. Buyout rumors that turned out to be based on little facts to no facts, as leaked information from Salesforce revealed Twitter was never even an acquisition target were able to create a 2.5+ billion dollar swing in market value. Chasing buyout premiums by relying on various forms of media, or even Tweets, no matter how powerful is not a viable investment strategy. And as recent examples indicate, often times when buyouts do occur, they are unforeseen and leave investors little room to react. It is not in the buyers favor to leak information, and thus send their buyout targets’s market value up. Buyers would like to get as good a deal as they can get and creating a wild rumor mill does not benefit them.
What We Can Learn
The hot story is not always the hot investment, and many times those stories can be removed from reality. There is a term for getting ahead on information: insider trading. If some of these rumors were true, they would be illegal. Don’t pick a stock with the intention that it will get bought out, pick a stock with good business fundamentals. It may not even be in the best interest for your chosen stock to get bought out. If you truly believe in the fundaments of the business, and its growth potential, owning the business in its purest form, rather than as a conglomerate of other businesses will provide the most benefit in the long run.