There are several stocks in “holding patterns” due to announced M&A deals. A company may have accepted an offer to be acquired but that won’t stop the speculators from paying an even higher price in anticipation of a better bid coming from a “white knight.”
The most obvious instance for this is Whole Foods (WFM - Free Report) which traded $43.64 on Monday, June 19 following the Friday, June 16 news that it would be acquired by Amazon (AMZN - Free Report) for $42 per share. The $1.64 over the deal price was Wall Street’s way of saying a higher bid could be coming, but will it?
The WFM and AMZN deal has a break up fee of $400M which would have to be paid to AMZN, so at 2.9% of the total deal it is not out of the question. There has been plenty of speculation about private equity names coming in and making a stronger offer. That bigger bid could make Amazon pay a higher price, but it could also draw the ire of Jeff Bezos and that isn’t a spot I would want to be in.
The end result is you have to expect that bigger bid if you are buying WFM here.
A Better Play
Xcerra (XCRA - Free Report) was added to my Stocks Under $10 Investor portfolio on February 15 at about $7.82. The stock was a Zacks Rank #1 (Strong Buy) at the time as earnings estimates were trending higher. Revenue was projected to grow around 11% and the price to book multiple was only a fraction of the industry average.
On April 10 the company announced that it would be acquired by Unic Capital Management for $10.25 per share. The deal needs to be approved and that has yet to happen, but the stock is still trading well below the deal price.
What is more, XCRA reported a very good quarter on June 1, topping estimates on top and on the bottom line.
A Missed Opportunity
Another stock in the service that I manage was being acquired and traded above the announced price. Synernon Medical (ELOS) traded up to $11.25 when the announced deal price was only $11. The company was given some time to find a superior bid, but no other bidder materialized. The stock slide into the expiration of the “go-shop” period and now I am holding this stock into the deal as it has recovered to trade within a dime of the deal price.