Saturday, October 18, 2008

Acquisition Wires: Sources for Special Situation Investing

Some of you may be wondering, "Where does Tony Alfidi get his M&A news?" Okay, even if you're not wondering, I'll tell you.

I check Reuters' Deals page almost daily to see summaries of the latest M&A annoucements for large, publicly traded firms. I will only consider a target company that has agreed to a friendly transaction as a candidate for my arbitrage play. Hostile takeovers entail too much risk. If the target fights the acquisition, or another suitor offers a larger bid, I run the risk of having to unwind a position at a loss.

Once I identify a candidate (usually the target, but sometimes both the target and acquirer) I plug its ticker symbol into Yahoo! Finance and look at its option chains. Nine times out of ten I sell call options to generate arbitrage profits on a deal, as I prefer to buy an underlying stock only on long-term holdings. If I decide to sell an option on a candidate company, I go for the longest possible expiration date that is just above the agreed-upon deal price. This tactic almost certainly ensures that the option will expire worthless when the deal is closed. I say almost because there is no way to eliminate risk entirely from any investment decision.

It's that simple! There are other sources available for M&A news, but I'm not going to pay for them. The best things in life are free. Just like this blog.