Getting straight to the point, it just doesn't seem that trading takeover arbitrages makes money these days. If anything, the way to make money from takeovers is to short the takeover target, although I certainly do not advocate or practise that strategy. For me, the most profitable and stress avoiding thing to do is just walk away and look for easier ways to make money.
Before I go on, if you are unfamiliar with the term 'takeover arbitrage', it means buying the takeover target after the takeover has been announced. The ideal takeover is a binding, all-cash offer as it theoretically reduces risk, and leaves upside exposure should a higher bid(s) come along.
The problem however is that bids can and do fall over and the downside can be horrible, especially compared to the upside. To use the three most common words in finance, there is often no 'margin of safety'.
There are two reasons why I find it hard to get excited about takeovers these days: 1. many are 'indicative, conditional and non-binding' and 2. plenty of takeovers are just dodgy.
Treasury Wine Estates (TWE) had not one but two conditional offers and still a deal could not be finalised:
Graincorp still hasn't recovered after the government knocked back the takeover:
The recent collapse of the Reef Casino (RCT) was just plain fishy and regardless of what the actual truth is, the takeover arbitrageurs got a spanking:
The mining sector is littered with failed takeover attempts, despite often superficially valid takeover bids on the table.
Warrnambool Cheese and Butter (WCB) has been the only (that I can think of) truly success takeover arbitrage story from the past few years:
I haven't traded a takeover for well over two years now, and apart from the very occasional sitting duck that has lots of embedded value, I can't see me trading too many in the future either. Please contact me if you disagree!
Kristian
Disclosure: no position in any of the above names
