In general, when one company announces it will acquire another, it usually pays a premium over the current price in order to get approval from the target’s shareholders. Hence, it is not uncommon for some investors to speculate on potential M&A activity (especially if an industry is going through consolidation), bidding up the stock prices of companies that they expect to be acquired. At the same time, other investors take the opposite view, shorting stocks that have risen from takeout speculation on the belief that any deal will not come to fruition. Here we will look at five stocks that been rumored to be takeout candidates that have also witnessed increased short-selling.
T-Mobile US, Inc. (NYSE:TMUS) is a $24.7 billion market cap company that provides mobile communications services under the T-Mobile, MetroPCS and GoSmart brands in the U.S., Puerto Rico and the U.S. Virgin Islands. Ever since SoftBank Corp. acquired Sprint Corporation (NYSE:S) in July 2013 to become the third largest U.S. wireless carrier, there has been speculation – fueled, in part, by comments from Softbank’s outspoken CEO, Masayoshi Son – that the Japanese company would purchase T-Mobile to become a stronger competitor versus market leaders Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T). Not coincidently, short interest in T-Mobile dropped from a peak of 13.7 million shares in late June to a trough of 4.7 million shares by late September, as the market priced in the possibility of a takeout. Since then, however, short interest has steadily increased, reaching 11.4 million shares as of late March 2014, reflecting increased investor doubt regarding a deal, partly due to anti-trust concerns.
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is a $28.5 billion market cap biopharmaceutical company that develops and commercializes life-transforming therapeutic products, such as Soliris, which treats genetic disorders. In July 2013, media reports discussed the possible acquisition of the company by Swiss drug maker Roche Holding AG to diversify into rare diseases. Since peaking at 3.8 million shares in mid-July, short interest in Alexion declined over the following several weeks. However, with no formal bid launched by Roche or anyone else, investors began to sell short the shares again, with short interest reaching 3.6 million shares by late March 2014.
Ellie Mae, Inc. (NYSE:ELLI) is a $708.2 million market cap company that provides on-demand software solutions and services for the residential mortgage industry in the U.S. In August 2013, various media outlets reported that the company was considering a sale of itself to private equity suitors. Subsequently, short interest declined from 3.3 million shares to 2.6 million shares over the next couple of weeks. However, as a formal offer failed to materialize, short interest began to increase, gradually reaching 4.2 million shares by late March 2014.
WellCare Health Plans, Inc. (NYSE:WCG) is a $2.9 billion market cap company that provides managed care services for government-sponsored health care programs in the U.S. In March 2014, a sell-side analyst published a note stating WellCare would probably be acquired over the next 18-24 months, citing Aetna Inc. (NYSE:AET) and Cigna Corp. (NYSE:CI) as the likely buyers. After peaking at 1.5 million shares in mid-March, short interest dropped to 1.1 million two weeks later. Assuming similar trading patterns to other would-be targets whose takeovers never took place, if a bidder does not emerge over the next month or so, short interest can be expected to reach or exceed pre-speculation levels.
Rackspace Hosting, Inc. (NYSE:RAX) is a $4.6 billion market cap company that provides cloud computing services and manages Web-based IT systems for small and medium-sized businesses and large enterprises worldwide. Rumors about interest from International Business Machines Corp. (NYSE:IBM), which is trying to diversify into businesses with higher growth potential, have been around for a while. However, short interest in the name has been fairly high, gyrating between 13 million and 20 million shares.
Disclosure: none
This article was written by Jason Seo of Insider Monkey.
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