Mergers: How to Trade them

Brief Introduction

A merger is simply the agreement between two companies (whether private or public) to combine into a single entity. A lot of companies do this to increase their market capitalization or enhance their market share, while others do it when they are trying to explore new businesses or tap into a specific market.

Finding them . . .

There are several ways of finding potential major plays–main one being through press releases. Companies often show their intent to merge by putting out an initial PR, which runs up the stock price that day. You could also find potential mergers through your own personal research: this involves sifting through news and the likes.

How to Play them

In playing merger stocks, you need to know the exact time frame for which the merger would close. Once that’s been determined (usually embedded in the initial press release), you’d look for a potential prospectus or news that shows the date of the merger meeting/vote as customary to every mergers. After ascertaining the date of the shareholder meeting, then you have a merger run-up date essentially. Meaning, you may start to buy the stock two weeks into the merger vote, especially if the stock price is under $1.00 (my preference). They tend to run about 30%-100% into the vote, after which you should sell and lock profits.

Recall that you only want to play the run-up, so sell on the day of the vote or the day prior. You may keep some if you fancy a gamble, but news of a merger vote approval or disapproval is usually released in AH (after-hours trading) on the day of the vote. The stock price usually goes up on a positive vote, but then down, hugely, thereafter. There’s always an outlier, of course, but they generally drop even on a positive meeting … $BPMX (as of today, May 17) ran huge in AH last week on a positive merger vote, although that typically doesn’t happen. $RTTR has a merger vote rescheduled for Monday, May 18, so expect a run in the morning; however, I can’t guarantee that it would run in AH once news is released, but I’ll certainly be keeping some shares in case. Another merger play to watch this week is $CNAT, as they have a merger vote on Thursday, May 21. It should  run tomorrow.

I WILL TALK ABOUT HOW TO MAKE UNLIMITED DAY TRADES WITHOUT BREAKING THE PDT RULE

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