Best bet on takeover news is that it is wrong

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The surest way to profit from takeover speculation in the stock market is to bet it's wrong.

Electronic news services, brokerages and newspapers reported at least 1875 rumours about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg.

A total of 104, or 14.5 per cent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 per cent, betting on declines yielded average profits of 1.2 per cent in the next month, an annualised gain of 14 per cent.

Opportunities to employ the strategy are increasing as mergers recover from the worst recession in more than 70 years, data compiled by Bloomberg show. After bottoming in 2008, the number of unconfirmed stories about possible mergers surged 71 per cent to 611 last year from 2009, data compiled by Bloomberg from more than 50 news providers and brokerages show.

"Sell into the strength," said John Orrico, who focuses on mergers and acquisitions at New York-based Water Island Capital, which oversees about US$2.2 billion ($2.9 billion). "We see it as an opportunity to sell if we think the rumour is false or ridiculous, which in most cases they are."

Short selling to speculate on declines on supposed takeover targets produced more than twice the average return generated by US stocks, data compiled by Bloomberg show.

At the same time, companies in the Russell 3000 Index had the same chance of being acquired in any 12-month period since 2005 as those that were the subject of merger stories, the data show.

Stocks tracked by Bloomberg fell 0.2 per cent, 0.6 per cent and 1.2 per cent on average in the day, week and month after a rumour report, Bloomberg data show. The S&P 500 rose 0.03 per cent, 0.2 per cent and 0.5 per cent on average during the same periods.

The 14 per cent annualised profit from short selling compares with a 6.2 per cent yearly return since 1900 before dividends for US stocks, inflation-adjusted data from the London Business School and Credit Suisse Group in Zurich show.

Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.

Akamai Technologies has been the subject of more buyout rumours than any other US company since the start of 2005, data compiled by Bloomberg show. The provider of computing services that speed delivery of internet content remains independent after being named 21 times.

The most recent instance was December 16. After rallying 1.7 per cent shares of the Massachusetts-based company lost 3.8 per cent in the next week.

- Bloomberg