A very wise newspaper magnate, when once asked to explain his company’s lagging share price, answered ‘the market is always right’.
Hard to argue with that.
And that phrase is also usually true in M&A transactions. When an offer is made to acquire a publicly traded company – such as the recent offer by Playtech PLC (LON:PTEC) to buy CFD broker Plus500 Ltd (LON:PLUS) for £460 million, or £4 per Plus500 share – the to-be-acquired company’s share price usually tells a very interesting story about what the market thinks of the deal, and what will ultimately happen:
- If the shares trade ABOVE the offer price, the market is betting that a better offer will ultimately be made than the existing one. Or, that a bidding war is about to start.
- If the shares trade right around the offer price, the market believes that the acquisition is a ‘done-deal’, very likely to close at the existing offer price.
- If the shares trade significantly BELOW the offer price, the market is betting that the deal is likely to NOT get done, at least on the terms offered.
Based on that logic, it does seem as if stock market investors think there is a significant likelihood that the Playtech-Plus500 deal could unwind. Potential causes of a broken deal include things Playtech might learn in due diligence, or an unfavorable ending to Plus500’s current attempts to resolve KYC/AML issues with the FCA.
There could be other reasons for Plus500’s share price remaining below the £4 Playtech offer price. We believe that many long-term Plus500 shareholders are taking the chance to recoup some of their losses from the past couple of weeks by selling now. Similarly, speculators who bought in recently (pre-deal) as Plus500 dipped into the £2-3 range are taking the quick money now and getting out.
Some investors, such as Odey Asset Management, continue to buy (below £4), clearly betting that the deal will indeed get done at £4 – or perhaps an even better price.
But if ‘the market is always right’, we probably haven’t seen the end of the Playtech-Plus500 story.