Why buy and sell shares when a friendly takeover is underway?

Question

I have recently had a... fairly reasonably priced lesson not to just buy the next stock on my "to buy" list at the face value. Namely, there was a friendly takeover going on so the stock price was fairly fixed at slightly less than the offering price of the over-taking company. My investment was small enough that the transaction fees basically ate up the margin.

Still, I'm wondering: Why were these (legal or natural) people selling at that rate, instead of taking the better price the other company was offering? And who were the people, other than neophytes like myself, that were actively buying the shares?

Answer 1

There's no way to definitively say why people were buying or selling at X, but here's a few possibilities:

• A merger may take months to complete, so rather then holding stock that's already priced slightly below the merger price, accept a small haircut and reinvest the proceeds in other stocks that will have higher returns
• There is a risk that the merger falls through, and the price of the stock would drop in that case

Answer 2

There is actually a good reason to be buying at the slightly discounted rate. Because there is an open offer to buy shares for more than the stock market price, buying in a large enough volume can turn a net profit. In fact, an investment in the hundreds of euros would have turned enough of a profit to cover the related fixed fees.

This is of course contingent on the buying company going through with the takeover. If they decide against the purchase at the last moment, your loss is equal to the mark-up they were going to offer. So, try and find out how committed they are to the purchase, and especially if a public offer for the company has been made, or can be lawfully rescinded.