I don’t typically attempt to trade mergers and acquisitions because they can be exceedingly difficult to time. Rumors of a buyout can send shares of a company soaring, but if one never materializes, the stock is almost certain to come back down.
When a deal is in fact announced, the target’s share price typically sprints toward the buyout price and it’s often too late to make any real money. What’s more, many mergers and acquisitions face regulatory opposition or other major hurdles that can result in the would-be deal falling apart.
But in the case of popular micro-blogging site Twitter (NYSE: TWTR), I see an attractive proposition for savvy investors and know a way they can stack the odds in their favor.
If you haven’t yet heard, Twitter is up for sale. According to Bloomberg, Twitter has hired Goldman Sachs (NYSE: GS) and Allen & Company to help find a buyer for the social media company.
I’ve been following the Twitter buyout buzz since the deal between Microsoft (NASDAQ: MSFT) and LinkedIn (NYSE: LNKD) sent TWTR soaring higher. As the buzz grows louder and louder, it’s seems a buyout or strategic partnership is very likely.
Why Twitter is an Attractive Buyout Candidate
Twitter could be a good fit for a number of prospective buyers and is said to be in talks with several companies, including Alphabet’s (NASDAQ: GOOGL) Google. Twitter could add to Google’s massive data aggregation, increasing its dominance in the “big data” realm. Google could sell ads across Twitter.
The Walt Disney Company (NYSE: DIS) is another potential suitor. Disney could use Twitter as a foray into social media, allowing the company to market its movies and TV shows in new ways and integrate Twitter feeds into brands like ESPN for a more immersive viewer experience.
Then there’s Salesforce.com (NYSE: CRM), which missed out on the LinkedIn deal and is reportedly hungry for a social media company. Salesforce could tap into the millions of professionals on Twitter to gather business intelligence data and expand its products and services.
Of course, this is all speculation and nothing has been formally announced yet, but my research and instincts tell me a deal of some sort isn’t far off.
Should a deal be announced, I anticipate a quick and painless acquisition. A Twitter deal is unlikely to face the regulatory hurdles that some other high-profile mergers and acquisitions do. The online social network doesn’t have a monopoly on anything, nor would its absorption into another company pose a threat to consumers’ well-being. It shouldn’t violate any fair business practices either.
Therefore, I see shares of Twitter quickly shooting up to the agreed-upon price, just as we saw happen with LinkedIn.
To be sure, Twitter has its flaws, but its usage, popularity and influence on global culture is undeniable. And since Microsoft just plunked down $26 billion for online professional network LinkedIn in an all-cash transaction, let’s consider a few things:
Twitter has triple the monthly active users (313 million) that LinkedIn does (106 million). That’s a powerful statistic that could make Twitter very attractive to a potential buyer.
How to Play a Potential Deal
Arbitrage traders have already bid shares up to $23. These are very smart people who pore through mounds of data to find a likely acquisition price. Even though there’s no guarantee that an acquisition will go through, they wouldn’t be placing these bets if they didn’t believe there was a good chance for a profit.
Assuming a company paid $30 billion for Twitter — a little more than Microsoft paid for LinkedIn — its 707.7 million shares outstanding would likely trade over $40 per share. At the very least, I anticipate an offer near the $24 billion IPO valuation. But even a $20 billion price tag — a 16.7% discount to the IPO value — would still put TWTR at $28-plus per share, and potentially spell a 20% profit for traders who get in front of such a deal.
Still many investors may not be comfortable with such a speculative trade, and I admitted up front that I usually don’t think it’s a good idea to attempt to trade buyout deals.
But Twitter is different, as I’ve explained above, and my confidence is increased even further by the fact that I do not intend on buying shares to play the potential upside.
While a quick 20% gain would certainly be nice, there is an options strategy that could return more than 30% and I don’t need TWTR to budge an inch. In fact, shares could fall almost 10% and I’d still make a profit. What’s more, I risk only a fraction of what it would cost to buy the shares.
All I need is for TWTR of be trading above $21 on Jan. 20. That means I don’t even need the most conservative of the above scenarios to play out. Even assuming a $15.5 billion purchase price, which would be more than 35% below Twitter’s IPO value, this trade should still be profitable.
If this sounds confusing or too good to be true, I promise you that it isn’t. It involves a strategy used by Wall Street insiders to build their fortunes. But there is nothing stopping your everyday trader from doing the same if they have the know-how.
While I don’t have the space to teach it here, I have put together a presentation that explains the strategy in layman’s terms. If you’d like to see if it’s for you, you can access the presentation here for free.