Investors who buy a company ahead of its acquisition or merger with another company can typically earn some great windfall profits.
However, the acquiring company can sometimes be a buy. If it’s an industry leader, and the acquisition makes sense for its overall brand portfolio, the deal can likely add tremendous value over time. In some cases, however, an acquisition might not make sense, but in either event, shares of the acquiring company may drop on the news.
Case in point? Oracle (ORCL). The software database giant saw shares drop last week on news that it would buy medical records company Cerner. That caused a modest drop, although shares have still been a big winner, up over 50 percent and nearly double the return of the S&P 500 in the past year.
Oracle definitely fits within the group of companies capable of making sound acquisitions that add value over time, and this deal appears no different. The selloff in shares simply reflects that it’s a sizeable move for the company.
Action to take: Shares are still heavily held by insiders, and the new merger could help increase the company’s slow-growing revenue over the past year. Investors may like shares, as the stock yield 1.3 percent here, and the dividend has a history of going up over time.
For traders, the March $100 calls lost nearly half their value on the merger news. Last going for about $4.40, they can likely make up for lost ground in the coming weeks as shares rebound.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.