Last fall I bought a few shares of Del Taco—they were trading at what seemed like a good price considering their expansion possibilities and the overall heat around the fast food sector. But instead of seeing them go up over time as their profits increased as I expected, the shares slowly drifted lower until they saw a sudden bump from under $8 to right around $12.50, which they have stayed very close to for several months now. So what happened?
It turns out Jack in the Box [JACK] made a bid to buy out Del Taco, and they came in at $12.51 per share with a cash offer. So now the stock is magnetized to right around that level while the market waits for the deal to be finalized.
Since investors now expect to exit, the price has consistently traded around the expected buyout price. Sometimes deals fail to go through, and if the market expected that then the price would likely diverge from its current level. But for now if we assume the deal will go through, what should investors like me expect when that happens?
Stock buyouts used to frequently involve share-based bids—for example, the bidding company could offer 1 of its shares for every share of the company being taken over. This would result in shareholders of the takeover target becoming shareholders in the acquiring company at the ratio offered. However the trend in recent years has been for the acquiring company to make a cash-based offer like in the Del Taco scenario, so for example offering $12.50 for every share.
The result of cash-based offers is that when investors are holding shares in companies that get acquired they get paid cash when the deal goes through. This requires investors to make a decision as to how to re-invest the cash when these buyouts happen—they can buy shares in the acquiring company, or they can put their capital elsewhere.
While owning individual company shares can have considerable upside, the churn of companies being acquired unexpectedly is a risk that comes with them. One advantage of many ETFs is that they largely abstract away most of this kind of stuff by following indices or sectors rather than individual companies.