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Many Monday mornings start with addressing “surprises” that happened over the weekend. While we can’t predict good or not so good surprises, we must have a process in place to deal with the unexpected. Last Monday, my partner and chief investment strategist Adam Harter, CFA, greeted me with the question, “Do you want the good news or the bad news?” That question always leaves an empty feeling in my belly. But fortunately, the surprise was good news!
We owned a stock that shall remain nameless for SEC compliance reasons. We liked the company or we wouldn’t have invested in it, and it seems that others also liked the stock. The company was “taken out” over the weekend, meaning that a buyer (usually a private money manager or a larger company) made a tender offer to the board of directors, offering to purchase all the shares and thus own the company. In such situations, the share price is always higher than the current trading price – often by more than 20%. Such was the case on Monday.
The “bad” news was that our families would incur short-term capital gains on their tax returns, a situation that always frustrates me. Yes, this situation is better than a loss, but taxes are painful. When a company is taken out in this manner, investors enjoy the profit and deal with the consequences at tax time. A company whose stock performance we had high hopes for over the long-term, instead delivered much of the bang in very short order.
Discussing the event, a friend remarked that such situations are always good deals because investors always make money. That is not true. Yes, the investors in the “take out” above made more money than they had the day before, but not necessarily more money than they would have earned over the long-term.
The company sold at an all-time high, so every investor made money. That doesn’t always happen. During my history in the industry, a paper manufacturer got taken out at a 25% premium over the previous day’s closing price. Let’s pretend the closing price on Friday was $100 and the tender offer to buy was $125. That is a nice weekend bump and it’s easy to see why people would consider every investor a “winner.”
We had a friend who worked at the paper company and used most of his retirement savings – against our recommendation – to purchase additional shares. His average share price was near $200 a share and he was holding indefinitely because he was confident the company and its stock price would recover. The $125 was more than he had on Friday but not near what he had invested and he had no choice but to transfer the shares to the new owner. Ouch!
There are many moving parts to the stock market. Every year companies are bought and sold.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]