How to Trade During Takeovers

This stock trading question in relation to how to trade during takeovers comes from Phil M. who asks…

“With regard to takeovers:
(1) Do you EXIT when you first hear of a takeover or do you wait till the takeover is completed than you exit the position?
(2) How are you alerted to takeovers?”

These questions were prompted by the recent TOL takeover which we were lucky enough to have exposure to in a few portfolios. Answer:

(1) The rule of thumb we have is that we’ll wait another 2-weeks after the initial offer. If there is going to be a competing offer, it will usually come fairly quickly. If, after 2-weeks, there is no competing offer we’ll exit the position. The TOL trade was a little different simply because it was such a significant offer and that the potential for a competing offer was therefore minimal.

(2) A takeover is always a surprise. Sometimes if it’s a friendly takeover the company may request a trading halt pending the announcement, but usually the announcement is made outside market hours and will be immediately priced in when trading resumes. In the case of TOL, it was announced to the market about 2-hours prior to trading so only existing shareholders could benefit.