What Do They Mean to the Market?

As we have mentioned many times in previous blogs, takeover fever is back. Potash and McAfee lead the headlines and HP jumped right over Dell’s previous bid for 3Par. The common denominator in all of these deals and for that matter proposed deals, was the cash takeover.

Many companies often prefer to acquire other corporations in stock deals. Basically, the prospective buyer uses their own stock as currency in the transaction. This is often done because the acquiring company often feels that their stock is either fully valued or inflated. This past few deals have been different because the premium paid was all cash. Potentially signaling to the market that the acquirer feels that there own companies share price is too cheap.

Now this seems to be a positive for the market because if S&P 500 companies would rather part with cash, this tells us they are confident going forward. Small and microcap stocks often don’t have the luxury of large cash positions and have no other choice other than using stock to make these deals. For example, even the most promising microcap or penny stock, usually uses a rising stock price to for buyouts. Simply because they are growth stories with little cash. However, the big boys can do either. Hopefully this vote of confidence will trickle down from the NYSE to the OTCBB.

So if you ever see a penny stock participate in an all cash buyout, you are getting a signal from management that things are good. Most times reading signs from companies is much more accurate than trading reports, brokerage analysts or penny stock newsletters. But, you have to sometimes read between the lines. So do your home work and prepare your large cap and penny stock lists.

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