Surest way to profit from takeover speculation in the stock market is to bet it’s wrong.

Deliberately spreading false rumors may

violate securities laws, especially if

the intent is to sway prices

(appears the SEC quietly endorses rumors if stock

price moves higher, however don't you dare

start a rumor that sends a stock lower...)

By Tara Lachapelle

Jan. 11 (Bloomberg) -- The surest way to profit from takeover speculation in the stock market is to bet it’s wrong.

Electronic news services, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg. A total of 104, or 14.5 percent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 percent, betting on declines yielded average profits of 1.2 percent in the next month, an annualized gain of 14 percent.

Opportunities to employ the strategy are increasing as mergers recover from the worst recession in more than 70 years, data compiled by Bloomberg show. After bottoming in 2008, the number of unconfirmed stories about possible mergers surged 71 percent to 611 last year from 2009, data compiled by Bloomberg from more than 50 news providers and brokerages show.

“Sell into the strength,” said John Orrico, who focuses on mergers and acquisitions at New York-based Water Island Capital LLC, which oversees about $2.2 billion. “We see it as an opportunity to sell if we think the rumor is false or ridiculous, which in most cases they are.”

Short selling to speculate on declines on supposed takeover targets produced more than twice the average return generated by U.S. stocks, data compiled by Bloomberg show. At the same time, companies in the Russell 3000 Index had the same chance of being acquired in any 12-month period since 2005 as those that were the subject of merger stories, the data show.

Versus S&P 500

Stocks tracked by Bloomberg fell 0.2 percent, 0.6 percent and 1.2 percent on average in the day, week and month following a rumor report, Bloomberg data show. The S&P 500 rose 0.03 percent, 0.2 percent and 0.5 percent on average during the same periods.

The 14 percent annualized profit from short selling compares with a 6.2 percent yearly return since 1900 before dividends for U.S. stocks, inflation-adjusted data from the London Business School and Credit Suisse Group AG in Zurich show. Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.

Rumor Origination

“The question that remains unanswered is where does the takeover story originate,” said Michael McCarty, managing partner at Differential Research LLC in Austin, Texas. “It’s most likely from someone who’s interested in selling.”

Deliberately spreading false rumors may violate securities laws, especially if the intent is to sway prices, said James Cox, a professor at Duke University School of Law in Durham, North Carolina. Proving a market-manipulation case is difficult, according to Peter Henning, a law professor at Wayne State University in Detroit and a former federal prosecutor.

“You might be able to see a unicorn before you see a market manipulation case established based on rumors,” Henning said. “It’s so difficult to pin down, and even if you can, to try to link them. You get lots of investigations announced and very few cases brought.”

Manipulation 101

Netlist, Inc. a maker of computer-memory systems, rose 1.9 percent when rumors were reported on Dec. 28, 2009, that Microsoft Corp. might buy the Irvine, California-based company. The shares declined 2.2 percent a day later, 9.4 percent a week later and 31 percent in 30 days.  Complete article by Tara

Chasing Takeover Rumors...chasing a greased HOG

By Steve Sears
Barron's
1/5/2011

The takeover rumors are back in the options market. The re-emergence at a time when the stock market is laboring to advance is not mere coincidence. Rest assured that rumor mongers are pushing junk just as they are worried about their own investment returns. This is why perennial takeover target Harley-Davidson (HOG) is back.

Add Focus Media (FMCN) to the list. And Rackspace (RAX) and Thompson Creek (TC). All the rumortrage names are backed by unusual options trading volumes, and a hiccup of credibility.

Atheros (ATHR) was rumored Monday to be a Qualcom (QCOM) takeover target, and indeed that did prove true.

The exchanges and Securities and Exchange Commission need to investigate the rash of takeover trading in the options market. It is a black eye for the market. Everyone who trades knows how easy it is to start a takeover rumor.

There are even websites that everyone uses to track takeovers and traffic in rumors. If you view the takeover rumors like lottery tickets, so be it.

If not, be careful because if you’re sitting at the poker table and you don’t know who the fool is it’s you. More Steven Sears Articles

How to cook the perfect HOG: TARP Marinade, LBO Rumor Dry Rub and Serve When Squealing Stops

You Can Lead a Horse to Water, but PIGS

and HOGS get Slaughtered.

The Securities and Exchange Commission appears content with rumors as long as the scuttlebutt moves a stock higher. It appears yet again that Harley Davidson is a contender of a LBO courtesy of (fill in the blank _________________). In March 2010, the repetitive unfounded buyout rumor moved the stock to $28+. In January 2011, the LBO rumors are alive and well with the stock trading at $35.

The HOG is up39% from its 12/31/2009 close and 57% from its June 30, 2010 close.

Barron's
By Steven M. Sears
10/13/2010

IN THE PAST THREE MONTHS, Harley-Davidson's (ticker: HOG) shares have surged some 25%. With the motorcycle maker scheduled to report third-quarter earnings on Tuesday, investors are well advised to hedge recent gains with defensive put options.

The stock typically makes big moves on earnings day, yet Harley-Davidson's options are priced as if shares will move 5.9%, up or down, compared with a 7.4% median earnings day move over the past eight quarters, according to Goldman Sachs' analysis of options volatility.

With the stock at about $32, investors are buying November $32 puts, which cost about $2 a contract, to hedge earnings.

This hedging action reflects a recognition that Harley-Davidson's recent stock gains are likely attributable to vague, recurrent rumors in the options market that the company is a takeover target for a buyout firm. Such news typically attracts "hot money" looking for quick profits, which inevitably causes the stock to make sharp moves higher — and lower.

Indeed, in current trading Harley's November $33 calls are unusually active on takeover rumors. Though the rumor has only pushed the stock up some 50 cents to $32.23, almost 7,000 November $33 calls have traded.

For Harley-Davidson's stock to really trade higher, the company will likely have to report strong earnings, and more importantly, a strong outlook. That's because a lot of the good news is already reflected in the stock price. Of course, if takeover rumors ever pan out, the stock might surge higher, but these rumors have been circulating for months.

In the meantime, to justify sending the price even higher, the company will have to offer investors a credible theme to bid up. If not, the shares could come under pressure, which is why it makes sense to buy puts to hedge the stock just in case the motorcycle maker's earnings report backfires.


Dealer News
6/10/2010

Market rumors are circulating that ailing Harley-Davidson may be a takeover target for private equity firms. The rumor has been bubbling up since Mar. 16, according to The Street.

That day there were rumors that private equity firm KKR might be interested in buying the Motor Co., which caused a flurry of trading activity in H-D shares.

The Street attributes the unsubstantiated, leveraged buyout rumors to growing business and Federal Reserve confidence in a U.S. economic recovery.

Meanwhile, options traders were busy Thursday speculating whether the stock would again sink below $25 a share, and a UBS Securities equity analyst lowered her price target on the shares to $28.80 from $32.

Analyst Robin Farley maintained a neutral rating, saying in a note to investors that the Motor Co.'s U.S. retail sales at dealers declined around 15 percent year-over-year in May against an industry decline of around 11 percent. Even though the company's quarter-to-date sales decline of 7 percent is brighter than the first quarter's year-over-year decline of 24 percent, "it also signifies that the worst may not be over" for Harley's dealer-level sales, Farley wrote.

H-D shares, which trade under the symbol HOG, have had a wild ride since their peak in the $70 range in late 2006, to a closing low $8.33 a share Feb. 24, 2009. The shares recently reached $35.49 April 23 of this year, but have settled back into the mid-20s. The stock traded up $1.14 Thursday to close at $27.32, but lost 20 cents in after-hours trading.

That volatility may be why the U.S. Securities and Exchange Commission dubbed HOG one of the first five stocks on the New York Stock Exchange to get the new “circuit breaker” mechanism designed to avoid another “flash crash” in the markets like the one that happened May 6. All of the major markets will implement the system, most by next week.

The failsafe will temporarily halt trading in any S and P 500 stock if it drops 10 percent or more in five minutes’ time.

Posted by Holly Wagner

Benzinga
By Daniel James Hayden IV
3/16/2010

Shares of Harley-Davidson, Inc. (NYSE: HOG) ended trading on Tuesday up nearly 7% fueled by takeover rumors.

Rumors are circulating that private equity firm Kohlberg Kravis Roberts may be considering a takeover of the motorcycle manufacturer. Neither Kohlberg Kravis Roberts, nor Harley-Davidson, Inc. have commented on the takeover rumors yet.

Trading activity for the shares of Harley-Davidson were three times the normal volume and the options market also saw heavy trading, where investors were expecting the stock to continue to climb.

Harley-Davidson has suffered financially because it's been difficult to sell expensive motorcycles during a time of high unemployment and economic uncertainty. The company reported a 4th quarter 2009 loss of $218.7 million. Shares of Harley-Davidson ended the Tuesday trading session up 6.98% at $28.35.