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Update: Fintech M&A, circa 2013

fintech M&A 2013

From Berkery Noyes, an independent iBank with some great industry data, comes an update on mergers and acquisition activity in the fintech space.

Q3 2013 KEY TRENDS

  • Total transaction volume in Q3 2013 increased by 21 percent over Q2 2013, from 77 to 93.
  • Total transaction value in Q3 2013 rose by 55 percent over Q2 2013, from $5.5 billion to $8.5 billion.

Q3 2013 KEY HIGHLIGHTS

  • Davis + Henderson’s acquisition of Harland Financial Solutions, a provider of software and services to fi nancial institutions, was the largest transaction in Q3 2013, with an acquisition price of $1.6 billion.
  • The industry’s most active acquirer year-to-date was Thomson Reuters with nine transactions. Five of these occurred in Q3 2013: BondDesk Group LLC, Bisk CPE and CPA Test Prep Division from Bisk Education, Inc., Omnesys Technologies, SigmaGen

For more transactional information on fintech, check out MandASoft

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Predict the next M&A – with Arye Schreiber

M&A crowdsourcing

By most account, the M&A process is fundamentally flawed.

Incentives aren’t aligned — from advisors to bankers to CEOs. All want more M&A, not more successful deals.

This week’s guest on Tradestreaming has created a crowdsourced model for investors to help predict the next successful merger and acquisition. Arye Schreiber, founder of Merjerz,  has created what he feels is a better model to align incentives, encouraging fundamentally more successful M&A activity.

And investors can be first to know.

Listen to the FULL episode

About Arye Schreiber

Arye is the founder of Merjerz. His previous experience has been in corporate law, advising multinational companies on M&A.

Continue reading “Predict the next M&A – with Arye Schreiber”

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Making sense of the Google, Motorola Deal – with Dan Hoffman

M&A crowdsourcing

We’re doing something a little different with this interview.In the wake of the announcement that Google ($GOOG) was buying Motorola Mobility ($MMI), I wanted to understand the deal dynamics better.

I spoke with Dan Hoffman, CEO and President of M5, a managed VOIP solutions provider.Dan’s an Internet pioneer, founding an early ISP. M5 services enterprise clients with cloud telephony, on the forefront of telecommunications service.

In this interview, we address

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Join us today: A live chat about global value investing — Prince Waleed Style [Tradestreaming Live]

by Jeff Towson

Many of you mentioned that you enjoyed our recent interview with Jeff Towson, best-selling author of What Would Ben Graham Do Now: A New Value Investing Playbook for a Global Age.  Towson spent 9 years closely working with Saudi Prince Waleed, one of the world’s richest and most successful investors.

Towson provides a global value investing framework for Westerners interested in getting involved abroad.  The thing is — after the interview — many of you still had questions.  Towson wrote a book intended for investors of all size, but many felt that his framework was more attuned to private equity investors — professionals with deep pockets.

I’ve invited Jeff to talk more about his book, his experiences working under Waleed, and his view on global investing in a new live format on Tradestreaming, I’m calling — for lack of a better term — Tradestreaming Live. Think of it as an intimate chat about global investing. Continue reading “Join us today: A live chat about global value investing — Prince Waleed Style [Tradestreaming Live]”

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Best way to trade the rumors? Bloomberg (and Tradestream) says short ’em

To a philosopher, all news as it is called, is gossip, and they who edit and read it are old women over their tea — Henry David Thoreau

Gossip is called gossip because it’s not always the truth — Justin Timberlake

With stocks, there is so much noise and pumping going on that investors can feel like they’re at a Motley Crue concert again.  So, how do investors using smart strategies and historical data profit from rumors?

Bloomberg is out with proprietary data today that suggests shorting stocks caught up in merger rumors is a viable, profitable strategy.

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.

In Tradestream, I devote an entire chapter, Grind the Rumor Mill, to rumor mongering and how that plays out for investments – essentially short-selling a basket of M&A rumors.  This strategy works because while real acquisition targets see above-average appreciation, most rumored M&As don’t actually come to fruition.

I included a rumor model developed by Nudge’s Cass Sunstein that he used in his recent book, On Rumors: How Falsehoods Spread, Why We Believe Them, What Can Be Done (affiliate link).  This included identifying propagators, qualifying their prior beliefs, and predicting the cascading effect from any change/reinforcement of those priors.

Much of the guts and data behind this strategy was documented by Gao and Oler in “Rumors and Pre-Announcement Trading: Why Sell Target Stocks Before Acquisition Announcements?” (June 2008)

Data

The Strategy

  • Research: Scan the WSJ’s Heard on the Street for reported, but unsubstantiated merger and acquisition rumors
  • Adjust for market cap: The strategy works better when you remove companies with market cap >$20B
  • Short basket trade: Short sell a basket of these rumored targets and hold for 70 days after the rumor first appeared.  Cover.  Hedge if you like.
  • Timing best for hot M&A years: if M&A heats up (like now, right), the data show the strategy works even better

Last thing

The Bloomberg research found that this short-the-rumor strategy worked (+14%) even when it coincided with other contradictory bullish signals like call buying.

Call volume in New York-based Jefferies Group Inc. jumped amid unconfirmed takeover reports on Feb. 27, 2008. Calls on the company changed hands 12,692 times that day, 24 times the four- week average and the most in almost a year, and the shares gained 3.7 percent. A deal never occurred and Jefferies dropped 3.4 percent the next day, 10 percent the next week and 20 percent in 30 days. The S&P 500 lost 4.7 percent in a month.

Caveat emptor: I have not actually used this strategy in portfolios (I’m pretty much long only) and I think it would take balls of steel to really stick to it.

Further Reading on Investing and Rumors:

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Can you trade on rumors? One possible model

In Tradestream, I spent a whole chapter looking under the covers of investing/trading strategies that focus on rumors.  Greater sentiment analysis (like the hubbub that erupted after Prof. Bollen published a paper on using twitter to predict stock market swings) is in early days but at its core is a desire to use news/chatter to better gauge future stock moves.  Bold and audacious, but not nearly there yet.

Rumors: A Model

In the book, I developed a model upon the one Cass Sunstein (co-author of Nudge and just a prolific writer/thinker) used in his most recent book, On Rumors: How Falsehoods Spread, Why we Believe Them, What Can Be Done.

Rumor transmission often involved the rational processing of information, in a way that leads people quite sensibly in light of their existing knowledge, to believe and spread falsehoods.  This problem is especially acute on the Internet — Cass Sunstein, “She Said What?  He Did That? Believing False Rumors,” Harvard Law School Public Law Working Paper No. 08-56 (November 2008), 2

Sunstein describes a useful framework with which to understand how rumors get started and how they get propagated — influencing decision making.

Sunstein describes the various actors in the social transmission of false information.  While he focuses on rumormongering, I try to apply this framework to investing.

  1. Propagators:
    1. self-interested, varying degrees: they may own a stock and work to discredit those who don’t like it or are short
    2. altruistic: sincerely interested in promoting some type of cause — these guys don’t even realize that they are spreading falsehoods
  2. Priors: success or failure of rumors depends on how closely they approximate the prior beliefs of those who hear them
    1. motivations: people don’t enjoy hearing bad things about ideas/people close to them and conversely, they are more open to receiving false info about something they dislike
    2. beliefs: Sunstein says that people who have strong prior beliefs usually do so because of what they know and therefore, require a lot of supporting information to upseat those beliefs
  3. Cascades: the mechanisms of rumor transmission, why/how/when people accept/reject a rumor is intimately connected to how the information affects their personal desires
    1. informational: groups of investors are led to accept a thesis in spite of individuals’ private info.  Think of all the hating that goes on on Yahoo Message Boards.
    2. reputational: people can be led to believe things in conflict with their priors but do so to curry favor with others.  This is equivalent to a fund manager on CNBC pumping his portfolio — as an expert — his status and street cred influence others’ beliefs (whether correct or not)

So, we have to narrow our focus down to why stocks move they way they do when unsubstantiated news — rumors — are floated.

Rumors and Preannouncement Trading

I chose to focus on rumors surrounding M&A announcements.  Many times, the Wall Street Journal will publish stories on unsubstantiated mergers and acquisitions.  Target stocks will jump and acquirer stocks drop.  That said, though, many of these rumored M&As fail to consummate.

“While sellers lose money when a rumor precedes an actual announcement, in most cases rumors fail to materialize into public announcements.” Rumors and Pre-Announcement Trading: Why Sell Target Stocks Before Acquisition Announcements?” (Gao, Oler)

Given the research of Gao and Oler:

On average, stock prices of rumored firms drift down to their pre-rumor level over a 70-day period after the initial price jump when a rumor is published and that only 12% of rumored takeovers materialize into actual announcements within 70 days.

So, really, Tradestreaming would be all about finding the right side of this strategy — where the numbers, data and probability is with the investor.  That would mean taking the other side of the trade.

The Antitakeover Strategy

  1. Research WSJ for reported but unsubstantiated M&A
  2. Remove all mega cap firms (<$20B)
  3. Short a basket of rumored acquisition targets and hold 70 days after the rumor first appeared.  You can hedge by going long the market if you like.
  4. Strategy performs even better during periods of increased M&A activity

Performance

The researchers found that this strategy would put up 4.2% in abnormal returns — when you further restrict the strategy to hot M&A years, profits go up to 12.7%.