Court ruling opens M&A floodgate
06/14/18

What do Aetna (AET) and 21st Century Fox (FOXA) have in common, other than they were both up big yesterday morning (around 4% and 8%, respectively) while the S&P 500 (SPX) was holding its breath (+0.05%) prior to the afternoon Fed interest rate announcement?

Answer: Nothing, except that they’re both widely viewed as takeover candidates—Aetna by CVS (CVS) and Fox the potential subject of a bidding war between Disney (DIS) and Comcast (CMCSA).

When a Federal court ruled on Tuesday that AT&T (T) could proceed with its purchase of Time Warner (TMX), the Street appeared to view it as a green light for other media deals, which had largely been in a holding pattern pending the outcome of the case.1  

But as Aetna’s rally indicates, the ruling was apparently viewed by some that mergers & acquisitions in general were not only getting a green light, they were being ushered onto the autobahn. Shares of two other potential (and non-media) takeover stocks that posted big gains yesterday were ExpressScripts (ESRX) and biopharmaceutical firm Clovis Oncology (CLVS), which specializes in cancer-fighting drugs and rallied more than 5%.

Experienced traders understand that huge news-driven moves are often driven by emotion, and can reverse, at least partially, just as quickly as they emerge. And buying a stock (like FOXA) that has just jumped more than 7% in a day and is trading at an all-time high leaves little room for error. (Standing in front of the freight train with a short trade doesn’t seem too appealing, either.)

Clovis Oncology (CLVS), 1/4/18 – 6/13/18. Off from highs.

Source: OptionsHouse

Clovis presents a different situation, though. As the weekly chart above shows, the stock is nowhere near its all-time high—in fact, it’s trading for less than half of its September 2015 peak price, and has been zig-zagging lower for almost a year from its July 2017 high. Clovis had, actually, been cited early in the year as an attractive candidate partially because of its relatively low stock price (which was $64 at the time, compared to around $44.50 now) and its past tendency to shoot higher on takeover rumors.2 It got some additional attention in April based on FDA approval and a positive outlook for one of its flagship drugs, Rubraca, in treating ovarian cancer.3

The daily chart below shows that before yesterday’s surge, CLVS shares had retreated to the level of their May lows—a nicely defined support level that many traders may view as a demarcation line: For example, two or more consecutive closes below the support level will cast doubt on the stock’s chances of rebounding in the near future, while the ability to hold on to at least some of yesterday’s gains could improve the odds of a push to the May swing high around $54—regardless of the takeover story.

Clovis Oncology (CLVS), 4/27/15 – 6/13/18. Rebound or head fake?

Source: OptionsHouse

Mergers and acquisitions are often rumored, but many never materialize and others take months or years to conclude. What never changes is the need to get into trades at advantageous price levels and control risk. That way, “surprises” like takeovers have a better chance of working in your favor.

 

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1 Bloomberg.com. Investors Are Betting on the Next Big M&A Deal After AT&T’s Win. 6/13/18.

2 Forbes. Clovis, Incyte And BioMarin Are Todd Hagopian's Top Takeover Candidates. 1/24/18.

3 TheStreet.com. 3 Potential Biotech Buyout Targets in the Second Quarter. 4/11/18.