Elite Trader Insights: Luke Cummings

Episode 13: Mergers & Acquisitions: The Ultimate Game of Poker

Each week we try to unlock the collective wisdom of the Trading Elite. Strategies and unique insights from hours of interviews with top traders, sliced into bite-sized pieces and delivered to your inbox for your pleasure.

Luke Cummings, the CIO of Harvest Lane Asset Management, is a seasoned expert in trading mergers and acquisitions (M&A) and also, an Aussie. His strategic insights are rooted in his extensive experience, making him a go-to authority in the realm of M&A strategies. In this interview, Luke delves into the mechanics of assessing and trading around takeover bids, offering valuable insights for both novice and experienced traders. Here are the top actionable takeaways from the conversation:

Key Learnings and Takeaways from the Interview

1. Assess the Credibility of the Bid:

It's crucial to determine how serious and binding a takeover bid is. Cummings emphasises the importance of checking whether the bid is binding or non-binding, the history and reputation of the bidder, and whether the bid is fully funded.

2. Understanding the Impact of Major Shareholders:

The stance of key shareholders can significantly influence the outcome of a takeover bid. Cummings points out that if major shareholders, especially founders, are on board with the bid, it will likely proceed.

3. Look for Go-Shop Clauses:

A go-shop clause allows the target company to seek out other potential offers even after receiving a takeover bid. This can be a sign of a potentially lucrative deal if the target company is attractive to other bidders as well.

4. Non-Binding Bids Require Caution:

Cummings advises more caution with non-binding bids as these provide several outs for the bidder and are less certain to close. He looks at the 6 month low of the stock before the bid was announced to determine possible downside, and therefore position sizing going into the trade.

5. Market Reaction Post-Announcement:

The initial market reaction to a takeover announcement can provide insights into the perceived value and likelihood of the bid's success. If the stock trades above the bid price, it might indicate that the market expects a higher bid. “If the stock is trading below the bid price, it may be a sign that investors are skeptical about the deal's chances of success."

6. Importance of Conditional vs. Unconditional Offers:

Understand the terms of the bid. Unconditional offers are less risky as they do not depend on further conditions being met after the bid is accepted.

7. Know Some Law and Utilize Legal and Regulatory Milestones:

Being aware of key dates and regulatory milestones can help in anticipating potential shifts in the deal's dynamics and stock price movements. He also suggests knowing some basics of Takeover Law: "You don't need to understand the full details of corporate law to trade takeovers successfully, but a basic understanding is helpful. For example, you should know that there are limits on how many times a bidder can revise its offer."

8. Event-Driven Strategies Require Active Management:

Managing a position in an M&A situation is not passive. Traders need to be ready to adjust their positions based on new information and developments. Luke also says; "Don't try to day trade takeovers. These deals can take months to complete, so you'll need to be patient." If you do, focus on buying stocks below bid price.

9. Scheme of Arrangement vs. Takeover Bids:

The type of acquisition approach can affect the risk and strategy. Schemes of arrangement typically require a higher threshold of shareholder approval and can be riskier than straightforward takeover bids.

10. Exiting the Trade:

Cummings generally holds positions until the conclusion of the deal but also suggests taking profits if the stock price significantly exceeds the offer price in anticipation of further bidding activity. "We think a lot about a lot of things in annualized terms, what are we giving up here if we sell this rather than holding it on an annualized basis?"

While way out of my wheelhouse, (these guys delved into setups that I haven’t traded for a long time), this chat was engaging and not only shed light on the specifics of trading M&A but also illustrated broader lessons in risk assessment, market analysis, and strategic trading. His approach highlights the importance of detailed due diligence and active management, offering a comprehensive guide for traders looking to venture into the potentially rewarding world of M&A trading & arbitrage.

Cheers

Marto