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Over the last several weeks we embarked on a little research project to analyze the characteristics and returns of the “potential” deals we have been tracking in a section of Inside Arbitrage called “Deals in the Works” (DITW). We started tracking these “potential” deals two years ago and built a tool for premium subscribers to see which of these rumored deals eventually came to fruition and which ones failed. To avoid speculative noise or baseless rumors, we restricted the types of deals we included in this DITW tool and described them in the disclaimer section of this tool as,
“These potential deals are ones where i) the company has indicated that it is “seeking strategic alternatives”, ii) there has been an unsolicited bid for a company as mentioned in a press release by the company or iii) news about the deal has been published by a leading news organization like The Wall Street Journal, The New York Times, Bloomberg, Financial Times, The Washington Post, Reuters and The Associated Press.”
“As best as possible we will try to avoid baseless rumors. There is a high probability that many of these potential deals may not materialize and if they do, the terms of the deal may be different from what was initially reported. Please do your own due diligence before buying or selling any securities mentioned on this website.”
With over 200 deals in this tool, a question by a recent premium subscriber about the types of deals that succeed and the ones that fail prompted me to analyze the data in more detail. Out of the 205 deals we analyzed, 80 succeeded (39% of total) and the successful ones generated returns of 11.96%. Confirmation of the deal usually followed in quick succession after the rumor came out and hence annualized returns were even more impressive at 149%. Unfortunately the 61% of the deals that did not materialize or that became inactive (we mark them as inactive if there is no deal within six months of the rumor) wiped out the gains from the successful ones.
We then decided to dig deeper and see if we could find any signals by looking at the type of potential deal, including news reports, unsolicited bids or the company announcing that they were seeking strategic alternatives. We did find some interesting patterns but nothing that looking particularly appealing and the numbers were so small that the results were probably not statistically significant. I shelved the post I had started writing about this little research project and figured I will revisit it when we had more data.