Wednesday, January 22, 2020

FT Alphaville's Bryce Elder Is a Genius: M&A Edition

There, I said it.
His introductory paragraph for today's Markets Not Live:
A common problem in M&A reporting (which the author used to do sometimes, until it got too difficult) is how to handle stale deals.

Speaking generally, it tends to be the case that when investors get wind of something non public that might be beneficial to the share price, such as takeover interest, they’ll want to see it publicised. But if people familiar with things insist the takeover interest is in the past tense, reporting it becomes a bit fraught. A lot of traders will buy on any story with the word "bid" in a headline then get mad at you when they reach "not currently" in paragraph three. Both the bidder and the target company will be mad at you for raking over old coals. Corporate flacks will be mad at you for writing a story, contrary to their off-the-record guidance that you shouldn't write a story....MUCH MORE
Which brought to mind this piece from the Columbia Law School's Blue Sky blog which I had intended to post and mislaid:
The Asymmetric Private Information Mask: Informed Trading in Takeovers
The U.S. Securities and Exchange Commission (SEC) has increased the regulation of asymmetric information-based trading, aiming to mitigate disclosure of material private information to select market participants. These efforts have not been fully successful, raising questions about the impact of asymmetric information on private equity trades, informed trades, and expected gains. The integrity of competing market structures and market makers’ rent has heightened the need to understand and measure the cost components of the market maker bid-ask spread. Whether the existence of private information in takeovers through selective disclosure is harmful to financial markets is still uncertain. Inside information is a particularly valuable in the takeover market, especially around private equity bids. Nevertheless, without information asymmetries, private equity would not exist, forcing firms to raise capital from banks and other sources of debt financing. Stock prices thereby include information leakage, evidencing how superior information can lead to superior returns.

My paper, “The Asymmetric Private Information Mask: A Comparative Analysis of Private Equity Bids and Tender/Merger Offers,“ empirically examines whether private equity targets exhibit differences in adverse selection costs due to informed trading, pre- and post-announcement, relative to tender or merger target firms.

Private information may result in increased insider trading as investors seek to maximize profits. Yet the anticipated profit from insider trading may be negated by the time necessary to convert private information into monetizable assets. Given the increased number and frequency of market transactions, and the technological advances that make sharing information easier, over the last 30 years, the risk of market makers encountering informed traders has also increased.  I predict that the expected monetary gain from inside information will increase the permanent spread component of the bid-ask spread, which compensates dealers for losses to informed traders, otherwise known as adverse selection costs. Adverse selection costs thereby represent price protection to buyers who expect to pay less if they believe there is an informed trader and information asymmetries....MUCH MORE
Elder may be the only business journalist in the world who could have triggered that association and thus the chain of events which led to the recovery of the CLS piece.
Now, if only he could help me find my keys.