This is What a Takeover Bid Looks Like

Good evening, Friends, I hope that everyone is doing well. There hasn’t been a formal announcement as yet, but London’s “Telegraph” newspaper has apparently indicated that a British company is preparing a bid for Canadian grain producer Viterra. The latter mentioned on Friday only that it had received expressions of interest in a takeover, which was apparently enough to have a rather noticeable effect on the stock. In addition, since the rumored acquisition will involve a UK-based company acquiring a Canadian firm, a look at GBP/CAD seemed in order. Here’s the result (on an hourly, not a daily, chart):

I’ve been involved in a few cross-border M&A deals over the years, and in my experience one of the first things that a potential acquirer does is hedge their currency exposure, often by buying a call, offsetting the premium expense by selling a put.  In this case, the investment bank would have hedged the option exposure by selling GBP (the currency of the supposed acquirer) and buying CAD (the currency of the target company). It sometimes happens that a bid has to be sweetened, which might involve coming into the market directly for some additional funds,  but I’ve never known a case in which a potential acqurer simply went into the spot market to purchase currency following an announcement of a bid. In short, once the bid has been announced, there’s almost never any point in taking a currency position in anticipation of demand; that’s already done.

In one case, I recall a U.S. corporate buyer of a French company who bought a call and wrote a put in anticipation of making a bid; the trade moved so far in the firm’s  favor prior to the announcement of the takeover that the Treasurer was able to take profits. He put the trade on again when it retraced, considerably reducing the cost of the acquisition, and making my desk a fair amount of money in the process.

In some cases, it’s possible to take advantage of a situation like this by monitoring spikes in volume, or by placing alerts above (or below) well-defined resistance/support lines, although as seen in the first chart, it isn’t for the slow, or for the faint of heart. Buying on a break above well-defined resistance is similar to the technique taught by Todd as the “first half hour breakout”, although the key determinant is price, rather than time. As I mentioned, there’s usually no point in putting a currency position on in the expectation of additional demand, although it isn’t unusual to see a little pop in the wake of an announcement. That won’t be the “smart money”. Best of luck in the coming week!

About the Author Brian Keith


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