July 2nd, 2012

“Mind the Gap”

I was struck by the stock action of two buyout announcements prior to their recent announcements.  We all found out about over the past couple of days but it’s clear by looking at several gaps up over the past couple of months in both of the stocks that some who knew about the prospective deals at higher than market prices were jumping in ahead of the announcements.

    1. AMLN: On Friday, Reuters reported that “Bristol-Myers Squibb Co will buy biotechnology company Amylin Pharmaceuticals Inc for about $5.3 billion in cash [or $31 per share]. Bristol-Myers said late on Friday it had also reached a follow-on deal with UK-based AstraZeneca PLC to collaborate on developing Amylin’s products once the buyout is completed, expanding upon an existing partnership between the two pharmaceutical makers in diabetes treatments.”  But AMLN has been one of the best market performers this year appreciating from $12 at the end of 2011 to $28.20 at Friday’s close.  Even more interesting were the five gaps with the first being in January and the largest in March, each accompanied by higher than average trading volume.

  1. QSFT: According to RTTNews.com, “Trading in shares of Quest Software Inc. (QSFT: News ) was halted. Dell (DELL: News ) has agreed to acquire the company for $28.00 per share in cash for an aggregate purchase price of approximately $2.4 billion, net of cash and debt.”  QSFT also saw 4 pre-announcement gaps higher over the past four months as the stock raced ahead from $19 in March to Friday’s close of $27.81; these gaps were also accompanied by higher than average volumes.

I bring these to your attention is not for political reasons but to underscore another technical indication of a possible trading opportunity.  Anyone who’s ever ridden a subway or commuter train has heard the warning to “mind the gap” between the train and the platform.  A similar warning can be made to traders.  Not every price gap up with higher than average volume leads to a tender offer but many often can present some quick (over a few days to a couple of months) and profitable trading opportunities.

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