The Injury from Insider Trading

Mergers become far more costly

In terms of sheer opportunity, those with private information who hope to make a big score in the stock market have never had it so good. So far this year, the nation’s mergers-and-acquisitions boom has already clocked an eye-popping $781 billion worth of deals. And the Securities and Exchange Commission continues to unveil cases of alleged insider trading.

While no one knows its extent, the prevailing of such trading in merger deals has sparked a lively economic debate. Worried that overzealous regulation could impede the flow of news to the market, some experts claim that the harmful effects of illegal trading are exaggerated. Such transactions provide early information to investors, they say, and don’t really drive up the final price paid for acquired companies.

In a new study in European Finance Review, Harvard Business School economist Lisa K. Meulbroek and consultant Carolyn Hart of Ernst & Young conclude that such views are mistaken on a key issue. It’s well known that stock prices of targets in takeovers tend to rise as early as a month before a tender offer is announced. In recent decades, shares of acquired companies have appreciated by 30% to 40% on average by the time a deal is done, with a third or more of the rise occurring before a bid is unveiled.

Such pre-bid run-ups don’t necessarily reflect insider activity. Prices may rise because of news leaks or because a prospective bidder is acquiring shares, or brokers are pushing likely merger candidates. So Meulbroek and Hart analyzed 112 acquisitions from 1974 to 1989 in which illegal trading was detected to see whether their takeover premiums differed from those in the similar group of deals ( matched by industry, year, and size) with no detected illegal trading.

The results were striking. After controlling for such merger factors as number of bidders, payment form, and hostile or friendly bid, the researchers found that takeovers with illegal trading wound up with final premiums averaging 48%, vs. only 33% for the control group. Further, an analysis of daily activity of both pre-bid and post-bid periods revealed that price increases were 10 times as large on days that insider trading was detected as on other days.

Thus, illegal trading appears to cost shareholders of merger-minded companies a bundle. And that, notes Meulbroek, raises the ominous possibility that its impact on acquisition premiums may also derail many otherwise economically efficient mergers.

By Gene Koretz, ”Business Week”

Notes

1. insider dealing (insider trading) –the buying or selling of securities by people whohave more knowledge than others of the company involved because they are connected with it some way
2. target in a takeover – компания-объект поглощения или слияния с другой компанией
3. hostile takeover – враждебное поглощение: попытка овладеть контролем над компанией путем скупки ее акций на рынке (т.е. против воли руководства или ведущих акционеров). Прямо противоположное значение имеет термин friendly takeover – дружественное поглощение

Vocabulary

acquisition -1)приобретение, покупка компании 2) поглощение компании путем приобретения контрольного пакета ее акций ; M & A (mergers and acquisitions) – слияния и поглощения

merger – сляние: сляние двух или более компаний для образования новой компании через взаимный обмен простыми акциями, через приобретение одной компанией акций другой или через консолидацию двух компаний путем образования новой, приобретающей их чистые активы

take-over (takeover) – поглощение: покупка одной компанией контрольного пакета другой компании путем предложения акционерам компании-объекта поглощения приобрести их акции по цене несколько выше рыночной

a bid – предложение: предложение одной компании приобрести акции другой компании; bidding – торги; to unveil a bid – объявить о торгах (при слиянии или поглощении); bidder – участник торгов; лицо, предлагающее цену;prospective bidder – потенциальный участник торгов; a friendly (unfriendly) bid – дружественное (враждебное) предложение приобрести акции компании

Exercises

1. Answer the questions:

1) What are the two contradicting opinions on the effect of insider trading?

2) What are the possible harms of insider trading, in the author’s opinion?

1. Paraphrase the following:

mergers-and-acquisitions boom has already clocked an eye-popping $781 billionworth of deals;they continue to unveil cases of alleged insider trading;overzealous regulation;targets in takeovers; shares have appreciated; pre-bid run-ups; takeover premiums; merger-minded companies; to cost a bundle; to derail many mergers.

1. Find in the text the synonyms to the following:

to make a big profit in the stock market; vigorous economic growth; a deal; to rise in price (value); ten years; unlawful; to offer a price; investor; influence; to happen; to disclose (reveal).

1. Do ex. 14 on page 66 in the Krasnov file.