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After a quiet period on the merger and acquisition front, the rumor mill is running full throttle once again. Over the past week, a slew of different companies have been caught up in the takeover speculation. Importantly, no major merger announcements have been made for several months because tighter conditions in the credit markets have resulted in a noticeable decline in buyout and merger activity. Nevertheless, a lot of talk is out there once again, and it is driving the share prices and call activity in a number of potential takeover candidates.

Shares of ValueClick (VCLK) rallied more than 7% on Monday after the stock was mentioned as a takeover player. According to the rumor mill, Time Warner (TWX) is possibly looking at the company. Other names, including Microsoft (MSFT) and Yahoo  (YHOO), have also been mentioned as possible suitors. Regardless, some investors do seem to believe that ValueClick is indeed be in play. As evidence, the stock rose $1.52 to $22.00 a share on Monday and more than 11,000 October 22.5 and October 25 call options traded on the day, or more than ten times VCLK’s average daily volume.

Safeway (SWY) also saw an increase in activity on Monday. Recent speculation is that billionaire investor Eddie Lambert is eyeing the grocery store chain for a possible buyout. Shares of Safeway rose 33 cents to $33.35 as the rumor made the rounds. Meanwhile, call volume rose to more than 9,000 contracts, compared to 1,300 puts and average daily options volume of less than 1,500 contracts. Most of the action was in the October 35 and 40 calls, suggesting that players were looking for a cheap way to play Safeway for a possible move higher in the short-term.  

Shares of Quest Diagonostics (DGX) options saw volume Monday. According to Bloomberg, DGX “call trading increased to 10,296 contracts, a 29-fold rise from the 20-day average, on renewed speculation that the largest U.S. provider of medical tests may be acquired.” The stock didn’t seem to react, however. Shares of Quest Diagnostics edged down two pennies to $56.64 on the day.

Sprint Nextel (S) was in focus on Friday amid takeover speculation. According to the rumor mill, an activist investor has accumulated a large position in the stock and could push for a possible sale. The news helped lift shares of Sprint Nextel 3.8% on Friday. Meanwhile, call volume soared to more than 40,000 contracts, compared to 9,400 puts and average daily volume of 8,500 contracts. With shares near $18.70, the October 20 calls were the day’s most actives. The call traded for 40 cents a contract late in the day and represent a very cheap way to play the stock for a move higher in the short-term.

Takeover speculation infected Boyd Gaming (BYD) late last week. The rumor is not new. It has been around since news surfaced that rival Harrah’s (HET) was being taken out several months ago. However, on Thursday, speculation resurfaced and this time the rumor was specifically that Las Vegas Sands (LVS) is interested in acquiring Boyd Gaming (BYD). Shares rose 2% on the day and call volume jumped to 7,200 contracts, or approximately ten times the normal daily options volume in BYD.

BEA Systems (BEAS) call options ware also active on Thursday. Volume picked up the day after Jim Cramer said on his Mad Money show that the stock’s fundamentals make it an attractive acquisition target. The software company said that it is not interested in being acquired. Nevertheless, BEAS rose 16 cents to $13.54 on Thursday and the move was accompanied by a noticeable uptick in call activity. More than 21,000 BEAS calls traded on the day, compared to only 512 puts.

QLogic (QLGC) saw action late last week after an EMC (EMC)-for-QLGC rumor made the rounds. On Thursday, 16,680 QLGC calls traded, compared to 858 puts and average daily volume of roughly 2,200 contracts. Shares didn’t react to the news and finished the day near unchanged at $12.71. Nevertheless, active trading in the October 12.5 and October 15 calls suggests that some players in the options market were biting on the rumors, and looking for a cheap way to play the stock for a short-term rally.

St. Jude Medical (STJ) is a takeover candidate. Of all the recent rumors out there lately, this one seems the most credible. Speculation is that Johnson & Johnson (JNJ) might be interested in STJ. According to one cardiologist, the move would make strategic sense because JNJ might be looking to beef up its medical device business due to recent problems with its own Cordis medical device unit. Furthermore, Johnson & Johnson “has no new stent or new technology down the pipe to bail them out. Therefore, I can see why they would want to acquire a prosperous company, which would also give them a new pacemaker/defibrillator market,” according to the cardiologist. Shares of STJ rose 4.1% as the rumor made the rounds a little over a week ago. Active trading in the October 50 calls accompanied the move higher.

Importantly, trading solely based on takeover speculation is not recommended. While takeovers can often lead to an increase in the share price of the company that is being acquired, rumors are often unfounded. In fact, bogus rumors will often surface as a stock approaches a key technical level, shortly before options expiration, or at other times when some investors might have a real incentive to see the stock price climb. For example, many of the recent rumors discussed here surfaced just before last week’s option expiration.


Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site
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