If you’re an avid trader, all the stock price action that open offers generate may appear very tempting. Just consider the statistics. Prices for 121 of the 142 stocks zoomed within a day of the announcement.
The offer itself was at a premium to the market price for two-thirds of the companies.
And with some of the tiny companies, there was the opportunity to make gains beyond your wildest dreams.
But while open offers can offer you quite a wild ride if you already happen to own the stock, they are rather dicey as a short-term trading opportunity.
Most traders may think of buying the stock immediately after an open offer announcement.
But buying a stock in the market post the announcement and tendering it in the open offer hasn’t worked out very well, as the stock price reaction to an open offer announcement is very swift. This leaves you with very little opportunity to benefit from the upside.
Going, going, gone... Forget price moves after announcement, the action in some stocks actually begins much ahead of the event.
Unilever Plc’s open offer to HUL investors at ₹600 a share was made public in the early hours of April 30, 2013.
But the stock price action commenced a day ahead of the public announcement.
The stock closed nearly 7 per cent higher on April 29 and on April 30, opened with a gap of 10 per cent. It swiftly hit a high of ₹597 within minutes, giving very little opportunity for traders to get in on the action. Likewise, the up-move in the price of GSK Consumer Healthcare India stock following an open offer announcement by its parent was so rapid that, once again, new investors didn’t stand a chance. GSK Consumer Plc offered ₹3,900 per share, 28 per cent higher than its last closing price.
The announcement was made in the morning hours of November 26, 2012; the stock opened 20 per cent higher, immediately hitting the upper circuit.
The next day saw the stock once again hitting the 20 per cent circuit at ₹4,391.
With the stock shooting 13 per cent higher than the open offer price, where was the chance for any trader to make a killing? The stock did not slip below ₹3,666 in subsequent trades either.
Given the unfavourable tax treatment for open offers — short-term capital gains taxed at the slab that you fall under — investors who’d attempted to capitalise on this opportunity would not have tasted much success.
Hitting the pits The other risk here is that if for some reason you don’t sell the stocks during the rally, there is a good chance that you lose your principal, with a fall in the stock price post-open offer.
Of the 142 stocks, seven went on to subsequently de-list from the bourses, 13 turned illiquid; 76 stocks saw their prices correct post-offer. Look at Swagruha Infrastructure, Grandma Trading and Agencies and Yamini Investments — though investors could have made big money in some of these illiquid stocks that offered sky-high premiums, they were the ones that crashed 80-90 per cent once the open offer closed.
Related link: Hitting the jackpot with open offers