Monday, September 21, 2009

Insider trading in M&A is alive and well

In an earlier post we discussed the fact that M&A about to pick up steam. That is in fact happening and will be accelerating as companies look for growth avenues in this economy and are feeling more confident about their own share price. Here is an example:

"CNN: Computer maker Dell will acquire information-technology company Perot Systems for $3.9 billion in cash, the companies said Monday. Once the purchase is complete, Perot (PER) will become Dell's services unit, a press release said. Dell plans to buy Perot for $30 per share, 67% higher than the IT firm's Friday closing price of $17.91."

But with M&A comes the dirty little feature of the US equity markets: insider trading. As the SEC spends their resources on implementing misguided registration and oversight of thousands of small hedge funds and venture capital firms, insider trading in public securities is alive and well. The proof is right there in plain sight. The chart below shows the PER Jan $20 call option price action and volume. As expected, the price spiked this morning with the acquisition announcement, but the volume spiked a few days earlier. And this is not some small random volume jump, it's a serious spike for a stock with a fairly sleepy options market.

Source: Bloomberg

Obviously not only was the information about this acquisition leaked out a couple of weeks earlier, but someone acted on it and made a bunch of money. In the boom days of M&A this sort of activity went on all the time and obviously things haven't changed much. It's a sad statement about the US equity markets and their regulator who is unable to halt this illegal practice.

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