by Thomas DeMark

I have been in the investment business for a long enough time to witness all the fads and market concepts that are imaginable.  The era of corporate takeovers was a thrill for me.  Fortunately, the supply-demand models I had created were installed and were being successfully used prior to the advent of this period.  Initially, my work would alert me to those situations in which aggressive buying was taking place.  Most technicians are parasites and require no fundamental justification for their market activities, so I assumed that positive fundamental developments had precipitated this demand.  I was soon to learn that a pattern had developed that correctly predicted pending buy-outs.  At last count, between 1978 and 1982, more than 32 acquisitions were correctly forecasted.  I even had the gall to notify corporate presidents and announce that their companies were being acquired.  In fact, I was described by one journalist as the “grim reaper.”

My goal here was to share information I acquired from experience to further validate acquisition candidates.  Having played basketball, I was never satisfied with the easy lay-up.  When I was put in a lay-up situation, I often passed the ball or made an effort to score with a more difficult shot.  The same strategy applied to inside information and potential buy-outs.  Not only did I prefer to make the process a challenge but I also was confident that by the time pending rumors of buy-outs were widespread and nothing was announced formally, the rumors were more than likely bogus.  I tried to explain this to others, but they were unwilling to listen.  I did much research to convince them with logic and with examples.

In the early 1970s, there were occasional buy-out rumors.  Most legitimate instances demonstrated a similar pattern.  I noticed that a surge in price volume was followed by a respite period of typically just over six months.  I came to respect this pattern; under the tax laws at that time, long-term capital gains required a holding period of six months.  Furthermore, the governmental agencies were not actively involved in prosecuting traders for insider activity.  Consequently, I was always aware of rumors from reliable sources and I advised others that, typically, the official announcement was more than likely forthcoming much later because the insiders were probably still in the process of accumulating stock personally – even though I never capitalized on this fact myself.  At the same time, the acquiring company was careful not to accumulate more than the percentage of the shares outstanding before the government required a formal acquisition announcement.

After the tax law was changed to abolish the six month holding period requirement, other factors that served to confirm rumors of a buy-out were tested and were applied successfully.  My belief was that once the rumors were received by the lowest common trading denominator – the public – and still nothing was formally released, more than likely they were nothing more than rumors.  To prove this fact to others, I conducted the following exercise.  First, I researched and confirmed the total shares outstanding.  Next, I multiplied the number of shares outstanding by 5 percent to arrive at a benchmark.  In turn, I multiplied this figure by a factor of 5.  Because the Securities and Exchange Commission (SEC) requires any shareholder accumulating in excess of 5 percent of a company to divulge this information, I assumed that for every share a potential buyer accumulated, four shares were being bought by others.  Were a rumor proven to be fact, then the critical 5 percent ownership would most likely be completed by the time 25 percent of the shares outstanding had been traded.  This particular filter process served me well in convincing others to avoid disasters.

Another important observation I have made throughout the years relates to the price activity displayed by a stock which has been “put into acquisition play” by the release of a statement from the acquiring company.  Specifically, once the announcement is made and it is a cash – as opposed to a stock – purchase offer and the price of the shares immediately trade at or above the acquisition price, generally either a higher price is bid by the suitor, additional buyers appear, or, in any event, the deal is easily expected to be consummated.