The Danger of Investing in Buyout Targets

International Paper's (IP) unsolicited public offer for forest products and paper company Temple-Inland (TIN) valued Temple at $3.3 billion or $30.60 a share. That's a premium of 45% above where Temple's shares traded Monday, seemingly a very generous proposal. Even so, Temple-Inland turned down the hostile takeover bid. Buyers poured into the company's shares in the hopes of a higher or alternative offer, but there is no guarantee it will be bought at all.

Investors who have jumped into the stocks of takeover targets have been burned repeatedly over the years, and this Temple surge may be no exception. Other deals that looked like "sure things" have died. One of the most visible of these was the Microsoft (MSFT) bid for Yahoo (YHOO). In early 2008, Yahoo shares were around $19, and Microsoft offered $31 a share -- a 62% premium to the market. That bid pushed shares up past $30, but Yahoo's board turned it down. The deal died. Anyone who bought Yahoo expecting a better offer to arrive was disappointed: Today, Yahoo's shares trade at just over $15.

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Earlier this year, NYSE Euronext became a buyout target as Deutsche Boerse made an offer for the company. Nasdaq OMX (NDAQ) and Intercontinental Exchange prepared a competing offer. Concerns that regulators would not approve the deal made Nasdaq drop its bid. NYSE shares hit $41.60 in early May. They now trade at $35.50.

Even rumors of buyouts can lift stocks, but when buyouts don't materialize, shares can drop as quickly as they rose. Martha Stewart Omnimedia (MSO) retained Blackstone to look at options for the company's ownership. Noble Financial Group said the shares could rise to $10. The stock did briefly rise to $5.38 from just below $4 when Martha Stewart Omnimedia announced its intentions. Shares fell back to $4.85 Monday, a drop of over 8% in one day.

Trying to ride a buyout wave may seem like a good way to make money. In many cases, it's actually a quick way to lose it.

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