Two Tales, Both Stinky*
ConAgra Offers to Acquire Ralcorp for About $4.9 Billion
–headline, Bloomberg.com (5/4/2011)
It’s hardly unusual for the target of a corporate acquisition to jump in price: such deals often occur at premiums, and can occasionally trigger bidding wars, further goosing the target’s stock price.
So, what’s the big deal about Ralcorp stock popping $6.3 a share last Friday, and another $6.8 a share Monday?
The takeover news wasn’t formally announced until this (Wednesday) morning, May 4 — whereupon Ralcorp’s stock promptly rose another $6 a share.
Proponents of legal insider trading, who of late seem to be becoming more vocal, make the case that prosecuting insider trading is notoriously difficult.
They further argue that having insiders trade on non-public information actually makes markets more efficient by promoting better pricing; and that no one is harmed by such trading.
To which I have a rather unambiguous, one word response: ‘Bullsh%#!!’
Who’s Harmed
According to TheStreet Wire, Ralcorp traded something like 2.6 million shares on Friday — more than four times its usual daily volume.
The only catch is that Sellers, who accepted $70 or $72 or $75 for their shares, clearly didn’t know something that Buyers (or at least some Buyers) did: that ConAgra was about to annnounce an $86/per share all cash offer.
The harm they suffered is the $10-$15 per share profit that they left on the table — which properly belongs to them, not the Buyers.
If the SEC were doing its job, two things would now happen: 1) those ill-gotten profits would be returned to the out-of-the loop Sellers; and 2) Buyers who bought with material, non-public information would be prosecuted, i.e., they’d be required to disgorge their profits, and face civil and criminal penalties (otherwise known as fines and jail time, respectively).
And by the way, should anyone at the SEC happen across this blog post: FYI, the biggest harm isn’t to the clueless sellers of Ralcorp stock last Friday and Monday — it’s to the market’s reputation for integrity and transparency.
*Stinky story #2 (pun intended): an older man goes to his doctor to complain that every day he has a bowel movement at precisely 7:30 a.m.
Noting his patient’s age and the regularity problems that can afflict older people, the doctor is non-plussed.
“Why is that a problem?” he asks.
“Because I don’t get up until 8 a.m.,” the man replies.
