Question

Define target run-up? What are some possible reasons for run-up?

Answer 1

Target Run Ups imply a sudden and dramatic increase in stock price and trading volume of the target firm in the event of merger & acquisition. Stock price of Target usually goes up because acquring company pays a premium on stock price of the target. Broadly, following are the reasons for Target Run ups-

1- Market Anticipation- In an efficient market, sophisticated investors can identify potential M&A targets. The stock prices of potential targets may witness a target run up due to acquisition speculation. Price levels and strategic considerations of companies also might indicate a possible merger and acquisition resulting in a run up. Stockes being traded at low prices or financial distress are also indicators of a possible acquisition and may catch attention of the investors.

2- Toehold acquisition- Pre announcement run ups are often result of toehold acquisition. A toehold acquisition means acquiring less than 5% of target company's stock with an intention of takeover bid. This, along with market anticipation, may lead to run ups before M&A announcement.

3- Unreported Insider Trading-Reported insider trading, due to statutory filing requirements do not contribute much to trading around M&A and therefore don't contribute to run ups. However, unreported insider trading through non corporate insiders by way of information leak or tip offs, do contribute to run ups as well as market anticiation which again contributed to run ups.