I agree with Joel. Inertia will reign until earnings come out.
As I stated in an earlier message, I firmly believe that the current discount was created by a difference in the confidence the shareholders of each company had in their investment. A large number of Rational investors probably averaged down after the stock drop. PureAtria investors just kept selling. So why does the discount remain? One must realize that compared to other recent mergers like MCI-BT and 3Com-U.S. Robotics; there isn't a huge amount of interest in these two companies. They produce products that currently only represent a market niche, although a rapidly growing one. Not a large amount of people have heard of these companies. Just take a look at the number of posts on the PureAtria and Rational threads in this forum. The number of responses pale in comparison to other companies. (I also remember being surprised at the total number of investors listed in the proxy statement for the Pure and Atria merger; I believe it was substantially less than one thousand.) Of those investors that are interested in these companies, a good number probably sold their shares after the merger announcement last week and are a somewhat relunctant to put money back in. So, one won't find individual investors appreciably moving these stocks.
So what of the institutional investors; why aren't they taking advantage of this discount? Institutional investors tend to be conservative and have significant experience in the market. They know that once the momentum investors leave a stock, it tends to drift downward for a month or more unless news brings significant renewed interest. Mergers only worsen the problem until they are completed. Momentum investors avoid marriages like this one, where both companies are nearly equal in size. It doubles the risk. Any bad news from one of the companies usually materially affects both companies equally; the effect of good news becomes diluted. Today, PureAtria announced their first quarter earnings and it was slightly better than the pre-announcement. This news should already have been priced into the stock with the pre-announcement. What this means is that Rational has become the near-term metric for judging an investment into this merger. Right now, the discount is only a good bargain as long as Rational investors remain confident. Rational must beat expectations in its upcoming earnings announcement before the institutional investors will buy. Otherwise, Rational shares will drop again, erasing the discount or even drop beyond the discount causing a further drop in PASW shares. The earnings announcement may also include an estimate of the amount Rational will charge against third quarter earnings to pay for the merger. If investors think its too high, it may also trigger a sell-off. One must also remember, that as a whole, the markets are still jittery. We are also approaching the slow months for tech stocks. These last two factors only increase the risk of investing in this merger.
Assuming my analysis is sound. Should an individual investor take advantage of the discount? Assuming that you have long term goals, I think individual investors should by PASW stock now. I think that it is more likely that investors will have a favorable reaction to Rational's earnings announcement. And, individual investors will certainly want to be in these stocks before the big players start buying. However, one should probably wait until late tomorrow afternoon just to see what the street reaction is to today's PASW earnings announcement. |
