Professor Bainbridge...on law, politics, religion, culture & food

Pre-Merger Insider Trading

Obviously, one can significantly increase takeover profits if one knows in advance that a takeover will be forthcoming. If you know of an impending bid prior to its announcement, you can buy up stock at the low pre-announcement price and sell or tender at the higher post-announcement price. The earlier one knows of the bid, of course, the greater the spread between your purchase and sale prices and the greater the resulting profit. By using options, rather than actually buying target stock, you can further increase your profits, because options permit one to control larger blocks of stock for the same investment. During the 1980s, a number of Wall Street takeover players—among whom Dennis Levine, Ivan Boesky, and Michael Milken are the best-known—allegedly added millions of illegally gained insider trading dollars to the already vast fortunes they realized from more legitimate takeover activity. This 2006 news report suggests it is still a problem: