What Can Happen When A Stock Merger or Buyout Falls Apart

Deals are never done until they're done. They can break-up at any point along the way to merging or a company being acquired. There are plenty of these that go through fairly smoothly...but then there are others that end very badly.

The T-mobile (TMUS) and Sprint (S) merger has been like an on-again-off-again bad relationship. They can't make up their minds what they want and they can't seem to agree on much. So when the news hits that they're in merger talks or acquisition talks, the underdog stock can tend to get a bump up in price.

However, if the deal falls through, that stock can get pummeled. And that's exactly what happened to Sprint today when it was announced that the deal was called off, yet again.

Sprint was down over 11% on the day and T-mobile was down almost 6% on the day. So neither company really did their shareholders justice.

Sprint got pummeled down to a new 52-week low on massive selling volume. It's important to know what can happen to a stock if a deal unravels. Why? Because right now, there are more big mergers/acquisitions on the table.

For instance, Broadcom (AVGO) is talking about buying Qualcomm (QCOM) for $70 per share. It's not certain at this point whether Qualcomm will take their offer or not. There is huge speculation that they will reject this offer. If that happens, the huge run-up that Qualcomm has experienced in the near-term could dissipate.

Keep in mind too that if Qualcomm accepted their offer, it would have to pass regulatory approval. If not approved the deal could fall apart. And if QCOM rejects the $70 takeover bid from Broadcom, Broadcom could choose to do a "hostile takeover bid". This is where Broadcom tries to appeal directly to shareholders and get them to sell enough shares to them so that they can put enough people on QCOM's board to gain control of the company that way. Here's more on that: http://www.investopedia.com/terms/h/hostile-bid.asp

So while a shareholder can always hold the shares and see what comes of it all, they do run the risk that the deal falls apart or doesn't get approved. Therefore, if you own the stock and you're up a lot percentage wise, you may want to consider taking profits to lock-in your gains and avoid these other potential risks.

If you hold the company and you're not up on your shares or you're not up a good amount (percentage wise) then you can always choose to hold those shares SINCE Qualcomm has such strong fundamentals. Depending on your breakeven price and thus your percentage gain will depend on which move you'll choose to make.

But just know, in the near-term there are downside risks if the deal falls apart for any reason. Yet long-term, the stock still is solid and has a great outlook whether these two companies join together or not.

As a side note, Intel (INTC) is probably watching this closely and is probably sweating bullets if these two companies were to join together. Intel's stock is grossly overbought anyway. So if these two companies did come together, it would give shareholders a big excuse to sell INTC shares massively. After all, Intel is a solid company, but its price is overbought, big-time and could be due for a sell-off anyway.

God bless!

I've been shorting Sprint with a long term put option. Their debt is staggering and revenues aren't strong enough to pay it down before they default, I don't think. Frankly, I was surprised that T-Mobile wanted anything to do with taking on their balance sheet.

Sprint carries too much debt and T-mobile doesn't carry enough cash on their books. So I wouldn't want to hold either stock, personally.