Wall Street Rumors: Damned If You Do, Same If You Don't

Takeover rumors have always been part of the game of Wall Street, but there are times they fly so quickly you don't have time to consider the sources.

Amid the seemingly unstoppable mergers-and-acquisition boom, buttressed by private equity, unconfirmed rumors now appear to be proliferating like weeds, sometimes just before or after bad news or unexpected events and sometimes out of the blue. Spreading these weed seeds often are one of the many Web sites geared to traders, whose reports include stock tips, such as Briefing.com, JAGNotes.com or TheFlyontheWall.com. "We're trying to explain stock movement," says a spokesman for TheFlyontheWall, who quickly adds, "We pass on more than we go out with."

Still, consider the action of April 9. Briefing.com published the following blurb: "Krispy Kreme Doughnuts (KKD) trades to session highs; spike attributed to private equity." Just three days later, the doughnut maker announced disappointing financial results that caused the stock to begin a 17 percent slide over next three weeks. On May 2, the day after bad news for Liz Claiborne (LIZ) and several rivals dragged down most of the apparel-maker group, Jos. A Bank (JOSB) rose. Briefing.com attributed the rise to "private equity chatter."

Then there is OmniVision Technologies (OVTI) , which makes sensor chips used in camera phones. In late March, several weeks after reporting disappointing financial results, the stock jumped 14 percent in one day on "unconfirmed & renewed takeover chatter," according to TheFlyontheWall. "The Fly," as it is sometimes called, quickly added that OmniVision "has been frequently mentioned as an M&A target." On Friday, the stock rose again on takeover noise.

Also on the recurrent-rumor front: In recent years there have been on-again, off-again rumors that Coca-Cola (KO) was buying Starbucks (SBUX) or, more recently, that Starbucks would go private. Or that Gap (GPS) would go private. (Officials of all companies mentioned above declined to comment or didn't return calls.)

Not surprisingly, the merger boom has ramped up the pace of unsubstantiated rumors, says a TheFlyontheWall spokesman, who adds that he has never seen so many rumors. They are so plentiful that he guesses no more than 1 percent to 2 percent ever get beyond the rumor stage.

In the mid-1990s, before the Internet was as developed as it is now, "about 25 percent of takeover rumors become reality," says finance professor Khalil M. Torabzadeh of the University of Lethbridge in Canada, who co-wrote a 1966 study on takeover rumors and is working on a follow-up. The study showed that market participants "are very good at differentiating between true and false rumors." If the financial press picks up the stories, "there's a higher probability they'll be true" and that the stock price will move even higher than if there hadn't been a rumor, Mr. Torabzadeh says. Of course, he adds, if it turns out the rumor was nothing more than a rumor, the stock price will go right back down to where it started.

Dollars for doughnuts

As I noted last week in my blog: In a November column, I chided Prudential analyst Howard Penney for writing a bullish report on Krispy Kreme, even though the company's SEC filings at the time were more than a year out of date. How could he write a report without credible and reliable numbers? Prudential's policy at the time barred analysts from talking to the press. That's no longer the case, so after he downgraded the stock in the past week, I asked the question again. "I listened to commentators for financial networks criticizing analysts for merely spitting out the company press releases," Penney says. "So here is someone who spends tremendous time to build a model, who takes the time to do the work, and he gets criticized for it. You can't have it one way, and say we're doing no work, and have it another and say we're irresponsible for doing this."

The stock has since made a complete round trip - and then some.

Damned if you do; damned if you don't.

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