Banking on a Buyout: Research In Motion Ltd (BBRY), The Walt Disney Company (DIS), WebMD Health Corp. (WBMD)

The ZipCar Situation

I read several articles talking about how great it was for shareholders that Zipcar Inc (NASDAQ:ZIP) was bought out by Avis Budget Group Inc. (NASDAQ:CAR).  There were more than a few traders dancing in the streets because they had bought in when the stock bottomed out around $6.  When the company was bought out by Avis for about $12, they made a really quick double.

But that didn’t represent the majority of investors.  The majority had been in at least a year.  People who bought a year before the buyout lost around 15% because of the buyout.  Those who bought at the IPO lost over 50% of their investment.

Why Settle For Buyouts?

There’s a better way to invest than investing in companies in the hopes of a buyout.  Instead of investing in weak companies hoping they are bought, why not buy the strong companies that are doing the buying?  When my Marvel got bought, I wanted nothing to do with Disney.  I was still a little bitter.  But how wrong I was.  If I had accepted the shares of Disney, I would be sitting on a near double, with an ever increasing dividend for the icing on the cake.

And truth is, The Walt Disney Company (NYSE:DIS) is a great company to be a part of.

DIS Revenue TTM data by YCharts

Despite being the colossal company that they are, this company is still building its empire.  And speaking of empire, the recent Star Wars purchase is yet another example that this company will continue to make investments to ensure that they stay a money-making machine for years to come.

The same can be said of some of the companies among the rumors.  Instead of buying a Research in Motion Ltd (NASDAQ:BBRY) that has a lot of problems, why not buy the stronger and healthier Microsoft?  Yahoo! has been growing their business lately, while WebMD Health Corp. (NASDAQ:WBMD) has become stagnant.

Final Thoughts

Let’s imagine you are in a rowboat at sea.  To one side of you is a sinking ship.  At the other side is the Coast Guard there to rescue the sinking ship.  Which ship would you rather board?  Would you rather board the sinking ship, or the ship who rushes in to save the sinking ship?

Invest in companies that are healthy.  Don’t invest in companies that are sinking.  Buyout rumors are just that: rumors.  If you invest in a healthy company that is appreciating in value, then you are winning.  Eventually if they are bought out, you’ve experienced a nice climb with your investment.  But if you invest in a sick company in the hopes that they are bought out, you have no idea if or when that will happen.  You may loose a large part of your investment waiting for the share price to pop.  It’s just too much speculation to be even considered an investment.

The article Banking on a Buyout originally appeared on Fool.com and is written by Jon Quast.

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