WFM Stock Trading Above Buyout Price
Markets were rocked back last week when Amazon.com, Inc. (NASDAQ:AMZN) announced its intention to buy Whole Foods Markets, Inc. (NASDAQ:WFM). However, something strange has happened since then. The Whole Foods stock price jumped past $43.00, despite the fact that Amazon only offered $42.00 per share. What is going on?
Here is what we know.
There are rumors that Amazon’s rivals will enter competing offers to buy Whole Foods, thus igniting a bidding war. Some analysts raised their price targets on WFM stock to $48.00 in anticipation of this bidding war.
This is to be expected if, and only if, the rumors are true. However, investors should understand that rivals may be spreading rumors in order to sabotage Amazon’s deal. This may turn out to be nothing more than a ploy to hit Amazon where it hurts.
If the company is forced to pay more than its original $13.7-billion offer, then WFM shareholders will pocket the difference.
In terms of corporate strategy, this is pretty standard stuff. Business is always Machiavellian when played at the highest level. But back on the ground, where we retail investors live, there is a different question at play…Namely, is this an opportunity to flip WFM stock?
Should You Invest in WFM Stock?
I don’t think we’ll see an eleventh-hour bid from any other firm, which effectively means the Amazon Whole Foods deal remains solid. Just look at the wording of the announcement.
“Amazon…and Whole Foods…today announced that they have entered into a definitive merger agreement under which Amazon will acquire Whole Foods Market for $42 per share in an all-cash transaction valued at approximately $13.7 billion.” (Source: “Amazon to Acquire Whole Foods Market,” Amazon.com, Inc., June 16, 2017.)
Did you see the most important words in that sentence? They were “definitive merger agreement.”
Not tentative. Not maybe. Not “if nothing better comes along.”
Of course the deal is still subject to shareholder approval, but I don’t imagine that existing WFM shareholders will kick up a fuss, because they already benefited from a 30% bounce on the merger news. This is an all-cash exit for them!
With that in mind, we expect the deal to be wrapped up by the end of 2017.
WFM true believers might rotate their funds into AMZN stock, which can potentially reignite a bullish trend on that investment. But other than that, I think the financial effects of the Amazon Whole Foods deal are done.
The logic for a Whole Foods stock rally presumes too much, and with too little evidence. A story could break at any moment disproving the rumors, at which point Whole Foods stock would plummet back down to $42.00.
Why Spread the Rumor At All?
You might wonder why Amazon’s rivals would go through the trouble of spreading rumors, if that’s indeed how this started. The answer is simple: Fear.
Fear can make people do crazy things, and make no mistake, Amazon inspires fear.
Perhaps not in the hearts and minds of consumers—they are the only constituency that matters at Amazon—but most certainly in the beating hearts of its competitors.
Companies like Instacart took a head start in the grocery delivery business by forging relationships with physical grocery stores. Amazon failed to make similar inroads because it stayed independent. Acquiring Whole Foods makes up for lost time; Amazon gains 430 brick-and-mortar locations.
Moreover, these Whole Foods locations are strategic godsends. They are typically located near young, wealthy professionals that prioritize comfort and convenience over price. In other words, they are exactly the kind of customers that would use Amazon’s delivery service.
Competitors fear this deal because they know the truth: a Bezos/Whole Foods connection can demolish their market share. They are trying to prevent their own destruction, an understandable cause if ever there was one. But it is probably too late.
This train has left the station.