Bad News May Prove Good News for This Company

Wall Street is active with plenty of mergers and acquisitions. Even during economic downturns, some companies look to combine forces. However, history isn’t kind to most mergers.

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  • That’s because the acquiring company has to either issue a lot of stock or go into debt. Issuing too much stock dilutes shareholders. And adding on debt can reduce a company’s ability to deal with unforeseen circumstances. That’s why the end of a potential merger may actually be the best outcome for a company… and investors

    Recently, JetBlue Airways (JBLU) was prevented from its proposed plan to acquire Spirit Airlines (SAVE). While JetBlue has to pay a termination fee, it will leave the company better positioned financially than if it bought Spirit.

    Given the high costs of operating an airline, that financial flexibility may prevent future issues for the company from performing.

    And given how travel demand remains strong and energy prices are coming down, it could be beneficial for JetBlue shares from here.

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  • Action to take: JetBlue shares are a speculative buy here. Without the overhang of a merger, they can likely trend higher in the next few months.

    For traders, the June $5 calls, last going for about $0.82, are almost in-the-money. A rally in shares from here could lead to high double or low-triple-digit returns by the time the option expires.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.

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