Soon to be part of the PTG Group of Companies.

Photographer: Scott Eells/Bloomberg

Avon Stockholders Can't Take a Joke

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Today Avon Products got a takeover offer from PTG Capital Partners, a global private equity firm in the same elite league as RKK & Co., Bane Capital, Bluestone, the Carlisle Group, and Schmerberus Capital Management. The offer is for $18.75 per share, a generous premium to yesterday's close of $6.67.

It is also self-evidently nuts, even beyond the fact that PTG manages to misspell its own name in two places. Avon "said it never received" PTG's offer -- perhaps there was a typo in the address? -- and "is treating the offer as a hoax." The only evidence that the offer exists is PTG's securities filing announcing it. This is bad evidence. Anyone can announce things. "'I’d give it less than a 2 percent chance of being legit,' said Stephen Velgot, head of event-driven research at Renaissance Macro Research," and I will sell him that 2 percent chance all day long.  

I guess there's one other piece of evidence for the offer's reality, which is this:

Shares never quite traded at the offer price, but they did get as high as $8.00 before everyone started treating the offer as a hoax. (Some of the jaggedness in that chart comes from a trading halt.) I submit to you that some part of that jump is attributable to dumb computers scanning the press release, seeing the offer and buying. Some other part is attributable to dumb people scanning the press release, seeing the offer and buying. And a further part is attributable to smart and/or lucky people and/or computers scanning the press release, seeing the fake offer, and figuring they could buy and sell to a greater fool before the inevitable halt and/or crash. 

But no part of it is attributable to reasonable people reading the press release and making an informed decision that PTG's offer is a material event for Avon's stock. PTG's offer is a transparent hoax. Perhaps it is just an amusing piece of performance art, or someone practicing with the Edgar securities filing system, but my assumption is that it's a money-making hoax. It's a sort of spoofing: Whoever's behind PTG presumably wanted to sell some Avon stock at a higher price than they paid for it, so they announced a massive bid to buy the stock at an absurdly inflated price. And it's a neat kind of spoofing, because unlike say Nav Sarao's alleged spoofing, PTG is at no risk of having to actually execute the purchase. PTG probably doesn't even exist

On the other hand it's the sort of spoofing that the Securities and Exchange Commission will probably notice. But if you do your sales anonymously enough, or in a far-away-enough place, perhaps you can escape the SEC's wrath even though it knows what you're up to. I don't know; I guess we'll find out. 

A while back we talked about a joke press release from Tesla, which also moved Tesla's stock up for a few moments before people and algorithms realized that it was a joke. Tesla has not, as far as I know, gotten in any trouble for that joke press release, which is partly a matter of intent: Tesla's intention was to make a joke, not to make money by manipulating its stock. But there's also a question of materiality: Would a press release that is obviously a joke "have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available" about the company? I said at the time:

Would this press release significantly change a "reasonable investor's" view of Tesla? Obviously not. Did it move the price? Apparently! This joke added -- very briefly, sure -- more than $100 million to Tesla's market capitalization. Would a reasonable investor care about a price move? Does the unreasonableness -- let us say charitably, the speed and literalness -- of the market make things that would not otherwise be material, material? My instinct is no: I think that materiality means what it says, and if people or algorithms do dumb things with trivial information that's their problem.

I suspect that the SEC will take a different view about PTG's press release. Algorithmic trading has really made the markets unsafe for comedy. In the short term, the reasonable investor is no longer the person setting the price in securities markets, and the sort of information that might not be material to a reasonable person can have a big effect on the unreasonable algorithm. While those algorithms may improve price efficiency most of the time, they're weirdly easy to dupe, and they're duped weirdly often. PTG was able to add $600 million to Avon's market capitalization, for a little while, without adding any real information to the market. Without even spelling its own name right. It's not an impressive moment for market efficiency.

  1. "Blackrock," I thought for this joke, and then, oh, wait. Also I bet there is a Bluestone. Sorry Bluestone! While I have you here, it bothers me that "Blackacre," a wonderful name for a real estate private equity firm, is the name of Cerberus's private equity firm and not Blackstone's. (Or BlackRock's.)

  2. E.g. it's got various punctuation and spacing problems, it says that "a combination of the Company and PTG Partners would result in substantial benefits to both our shareholders and to the Company's shareholdersand employees," it mentions a fake law firm, etc. Also most notably the boilerplate is pretty much copied from TPG Partners' Wikipedia page.

  3. The stock was at say $6.60 before the offer and is a bit above $7.00 as I type this; if you attribute 40 cents of gain to this offer, then that's 40 cents out of the $12.15 offer premium ($18.75 - $6.60), or a bit over 3 percent, suggesting that the market gives the offer a 3-4 percent chance of being legitimate. SEEMS TOO HIGH!

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net