When Executives Stop Selling Stock, a Big Deal Might Be in the Works

In December, Investors learned of Amgen Inc.'s $28 billion bid for Horizon Therapeutics PLC. But a Clue to a Potential Deal Emerged Months Earlier, When Insiders at Horizon Therapeutics Stopped Selling Stock.

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The recent halt to stock sales by executives and directors at Horizon has been mirrored at some other big companies involved in recent deal making. This pattern highlights why some hedge funds and other investors scrutinize activity by corporate insiders in the hope of identifying candidates for mergers and acquisitions, which can generate outsize gains.

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According to Ben Silverman, research director at VerityData, which monitors trading activity by corporate insiders, when insiders who are selling regularly stop, it can definitely be a green flag, indicating that the company may be working on a possible deal. The U.S. Securities and Exchange Commission requires executives and directors to report share sales publicly. This allows investors to track their trading activity and see when a stock is undervalued.

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If a sector is consolidating or a company is rumored to be in play, and there is an unusual pause in insider sales, it may suggest that a potential deal is in the works. Insiders typically have to refrain from trading to avoid violating insider-trading laws when they have material information that is not yet public.
Horizon's established treatments for thyroid eye disease and other afflictions are appealing to Amgen and other pharmaceutical companies. These companies rely on acquisitions for new revenue to offset sales lost as key drugs lose patent protection.

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Horizon insiders have been selling shares since August, when weak second-quarter earnings pushed down the company's stock. According to VerityData, this is the only time in more than three years that insiders have refrained from selling for an entire calendar month.

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A Horizon spokesman said this week that the dip in selling was due to the company's second-quarter results and the subsequent stock impact.
Insiders continued to hold off on sales through October and much of November. On Oct. 15, Horizon received its first takeover approach, according to a later filing. In November, its shares surged after it released strong quarterly earnings. Later that month, it acknowledged being the subject of bid interest after the publication of a report in The Wall Street Journal.

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In December, Amgen agreed to buy Horizon for $116.50 a share. This was a significant increase from Horizon's share price in early August, which was around $67. The purchase was a result of Amgen's positive second-quarter earnings release.

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Investors are looking at insider share sales to help identify potential investments. Among those looking at this information are Third Point LLC, the activist hedge-fund manager headed by Dan Loeb, Senvest Management LLC, a New York-based firm overseeing about $3 billion in assets, and hedge-fund firm D1 Capital Partners LP.
Insider activity can sometimes offer clues about potential acquirers and sellers.

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Unless businesses have a system of prearranged stock sales in place, executives typically confine trading to company-imposed windows. These windows usually open shortly after quarterly earnings are released and close before the end of the next quarter.
For example, at retailer Kroger Co., insiders sold shares during each allotted trading window for all but one quarter between November 2018 and April 2022. However, that activity then stopped, according to VerityData data. A later filing showed that Kroger first approached rival supermarket operator Albertsons Cos. about a possible takeover on April 25.

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In October, Kroger announced a $24.6 billion acquisition of Albertsons. Albertsons had said in February that it would consider potential deals, but Kroger declined to comment on the matter.

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Nutanix Inc.'s stock prices jumped by 8% at the start of December, following reports that Hewlett Packard Enterprise Co. had shown interest in buying the cloud-computing provider. However, starting around December 16, at least four Nutanix insiders, including the company's chief operating officer and chief executive, sold shares, according to filings.

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Raj Vazirani, who runs New York-based Vazirani Asset Management LLC, believed that the fact that Nutanix executives were selling their stock showed that the company was not in takeover talks. He bet that the stock price would fall, and his bet paid off when HPE said there were no takeover talks on December 23. Nutanix shares fell by about 8%.

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"I would never have bet against the deal if it hadn't been for the insider sale," Mr. Vazirani said. "That was the main reason I initiated the short position, because it was a clear signal."

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Hedge-fund investors say that this is one factor they consider among many, and that it can be difficult to pinpoint the reasons behind selling patterns.
The use of 10b5-1 plans by companies can make it more difficult to assess the significance of trading activity. These plans allow corporate executives and directors to set up schedules for future stock sales and purchases, which protects them from violating insider-trading rules when they have material nonpublic information.