eBay-Yahoo! Merger Rumor Suckers Traders

The old adage “don’t believe everything you read” came roaring back into vogue this week when some up-to-the second investors lost 20 percent of their investments on outdated rumors of a partnership between eBay and Yahoo!.

The price of eBay’s stock soared more than 10 percent in after-hours trading Tuesday evening based on cable network CNBC’s report that the online auctioneer was in partnership or merger talks with Yahoo!. The report cited sources that claimed the talks had a “50-50 chance” of resulting in a “deep partnership” and a lesser chance of ending in a merger.

Such roaring after-hours action normally foretells a huge opening the next morning, particularly since the news is spread worldwide on the Internet in a few hours.

Talks Were All Talk

There was one problem with the story — it was not true. Financial Times reporter William Lewis reported Tuesday evening at 7:54 pm EST that the talks had died the previous week. According to his sources, the talks were spurred by the America Online and Time Warner merger. Sources said they were called off primarily because of eBay’s long-term partnership commitments to AOL, a major Yahoo! competitor.

It was at this point that the after-hours trading action began, and it was not until midday on Wednesday that the report was thoroughly debunked worldwide — when most of the publications that carried the original story announced that the deal was apparently dead.

Wall Street Reacts

Despite the Internet activity, Wall Street investors were alerted to the truth before Wednesday morning’s opening bell. eBay’s stock opened at $217.25 per share — well down from its high of $235 the previous evening — and dropped throughout the day. The stock closed Wednesday at $189.75 per share, representing a painful loss of $45.25, or 19 percent, for investors who bought at $235. The high-flying Nasdaq itself dropped by 123.95 points.

Fear of Manipulation Real

While there seems to be no reason to believe that manipulation was at the bottom of the incident, the results show how vulnerable fast-reacting financial markets are to potential manipulation.

Just this week, the Securities & Exchange Commission (SEC) charged a former part-time word processing clerk at Goldman Sachs & Co. and Credit Suisse First Boston Corp. with the first case of Internet-based insider trading.

The SEC alleges that the former clerk, John Freeman, 34, met insurance agent James Cooper, 41, and laser printing company executive Benton Erskine, 39, in an Internet chat room where they hatched their plans. The SEC further claims that the scheme eventually escalated to encompass 19 people and generated more than $8 million in illegal profits before it was uncovered.

Risky Business

Ultimately, this episode shows that the rush to disseminate information quickly is essentially a double-edged sword — and that anyone who uses such information to make a lightning-fast strike in the stock market is taking an enormous risk.

More than ever, people should be contemplative about what they read, and, as Tuesday’s eBay/Yahoo! debacle proves, remember that loose talk can — and does — spread like wildfire.