Garbatrage

In our home country, Shmooperica, domestic automakers were more like auto-“meh”-kers. No matter what they did, they couldn’t seem to compete with car sales from places like Japan and Germany; when buyers were asked why they prefer foreign cars, they cited everything from looks to price to safety features to fuel economy. This was awfully troubling for Shmooperica’s automobile manufacturers.

But then, one day, RapidChow, one of the country’s most successful fast food restaurant chains, makes a surprising announcement: they’ve acquired GoGo Motors, Inc., Shmooperica’s largest auto manufacturer. And before they can really even tell the world what they plan to do with their new acquisition, GoGo’s stock price starts rising and the number of shares being traded increases exponentially. Then, soon afterward, the stock prices of other domestic auto companies start rising as well.

What’s going on here? RapidChow only bought GoGo Motors, so why are these other companies’ stocks rising?

Well, there’s a name for this phenomenon—it’s a garbatrage.

“Garbatrage” is what happens when an industry sees its stock prices and trading volume go up as a result of an acquisition by a company not in that industry. This flurry of activity is totally psychological: investors see one big change happen (like a fast food chain acquiring a car company) and start speculating about what other kinds of big changes are coming down the pike. There might not actually be any physical evidence that any other changes are coming, though, which is why “garbatrage” is also called “rumortrage.”

We love a good portmanteau as much as the next person, but merging words like “garbage” and “rumor” with “arbitrage” makes us question how seriously we should take those kinds of speculations.