Are Insider Traders Moving Taleo?

This morning, as the greater equity markets are moving higher on positive comments from European leaders, the technology sector is swarming with activity. Various financial transactions have been announced, including amicable contracts, debt and equity offerings, and mergers and acquisitions.

One big story is that SAP SAP announced that it will purchase SuccessFactors SFSF for $3.4 billion. The move comes after a week of strong equity activity, and may simply be a testament to the strength contained on corporate balance sheet. SAP is seeking to streamline costs and increase its exposure to multiple sub-industries with the acquisition. It also hopes the acquisition will be accretive to earnings in 2012.

Other tech companies that have made significant gains in early trading today include Concur Technologies CNQR and Taleo Corp TLEO. Taleo Corp gained over 18% so far in today's trading session, apparently on minimal news. While the rest of the technology sector is performing well, Taleo gapped up significantly, which may signify that there is some sort of unknown news that is driving the stock. Currently, we do know that BMO Capital Markets produced a favorable equity research report on the company, meaning that it has increased confidence in Taleo's future success.

What may also be happening is that insider traders are pushing the stock up. It does not appear to be a short squeeze, considering that the stock is quickly approaching 52 week highs. While insider trading is illegal, it is important for traders to be able to recognize large movements in the marketplace. The one question is, how high will it go?

For retail traders who do not know the information behind stocks' price action, it is important to be able to guess where the stock may go. Fortunately for Taleo Corp, the guess is fairly easy. It is very close to 52 week highs, so for conservative investors, there is not enough upside to warrant the investment risk. However, risk-taking traders may consider the prospect of huge news regarding the company.

If Taleo's stock rallies past its established 52 week high, insiders may be trading on M&A news. If that were the case and if the buyer were to purchase the stock for a 5-10% premium - which is very common - then risk-taking investors may be interested in that bet. It would not be surprising, considering that Taleo Corp is a small-cap company operating in a niche space.

Taleo provides clients with talent management services on-site and online. Its current business model can definitely be interesting for large information technology consulting firms, including Cognizant Technology Solutions CTSH, Wipro WIT, and Infosys INFY.

From a financial perspective, Taleo may or may not be a good investment for companies. It has been able to increase revenues annually in a very steady manner, which is always a plus. However, various research and development programs along with increasing salaries and marketing costs have resulted in diminished margins over time. Problems in margins could be solved as a result of an acquisition, as the parent company starts to strip away unnecessary services and streamline costs.

Margins, which consequently brought down income figures, have adversely affected cash flows. Along with increases in receivables, cash flows from operations have been declining over the last 1.5 years, albeit historically volatile. The company has also spent significant sums of cash on asset purchases, acquisitions, and other investments. It has also been diligent about not issuing significant debt securities or equity securities. While this is positive on a more qualitative basis, this has certainly not helped the company's cash position, which has become worse over the years.

Except for cash, assets have been growing positively over the last few years, as Taleo has boosted business and asset acquisitions. On the same token, it has managed to avoid accumulating short-term and long-term debt. It has also collected up to $90 million in deferred revenues, which may have overstated its revenue figures in the income statement.

For these reasons, Taleo may or may not be a good acquisition target for large IT companies. It ultimately comes down to what the buyer wants from its target and what its own financial position is. If it is able to compensate for the lack of cash flow and can streamline costs, Taleo just may be a good target. If not, potential buyers may stay away.

Investors should be able to determine what is likely and what is not in peculiar situations. In times when limited news is available, the safest option is to always stay in cash. However, as Taleo has rallied on huge volume, some investors may want to place speculative bets and think about the possible scenarios for the company's future direction.

Taleo Corp is currently trading at about $39, up over 40% for the year.

ACTION ITEMS:

Bullish View:
Traders who believe that Taleo Corp is an appropriate long investment might want to consider the following trades:

• Purchase Taleo shares as soon as possible. If acquisition speculation ends up being true, then investors will want to maximize the profits made.

• Go long the Technology SPDR ETF XLK, as the technology sector is bound to rally after further positive news, especially if a large IT consulting firm buys out Taleo.

• If my speculation is correct and Taleo is acquired, short the acquirer, as traders will immediately think the transaction could cause problems. Short with a short-term timeframe in mind.

Bearish:
Traders who believe that Taleo is more suited for a short play may consider an alternate position:

• There is a chance that Taleo is moving simply because the tech sector is doing well. If so, it may be overbought.

• The tech sector itself may be overbought, meaning that shorting a tech ETF could be a good idea, if traders dictate a pullback in the coming weeks.

• Considering that Taleo is a small-cap company, shorting the iShares Russell 2000 ETF IWM, may be a good idea.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. Follow me on Twitter at @makinmarkets