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BAC – MER Deal May Not Happen

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September 15, 2008 – Comments (2) | RELATED TICKERS: BAC , MER

Today we learned that the BAC offer for MER wasn’t really $29 per share, but was an all stock deal swapping 0.8595 shares of BAC for each MER share.  This sets up an arbitrage trade that should keep the value of the two securities tied closely to the deal ratio.

Today’s BAC closing price of $26.55 values MER at $22.82.  But, MER closed at $17.06, barely above Friday’s close before the buyout was known.

If the arbitrage traders believed the deal was on track to close at the announced share swap ratio, they would be selling BAC and buying MER to cash in on the $5+ per share discrepancy.  At today’s close the arbitrage trade would be something like:

     Sell 8,595 shares of BAC for $228,200
     Buy 10,000 shares of MER for $170,000

When the buyout is completed, the two share positions cancel each other out and the trader keeps the $58,000 difference minus trading costs.  If a deal is a near certainty, arbitragers will execute these trades anytime the spreads get wide enough to make it profitable and the shares will stay within a couple percent of trading in tandem.

A spread this large tells us the market thinks there’s a good chance the deal either isn't going through or will get changed to be less favorable to MER. 

Stand-by market news junkies, the fireworks with this one may not be over.

 

2 Comments – Post Your Own

#1) On September 15, 2008 at 7:16 PM, biotechmgr (36.68) wrote:

Great commentary. I saw these share prices in cursory fashion but was watching my real positions more closely. In the back of my mind I thought "what else is going on"?

 It's not a sale until you get paid.

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#2) On September 17, 2008 at 7:37 PM, TMFAleph1 (95.97) wrote:

rd80,

I apologize -- I should have credited you for being the inspiration for my article. I hadn't spotted the arbitrage spread between the two shares and when I saw your post, I couldn't resist writing about it as I'm fascinated by risk arbitrage (see this article, for example). In fact, I've put together what is arguably the best possible collection of texts on risk arbitrage.

Respectfully,

Alex Dumortier (XMFMarathonMan)

 

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