Barrons 5/27/00-
Briefly, Terra bid $97.55 a share for Lycos, to be paid in Terra stock. As long as Terra trades between 45 and 68 the deal is firm. If it trades below 45, Terra issues 2.15 shares for each Lycos share; if above 68, Terra issues 1.43 shares.
With Lycos trading in the 50s, McMillan says, "this looks like a great time to buy Lycos." Why? Scare stories that Lycos' shareholder CMGI will put the kibosh on the deal are just that. Moreover, Terra put options are expensive, as good a clue as any that arbitrageurs are betting on the deal's eventual success. (For disclosure, McMillan is long Lycos stock.)
"As long as Terra puts stay expensive, and Lycos call options do the same, then the arbs are 'saying' this deal will go through," McMillan points out. Finding the right strategy is tough, although the one he likes best is to buy Lycos stock and protect it with Terra puts, such as the September 30 strike. Here's McMillan's caveat emptor: If the deal goes through, you make money as long as Terra is above 33. If the deal blows apart, you could lose more than half your money. "If you're uncomfortable with the risk, then don't take this trade."
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