WLD:
No arb play right now. Usually, the stock price of the company being acquired trades at a discount to the offering price, reflecting the uncertainty of the deal going through. So arb players short shares of the acquiring company and buy shares in the company being acquired, so when the deal closes, they get a profit equal to the arb discount. Or, some arb players will simply sell their stock in the acquiring company and buy stock in the acquiree company, when the deal closes they get back their original stock plus the extra shares provided by the arb discount. I've done it both ways myself in the past with AOL/NSCP, LU/ASND, MSFT/VSIO, to name a few, made at least 15% each time.
Here we have PALM paying $22/share for XTND, for any PALM share price between $16.60 and $22, so XTND will trade pretty close to $22 until PALM gets above $22, at which point they should trade in a 1:1 lockstep. If PALM goes under $16.60 (unlikely IMO), XTND will go under $22 to (1.325 x PALM). If PALM trades above $22, keep an eye on XTND to see if it lags significantly, because if it does, the arb players will probably be all over it and PALM will be back at $22 lickity split. Since there seems to be very little chance that this deal will not go through (no regulatory involvement and XTND shareholders ought to jumping over the moon by June), I don't think we'll see much of an arb spread even if PALM goes well over $22.
Right now, we have a kind of reverse arb, because XTND is trading at almost $23 with PALM at $21.50, probably because buying XTND here is a virtually risk free way to get PALM - for $23 you get PALM with a guaranteed maximum downside risk of $22 (the floor in XTND as long as PALM stays above $16.60), and the unlimited upside if PALM goes above $22. Beats me why anyone is buying PALM here with the downside risk, when they could go the XTND route and pretty much eliminate the downside risk. I toyed with the idea of swapping out my PALM for XTND this morning, but I'm not prepared to cough up $1.50/share for the downside protection when I think PALM is finally headed back up. OTOH, if you want to buy PALM here and you're into buying protective puts against another downturn, it's much cheaper to buy XTND with the $1.50 premium than buying say April/May $20 or $22.50 puts at almost double the premium.
I swear I've seen more weird things with COMS and PALM over the past year than with any other stock I've ever been involved with. The one weird thing I'd love to see is PALM back at it's IPO day opening of $165 - now that would be nice!
David T. |
