Andrew and Mason,
Re: the risks of arbitrage. We are agreed that there is substantial risk, and therefore should not be a major part of one's investments. That said, BECAUSE of the risk, there is a considerable premium out there for those who are willing to take the risk. One tries to minimize the risk by understanding the acquiring company as well as possible, and the terms of the agreement as much as possible. Ciena/Tellabs is another example of a merger gone bad, where abitrageurs must have taken a big hit.
I have taken the position that arbitrage makes sense to me only when I understand and want to acquire shares of the merged entity in any case, and have made good money in a down market on the mergers of MCIC/WCOM and GNK/LHSPF. I naturally haven't committed to this one yet, as I don't know all the terms, but it looks interesting so far, and may be too enticing to pass up if AMAT gets back below 24.
Hopefully this isn't a topic too far afield from the intent of this thread, since at the bottom of semi-equipt cycles, mergers and acquisitions are common. Therefore, if we are soon (or presently) at the right time to buy into our choice of companies, and a merger/acquisition makes the price even more palatable, it should be an option that is very pertinent.
One final thought - if/when the merger/acquisition involves two companies, both large enough to have options traded (MCIC/WCOM, for example), one can greatly reduce the potential risk by buying protective puts. This strategy allows a guaranteed profit, albeit somewhat reduced, which could look very attractive during a prolonged downturn - and if the market rallies, the stock of the acquiring company that you'll end up with will gain in value, so one doesn't lose out in that scenario, either.
Bob |
