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Technology Stocks : Pure Atria Corp(PASW) and Rational(RATL) Merger
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To: joel sherriff who wrote (21)4/8/1997 6:02:00 PM
From: Czechsinthemail   of 147
 
I think the Ascend/Cascade comparison is a good one. The preannouncement of an earnings disappointment tanks both companies on a for-stock deal like this. There may be some legitimate concern about new problems for RATL from this deal. That would explain some of the big dropoff in RATL shares. The other factor is the arbitrage opportunity. You can buy 1000 shares of Pure Atria, short 900 shares of Rational and use the 0.9 Rational shares you get when the merger goes through to cover the short. The uncertainty about whether the deal will go through or not, coupled with PASW's preannouncement of lower than expected earnings depresses its price and tends to widen the spread. When the spread gets too wide, arbitrageurs and/or people who just want to buy Rational shares on the cheap will come in to buy up PASW and the spread will narrow. While possible, I don't think it is likely the deal won't go through. That means if you buy PASW shares at 9 7/8 or 10 you are buying into RATL at about 11 or 11 1/8. With RATL at about 14 1/2, you are buying the stock at about a 25% discount. Or you could look at it that if RATL just stays flat between now and the time the merger is completed, PASW shareholders buying in at these prices would make 30%+ on the deal. If RATL recovers, they will make efen more.
The predicament this kind of deal creates is that if you're a long term holder of RATL you have big capital gains and major tax consequences from selling. Otherwise, the no-brainer is to sell RATL or short it against the box and buy PASW shares to profit from their eventual appreciation relative to RATL. Over the long term, I think the combined company will do very well for shareholders, especially those who get in at these prices.

Baird
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