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Technology Stocks : Pure Atria Corp(PASW) and Rational(RATL) Merger
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To: NASDBULL who wrote (83)4/18/1997 8:38:00 AM
From: Skeptic   of 147
 
If the merger does go through, and all indications are that it will (other than the unexplained discount), you get a 40% return on your investment in 4 months regardless of what happens to the two stocks.

For example, go long 1000 PASW at $8 and short 900 RATL at $13. Now assume RATL drops to $5. Each PASW share will be worth $4.50 when the deal closes. You make 900*8 = $7200 on RATL and lose 1000*$3.50 = $3500 on PASW for a net gain of $3700. In fact, your gain is $3700 no matter what RATL's price is at the time of the conversion.

I'm assuming that you can't spend the $11700 proceeds from shorting RATL, so your return is $3700 on your $8000 investment in PASW, or 46%. Institutional investors would probably be able to use the cash from the short sale of RATL to buy PASW, so their return would be even higher.

The smart money must think there is a significant probability that the deal won't go through, or this discount wouldn't exist.
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