AMAT's takeover of ETEC presents a nice arbitrage opportunity.
AMAT and ETEC have agreed to merge, with ETEC shareholders receiving 0.692 shares of AMAT for each share of ETEC. Both companies manufacture semiconductor manufacturing equipment. The merger is subject to shareholder approval and regulatory approval.
At this moment, ETEC is trading for 84.5, which is a discount of about 5 3/8 points, compared to the value of the underlying AMAT shares, based on AMAT's current price at 138.5. If you watch the stocks, the discount fluctuates intra-day between 4 and 7 points.
I shorted AMAT, and immediately bought an offsetting ETEC long position. To insure the position, I then bought out-of-the money ETEC puts and paid for the premium on these options by writing covered puts on the short AMAT position.
The net effect of these transactions, net of trading costs, was to give me about 4 points of cash, which I hope to keep if the merger goes through. In that scenario, the options will expire worthless and the broker will journal out the short and long AMAT positions after the merger. I'll pay no commissions and no trading costs to close the positions. In the worst case (the deal folds) I'll lose maybe 20 points before the ETEC puts are in the money, providing a cap on the loss. So, I'm betting that the odds of the merger going through are better than 5:1.
I don't see a significant risk that the merger could fail, for the following reasons:
* they are both big companies that know what they are doing,
* AMAT has huge financial resources,
* the takeover is friendly,
* the industry is in a cyclical upswing that is forecasted by Dataquest to continue until 2002,
* the companies don't compete so there's no possibility of an antitrust problem.
Here's the announcement of the merger:
biz.yahoo.com
Here's the 10k for AMAT:
freeedgar.com |
