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Technology Stocks : JDS Uniphase (JDSU)
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To: Harry Soin who wrote (15641)12/29/2000 5:41:11 PM
From: Stocker  Read Replies (2) of 24042
 
Harry, the 6.7% is a reflection of the risk involved. The risk as measured by the return has come down a lot over the last few months but, as always, there is risk until the deal is officially closed. If you consider this a high return it's also likely the risk is higher than you think. For example, there is always the chance a competitor could try to block the deal and the spread could widen considerably. Or, the regulators could drag their feet. Or, one of the companies could report an slowdown in orders or expected revenues. All of these types of things would affect the spread. Consider too what would happen if JDSU reported they expect strong earnings/sales while SDLI reports they are having trouble. You might take a hit on both positions in this case. Now these types of problems may not happen and many would argue their likelihood has decreased the last while but the risk is still there, hence what seems like an easy 6.7% return.

Also take into account commissions in your calculations as these will affect return (unless you're with Ameritrade or something).

The large funds doing this kind of thing use buy/sell models and have the ability to take advantage of very small spreads quickly if they so desire. They also play in size which makes these trades worthwhile. Some might say that the fact that they haven't narrowed the spread further given the short time left and hurdles cleared represents caution.

All in all it's your decision to make based on your assessment of the risk. This isn't a flyer but isn't a T-bill either.
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