CMGI v. GCTY arb ...
[ disclaimer: I haven't followed CMGI, or the new GCTY IPO, but just thought I throw out the following idea as a Sunday night quarterback discussion. ]
Let's say I think the recent move up in CMGI is overdone, but I want a bit of hedge on the new Geocities (GCTY) offering coming out tomorrow, and assume that GCTY may have more legs (will outperform initially) than the rest of CMGI's portfolio.
The Forbes article says CMGI owns about 1/3 of GCTY. It says GCTY may go out at a mkt. cap. of 1B. CMGI's market cap. is currently about 2B. So, when GCTY pops to 1B, CMGI stands to gain 0.3B in mkt. cap, taking its market to 2.3B. Now let's say GCTY increases by another 30% in mkt cap. to 1.3B, this will increase CMGI's mkt. cap to 2.4B, or increase its mkt. cap by 4%. Thus, to neutralize the further effect of GCTY's gains on CMGI's price, we'd be short 25 shares of CMGI for each 1 long share of GCTY.
CMGI's +30% move in the last two trading days seems way above that warranted by discounting its stake in GCTY. If the math above is close, then a 10% move in CMGI would have discounted its share in GTCY's IPO.
Since the going forward impact of GCTY on CMGI appears to be so
small, the above scenario is not a good trade, but I'm just wondering if the assumptions and underlying ratios described above look about right? |
