Clay, here's how it works: you short 1,000 shares of LU and you go long 1,212 shares of ASND. Let's say that LU is at $105, and ASND is $81. So your net cash position is $1000*105 - $1212*81 = +$6,828. Now let's assume two scenarios.
Scenario #1 At the time of the merger the price of LU rises to $150.
Scenario #2 At the time of the merger the price of LU drops to $50
Since at the time of the completion of the merger 1,212 shares of ASND (your long position) becomes 1000 shares of LU (your short position) you simply replace the borrowed stock regardless of the price of LU. All of your profit is taken up front, and earns interest. The danger is that the merger falls apart. The $6,828 is the compensation for the risk, which is substantial if the merger falls apart. Imagine that the merger falls apart and the price of LU rises to $115, and ASND falls to $60. Your long position is $72,720 + $6,828 = $79,548. But your short position is -$115,000, for a net loss of $35,424. That's how LTCM went broke on the failed TLAB/CIEN merger.
TTFN,
CTC
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