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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: RoseCampion who wrote (30920)	10/20/1999 2:19:00 AM
From: Gerald Walls	Respond to of 74651

...VSIO as a MSFT "surrogate"... To my way of thinking, as I know both companies and have every belief that the deal will go through as planned, this seems like I'm getting to buy a deep-in-the-money MSFT call that has a negative 5% time premium built in. Does anyone else see it this way, or am I missing something obvious here? Nope. You're reading it right. However, you don't get money for nothin'. You're getting that 5% discount because you're assuming the arbitrage risk that the deal won't go through. If the deal fell apart then you'd lose quite a bit more than you would by owning a call. With a company like MSFT I think that you're pretty safe. I did the same thing this last spring by buying selling my LU and replacing it with ASND. Boy, I should have dumped that dog a lot sooner than I did. BTW, on a pure arbitrage play you'd short 45 MSFT for every 100 VSIO that you bought. IF the deal went through then you'd have locked in that 5% gain because you'd deliver the MSFT that you got in exchage for your VSIO long to cover your MSFT short. This is the reason that the company doing a take-over drops and the company being taken over rises as quickly as it does. The arbitragers buy the acquired and short the acquirer.

To: RoseCampion who wrote (30920)	10/20/1999 2:21:00 AM
From: Dwight E. Karlsen	Read Replies (1) \| Respond to of 74651

Rose, I don't think you're missing anything. If the deal closes, you will get the exact premium for VSIO that the deal specifies. I closely followed the price action of USRX (U.S. Robotics) for months after COMS (3Com) bought them out. There were many times that there was a similar gap. As the time neared for the consumation of the deal, the gap closed. The gap is caused by m&a arbitragers on wall street. The gap represents the risk that the deal will fall through. Should that happen, VSIO would in theory fall, assuming there had been a premium paid for the VSIO stock.