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Technology Stocks : Loral Space & Communications -- Ignore unavailable to you. Want to Upgrade?

To: Geoff who wrote (1539)	12/4/1997 6:27:00 AM
From: Thomas	Respond to of 10852

Re: Readware comment on Orion/Loral arbitrage. I agree that the arbs may be trying to keep the pressure on LOR in order to increase the number of LOR shares they get. At LOR price of $24, an Orion shareholder would get around 0.73 shares of LOR for every share of ONSI, while at the lower end of the range ($16.40 LOR price), the ONSI shareholder would get around 1.07 LOR shares. Since an arb who is long ONSI is hedged against a big move to the upside for LOR, theoretically, he would short LOR, to keep the heat on, in hopes of getting a better conversion ratio. If that is the case, then once the deal goes through, there should be big short-covering and some kind of pop for LOR. So, the arbs would like to keep the LOR price low, but for a different reason that Readware suggests. Actually ONSI price currently includes an implicit LOR call option (since the conversion price cap is around $24, if LOR were to trade at, for example $30, the ONSI holder would have an additional paper profit above the $17.50, specifically the ONSI share would be worth around $21.90). Think of it as getting a 1stQ LOR 24 call option. Just to round out the picture, the ONSI price also reflects a "written" or short LOR put option (i.e. ONSI shareholder gets less that $17.50 of value, if LOR trades below the ~$16.40 floor of the conversion price). I am not an arb or an expert, but I believe this implicit call option on LOR is valued by the market more highly than the offsetting written put option, and that is the reason why ONSI has traded (and could continue to trade)above the $17.50 merger price. So, if volatility of LOR (or the satcoms industry in general) increases substantially, theoretically the value of ONSI should go up, in step with the increased value of the imbedded options. Anyway, my two cents on this subject, please forgive the rambling. Of course, I am rethinking my decision to buy LOR via ONSI, as ONSI has moved 4.4% and LOR >10%. Oh well, shows that I shouldn't be in the arbitrage business. Personally, and I don't think I am alone, I would like to see LOR trade down big the day before closing, then ride the short covering rally up with my higher number of LOR shares. Wishfull thinking, eh? Cheers, Thomas