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Technology Stocks : WCOM -- Ignore unavailable to you. Want to Upgrade?

To: Harry Ehrlich who wrote (2753)	6/26/1998 1:33:00 AM
From: ANANT	Read Replies (2) \| Respond to of 11568

Harry E: Comments on Shorts Please see the following excerpts from WSJ: About Short selling and arbitrageur game Traders who sell securities "short" borrow shares and then sell them, betting they can profit by buying the stock back later at lower prices. Short interest is the number of shares that haven't been repurchased for return to lenders. As such, it is often taken as an indicator of the degree of negative sentiment among investors in the stocks. Investors may rely on short selling for other purposes, including as a hedging strategy related to corporate mergers and acquisitions, for convertible securities and options and for tax purposes. WorldCom Inc. had the largest increase in short interest, up 14,070,348 shares to 116,953,707. Harry Blount, director of telecommunications services at CIBC Oppenheimer, attributed WorldCom's large short position to investors' employing an arbitrage strategy to take advantage of the company's impending merger with MCI. "The short position is not a reflection of the company's prospects postdeal," Mr. Blount said. "Rather, I think it is a reflection of a financial transaction that allows investors to lock in a fair return with a low amount of risk." WorldCom's short position broke the 100 million mark last month and has jumped 162% since the company made its initial offer for MCI in October. As the probability of the merger increases, more investors are shorting WorldCom, Mr. Blount said. --------------------------------------------------------------- IMHO: The acquirer is wcom and acquiree is MCIC. At the closure of deal: If u own 100 shrs of MCIC, u will get 100 * (51/41) = 124.39 ( rough) shares of wcom. This is the deal At the announcement of the deal, the arbitrageurs (A) will sell short 124.39 WCOM and buy 100 shares of MCIC. At the close of the merger A will get 124.39 shrs of WCOM for the 100 shrs of MCIC they hold as per the deal and with these A will cover the 124.39 shorts of wcom. Why do the A do this? What do thy get.? At the time of announcement , due to the uncertainties of the merger the prices of WCOM and MCIC do not reflect the ratio of 1.2439 factor. As the deal gets more certain, the prices of W and M will approach the ratio. A will make money due to the discrepancy in the ratios before the closure time and at closure time. A will factor the time value of money invested till the closure time in this game.