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Technology Stocks : America On-Line (AOL) -- Ignore unavailable to you. Want to Upgrade?

To: Dr. D who wrote (1275)	1/4/1999 12:40:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 41369

3d, I'm pretty confident. The combination makes a lot of sense, and given the lawsuit against MSFT I don't think that Gates will be putting up any roadblocks (either directly or indirectly) because wielding monopoly power would threaten its legal position. Apparently the narrowing of the premium to around 4% shows that the arbitragers also believe the deal will go through. If you recall the aborted TLAB/CIEN merger you could see the probability of the deal ebbing as the premium increased. For those on this thread who don't understand the way the arbitrage position works, assume that AOL is selling for $150 and that NSCP is at $64 and that the buyout ratio is 0.45 AOL for each share of NSCP. To take advantage of the spread you would be long 1/.45 or 2.222 shares of NSCP for each share of AOL you short. Now, provided the merger is consummated, you are locked into a profit. Here are two possible scenarios: 1. AOL at the time of the merger is $200. Since you were short AOL at $150 your loss is $50. But since you were long 2.222 shares of NSCP your gain is $200 - 2.222$64 = $57.79, so you net gain is $7.79 per share of AOL shorted. 2. AOL at the time of the merger is $100. Since you were short AOL at $150. your gain is $50. But since you were long 2.222 shares of NSCP at $64, your loss is 2.222$64- $100 = $42.21, so your net gain is $7.79 per share of AOL shorted. The allure in this is that the net cash position as a result of the hedge is positive. Neglecting interest, transaction fees, and margin requirements, the short yields $150 and the long position requires $142.21 So the net cash inflow at the time the arbitrage position is created is $7.79. The danger is that the merger falls apart (as it did with the TLAB/CIEN deal). The result is generally that the acquiring company's stock increases in value, while the acquired company's stock decreases in value. That is exactly what happened to LTC when its hedged position fell apart with TLAB. TTFN, CTC