On May 30th I commented that aQuantive was sitting at $5B, even though MSFT had agreed to pay $6B for the company.
Per share, MSFT agreed to pay $66.50 (an 85% premium) even though as recently as May 30th, the stock was only at $63.75.
Today - July 6th - marks the end of the anti-trust period where if anyone had an objection, they could raise it. The deal cleared that hurdle today. As a result, AQNT is up $1 because all that remains is a vote by AQNT’s board, and unless they suddenly grow an aversion to being stinking rich, they will approve.
The discrepancy of $1B in the market cap of AQNT after the deal was announced and when the deal will close was due to uncertainty about whether or not the feds would approve it. Sure, while DCLK/GOOG combines two advertising leaders, in this MSFT is buying something new in a business it’s not in. The antitrust issue is and was, somewhat moot.
That is why I did not think the market was pricing this correctly, of course, the market is usually right.
Regardless, most people knew that this one would not backfire and the feds would not object, as such, if anyone had money sitting around, they could have bought a bundle of shares and make an almost riskless profit (arbitrage) and I suspect many did. There is, after all, an entire subset of the investment community that partakes in merger arbitrage, and this was one of the more obvious, riskless opportunities.
If you would have spent $10M and bought roughly 150,000 shares, you could have made $415,000 in profit in a couple of months ($66.50-$63.75 x 150,000). That’s not bad at all.
Someone should really hand me a billion dollars to manage.
Disclaimer: I own shares in MSFT. This should not in any way be construed as investment advice, is for entertainment purposes only.
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July 6th, 2007 at 11:23 am
Ashkan:
As you point out, the likelihood of the deal failing to complete is low, but not zero. So technically this is not risk-free arbitrage [esp. if you put 10M into it :-)] - I think you should also consider, in this case, what you think would happen if, for some outlandish reason, the deal *did not* go through; what would AQNT be worth then?
Now if you could somehow hedge your position - say a small investment that would do well if the merger failed - then you’re talking risk-free or close to it!
July 6th, 2007 at 6:42 pm
You are right in the sense that there is no such thing as a totally risk-free investment. In fact, transaction costs will eat up some of the profit, too. But my point was that maybe the market attributed as much risk of this deal falling through as it did/does to the DCLK/Google deal.
Of course, since that one involved a private firm, we can’t really compare the two risk factors.