Interesting EV question about trading after a buyout announcment

[schnoodleC]

A stock I own Oak Brook Bank (FOBB) is being bought by MB Financial for a mixture of cash and stock that puts FOBB at a premium of ~37% more than what it was trading it. Now, right after the deal was announced FOBB went up about 28-29%, leaving what seems to me to be a fairly large spread of 8-9% left below the buy out price. FOBB gained another 3% by the end of the day, then 2% each of the following 2 days.

The question is did the idea of buying in right after the announcment to exploit the spread between the price of FOBB and the buyout price have positive expected value? If so, how big a spread is required in such situtations (when would you have to have jumped in) ?

The way I see it, if the deal falls through, then FOBB would drop back down, but the question is how far? Would it go below its pre-offer price because the market would be scared about why the deal fell through or would it stay above because the market would continue to recognize the value of FOBB (on its own and as a buy out target)? Of course, the other question is, what is the probability that the deal would fall through?

So: EV of buying FOBB after announcment = ((1-P1) * (1+Y%)) - (P1 * -x%)
where P1 is the probability that the deal will fall through, Y is the percentage gain expected if the buy out goes through (the spread) and X is the percentage drop in FOBB if the deal does fall through.

If p1 = 5%, Y = 8% and X = 29% (FOBB goes back to pre-announcment level) then the ROI of such a trade would be (1.026 - .0145) = 1.011 or 1.1%. This is positive expected value but quite lower than you might imagine from an 8% spread and while positive it might not be worth the varience that your portfolio would face from such a trade.

However, if p1 was only 1% then we'd get 1.0692 - .0029 = 1.066 or 6.6%. A much better number that would clearly make this a good trade.

Throughts?

P.S. Anyone know of any other good regional banks that are takeover targets? [img]/images/graemlins/cool.gif[/img]